Agribusiness solicitor Diane Barnes discusses clawback / overage agreements.
It is quite common nowadays for land to be sold subject to clawback or overage agreements, where the seller wants to make sure that they have a second bite of the cherry in the event that development takes place on the land being sold.
With planning laws getting more and more relaxed, it is not surprising that sellers are cautious as to whether land might be developed in the future, as who knows what might be the case in 20-30 years’ time. Overage agreements allow the Seller to recover an Additional Payment later if development takes place.
Overage agreements are notoriously difficult to agree as they reflect complex arrangements that can be drafted in a wide number of ways. The parties have to try and consider all reasonably foreseeable circumstances in order to ensure that the overage provisions remain effective for the whole of the overage period. Unfortunately, we do not have a crystal ball to assist.
The main issues to be agreed are:
- When the Additional Payment is due: the Seller can either demand payment on any of the following:
- Receipt of planning permission
- Disposal of the land with the benefit of planning permission
- When the development works start
- The date the development works are completed
- Disposal of the completed development
Planning permission for development can be obtained by anybody; it is not just at the liberty of the owner of the land to do so. Buyers will not want to make an overage payment for a planning application which they have not made or consented to.
- The amount of Additional Payment due and how that is calculated; a buyer will be keen to ensure that his costs of obtaining planning permission and obtaining possession of the land are deducted
- The type of development that triggers payment – limited to residential development or any development. Certain works such as rights being granted to utility companies should be excluded, otherwise, they could trigger payment.
Overage agreements are usually protected by a restriction placed on the title register of the Property, which prevents the buyer disposing of the Property, without passing the obligations under the overage provisions to their purchaser.
A buyer should also note that Stamp duty land tax must be paid on any Additional Payment made to the Seller. When a buyer is submitting a return for the purchase, they either need to pay tax on a reasonable estimate of the final purchase price to be paid (including overage payments) or make an application to defer payment of tax in relation to the uncertain overage payment.
Contact Diane on 01228 552222 or email email@example.com for further advice on clawback agreements.
About the author
Senior Associate Diane specialises in agricultural land and property sales.
Published: Tuesday 10th November 2015