Throughout this year, we have been dealing with a significant number of ‘overage’ agreements, which essentially enable a land seller to share in any value increase once a sale has been completed.
Overage agreements can undoubtedly bring benefits for landowners, but the legal position is hugely important – and seeking legal guidance around what is a complex process is therefore vital.
Essentially, overage can be used where land is being sold and when there is a likelihood that its value will increase, usually due to planning permission being granted or a development taking place.
A landowner may be selling land that has been valued as agricultural. They may not be in a position to apply for planning or carry out development themselves, but would still like to benefit from any increase in the value as a result of permission being granted or further development.
In this situation, a seller could sell the land subject to overage obligations, which would require a buyer to make additional payments, representing a percentage of the increase in value as a result of planning permission being granted.
Nonetheless, while overage agreements can financially benefit a landowner, they are complex documents that require extensive negotiation between a buyer and seller. Both parties will incur costs in preparing the agreement; so if there is no likelihood of planning permission ever being granted, it may not be worthwhile going to the expense of entering into an overage agreement.
Other considerations include any impact on the sale price, as a buyer may not be prepared to pay as much for land that is subject to an overage agreement. Those selling land must also consider how long the agreement will last, as it cannot go on indefinitely, and how the overage will be calculated. This will usually be by reference to a percentage of the increase in the value of land.
An overage agreement can be a good option for some sellers, but there are many considerations to make before entering into one.
Emily Regimbeau is a solicitor in the agriculture and rural affairs team at mfg Solicitors