Overage agreements are, for many reasons, a trap for the unwary.
When reviewing an existing overage agreement, the parties will almost always have opposing interests. One is looking to maximise, while the other hopes to minimise the payment that is potentially to be made. Clear and precise drafting is an essential part of ensuring that the overage works in the way the parties originally intended.
One of the key elements of an overage is the calculation of the payment. So, what are the key points to consider?
First, where possible, use a mathematical formula to determine the calculation. A fixed mathematical formula offers far more certainty than words, which can be open to interpretation. Needless to say, make sure the formula works by reviewing every element of the formula. For example, if the overage is based on a future valuation of land, clearly express the default valuation methodology to be used if the valuation cannot be agreed between the parties. Check the formula by using different examples of possible outcomes to check the result is always as expected and consider including within the agreement example calculations as illustrative of how the parties intend the calculation to work. This is particularly important where it is not possible to agree a ‘simple’ overage calculation.
Second, pay special attention where you have the potential for multiple overage payments. Avoid double counting in relation to the trigger events. Should the formula provide for an equalisation of the overage payments to balance out the payments? For example, if the overage is based on the land sale price achieved should there be an equalisation if (say) the early sales trigger a high return as against the subsequent lower value sales?
Third, consider whether the date of the calculation is important and, if so, make it clear what that date should be. This is critical if the overage is based on fluctuating future land valuations.
Finally, including a dispute resolution clause is always sensible but it is not the answer to all problems and it is no replacement for clear drafting in the first place.
Dominic Whelan is a partner in the real estate team at RWK Goodman