Overage arrangements can be complex and time-consuming and can add significant costs to negotiating a sale. Yet overage agreements are a popular method of funding developments, with the land owner taking substantially less up front in return for overage rights in the future.
When negotiating an overage arrangement, developers should look out for the following:
1. Be sure to use a simple formula. In the case of George Wimpey UK Ltd v Vi Components Ltd, the overage formula was so complicated that on the twelfth round of negotiations, no one noticed when part of the formula was missed out which resulted in the developer paying an extra £500,000 in overage payments and £100,000 in legal costs.
Similarly, in Chartbrook Ltd v Persimmon Ltd, the formula expressed in words could be calculated in two ways – either the seller would pay 23.4% of all sales or 23.4% of sales if the scheme performed better than expected. Persimmon had to go all the way to the House of Lords to find the result was the latter. Keep the formula and wording simple to avoid these types of disputes.
2. Restrict the duration of the overage agreement to as short a period as possible. The longer the period, the greater the hindrance to the developer. For example, if the overage remains in place for 10 years and is conditional upon securing planning permission that increases the value of the land, but the developer secures a planning permission which does not increase the value within that time, the developer would not be bound to make an overage payment. It may well be that only on the second or third application lodged during the 10 year period there is an increase the value, thus triggering an overage payment.
3. Be wary of the land owner registering a restriction at the Land Registry. Whilst a restriction can be a good way for a developer to protect its interest in the land, it might make it difficult to sell the land, especially if the land owner is later untraceable.
4. Remember the Stamp Duty Land Tax (SDLT) implications. In addition to the purchase price you are agreeing to possibly pay further sums to the seller at a later date. Before completion you will have to make a fair assessment of the likely amount to be paid in the future. You will need to include these details in the SDLT return and pay SDLT on both the basic purchase price and the estimated overage following completion of your purchase. If it not possible to make a reasonable assessment of the SDLT and the SDLT is contingent or unascertainable then you may apply to defer payment of the SDLT, but you must do so within a maximum of 30 days after completion. If you subsequently end up paying more overage to the seller than you have estimated, you must complete a supplementary SDLT form at the time of paying overage and pay the additional tax.
5. Dividing a site up into different parts could impact on value. Instead of agreeing to make staggered payments as different parts of a site are purchased, it may be more appropriate to keep it simple and release the whole of the land being purchased from the overage obligations as soon as it is possible to do so to. This not only gives you a site clear of overage obligations, but enables you to anticipate the costs of the development earlier on.
Of course every overage agreement should be tailored to your needs and to the property being purchased. If you would like to discuss your requirements further, please contact the Commercial Property Team on 020 8943 1441.