When you agree to sell your property it is reasonable to expect to receive the best price possible and, in certain situations, the best possible price may be obtained by taking a share in a future increase in the value of your property, a sum that is customarily referred to as ‘overage’.
As a seller, you may wish to negotiate overage if you have an expectation that your buyer may redevelop the property at some time in the future and you would like to take a share of the proceeds. This uplift may be contingent upon, for example, the grant of permission for commercial development or change of use. Alternatively, it may be possible to negotiate the payment of overage should your property subsequently be sold on at a higher price within a fixed period of time.
In this way, a seller may be able to realise a property asset by selling now yet benefitting from a share of future potential profit. But beware: overage clauses are not always appropriate. If site redevelopment is unlikely then the cost of negotiating inevitably complicated overage provisions may outweigh the potential payment itself, while the existence of an overage clause that requires potential developers to share their spoils may adversely affect your property’s current value, making it a less attractive proposition to purchase in the first place.
Because of the complexity of overage provisions, sellers and buyers should take particular care to ensure that the documentation accurately reflects what has been agreed. This is not always straightforward, as it requires each party to consider myriad future scenarios in order to ensure that the overage provisions are adequate and binding. There are plenty of cases on record that serve to illustrate the many pitfalls.
Overage arrangements must provide an element of security for the seller and it is imperative that adequate safeguards are put in place to protect any future payments that may fall due. Various means can be used such as legal charges, guarantees, bonds, leases, reverse options, ransom strips, restrictive covenants, positive covenants and restrictions, but each method has its pros and cons and these should be thoroughly discussed with your lawyer in advance.
At first glance, overage may appeal to you as a seller, but it is important to be aware of its implications and the consequent obligations that could affect you for a long time to come. For expert advice, contact George Ide’s experienced property team on 01243 786668.
Danii Jhurry-Wright. Partner, commercial property department.
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