Seven top tips for creating overage (claw-back) agreements for property developmentsSeptember 03, 2020
Property development often involves uncertain outcomes, and the pandemic has highlighted that circumstances can change in unexpected ways. One way that property development deals with this risk is overage agreements. ‘Overage’ can mean different things; it is a generic label and generally it refers to some form of clawback or extra money being paid to a seller or former land owner, if circumstances change.
Our top tips for this area are:
Future proof the deal.
Engage at the initial or heads of terms stage with all parties, including your lawyers and surveyor, to agree how the deal will be future proofed. If there was a change from what is expected, what will happen? Would you be happy with the pricing outcomes under various different scenarios?
Commercial context is key.
What is the planning context and where is the land in the development pipeline? Is this land where there is a long term (but currently remote) prospect of development, but what if that changes all of sudden? This will impact on the legal drafting and structure of any overage clauses.
It is important to consider what will trigger any overage being payable. Will this be the grant of a planning permission (and if so will it be a detailed, outlined or reserved matters permission)? Alternatively, will it be the actual implementation of planning permission or the sale of the property to a third party with the benefit of planning permission? The drafting of the trigger provisions in an overage clause can be extremely technical and can cause dispute if not thought through.
Number of payments.
Will there be "one bite of the cherry" or will there be a number of incremental overage payments as the planning status of the land is enhanced? This could be over many years and would require careful consideration at the outset and consultation with any relevant stakeholders.
Monitoring the land.
The prospect of any overage being paid might be some time away. What happens in between (for instance if there is long lock down delay) and how does the seller check? Does the agreement allow a seller to monitor the buyer's activity on a disposed site and to check regularly if any overage has arisen?
There is often a complicated mathematical calculation to ascertain what overage might be due. This can impact on what planning or other development costs are to be deducted before the overage distribution. What if these development costs spiral for reasons no one expected? Anybody considering such provisions needs to be clear on what the outcomes are to be, so that the legal drafting of such arrangements can be made as clear as possible.
Where there is the possibility of a future payment, then how will such payments be secured? Overage provisions on a sale will not necessarily pass automatically to any successors in title. There are a number of ways of imposing this obligation on the land, including a restrictive covenant, the imposition of a legal charge or sometimes the retention of a "ransom strip". Careful thought as to the mechanism to be used is recommended early in the process.