How can developers avoid future issues with overage agreements?

The stamp duty holiday, furlough scheme and a largely development-friendly government agenda are among measures that have somewhat insulated the industry. Many developers have therefore been making hay – capitalising by doing as much business as possible, from land deals to plot sales, as quickly as possible.

To facilitate this, developers may be tempted, particularly with the future economic uncertainty, to put in as little money as possible upfront and defer other payments via overage agreements.

Overage is a contractual device negotiated at the outset of a deal to cater for the future payment of money between parties if or when various eventualities arise (such as planning permission, development or property sales). While overage agreements are common, they are always particular to their own facts and circumstances and are often complex and fraught with risk. It is notoriously tricky to comprehensively provide for unknown future events and for parties with changing and potentially conflicting interests.

My advice? Remember the old adage ‘a stitch in time saves nine’. Do not rush contracts through, thinking ‘we’ll worry about the money later’. This can result in mistakes being made when it comes to the negotiation and drafting of vital provisions.

Instead, invest time carefully considering what exactly will trigger overage payments. Provisions should include clear and specific timescales within which conditions should be met, obligations should arise and payments should be made. Also consider whether there is scope for uncertainty. If so, include formulas for ascertaining values, mechanisms for enforcing obligations and resolving disputes, and longstop dates for payment.

Claire Acklam is a senior associate at Walker Morris