What is an Overage Clause in Property Transactions?

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What is an Overage Clause in Property Transactions?
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The value of a property or area of land is always changing. In the UK, property owners are always hoping to invest in a property which will increase in value – but on the other hand, you sometimes find that sellers want to benefit from an increase in value, too.

But how is this possible? What can sellers do to benefit from any future increases in property or land value? An overage clause provides an elegant solution to this problem. Read our blog below to find out exactly what an overage clause is in property transactions.

What is an Overage Clause in Property Transactions?

An overage clause is included in a property transaction if the seller wants a share in the future value of a property or land. An overage agreement will outline how the seller will benefit from any future increases in value – and the buyer can decide whether to agree with this.

Overage clauses are a lesser known, but important, aspect in some property transactions. Most sales do not include them, but some do. You should therefore seek expert legal support if you are going down this route.

Overage clauses are most commonly seen when a property developer is purchasing land, as the seller may want to benefit from any new developments which are built there.

In an overage clause, there are usually certain ‘triggers’ which will initiate an overage payment. Examples of these triggers include:

  • Demolition and reconstruction of a larger building
  • Gaining planning permission for vertical or horizontal extensions, extra dwellings or other value-add purposes
  • Disposal of the property at a higher price within a fixed time period
  • Sale of the property or land after pre-planning conditions have been met

There are many, many more triggers which could potentially feature in an overage clause, besides from the ones listed above. You should consult with a legal expert to ensure that ‘all bases are covered’ and to get a more comprehensive list of potential triggers for an overage.

You should keep in mind that not all conveyancers have experience dealing with overage clauses, as they are not extremely common. You can find legal experts who specialise in this area, and you may therefore wish to consider hiring them.

Finally, you should keep in mind that overage clauses complicate a buyer’s tax position, as they may have to pay more Stamp Duty Land Tax. The seller may also be required to pay tax on overage payments further down the line, depending on the circumstances. You should speak to legal and tax experts for guidance on this.

What do buyers gain from an overage clause?

A potential buyer may be willing to include an overage clause if they suspect that the purchase won’t take place without one. For example, some property developers will incentivise someone to sell by offering an overage clause which will hopefully act as a financial reward further down the line.

What do sellers gain from an overage clause?

In a typical sale (without an overage clause) the seller gets an up-front payment for the property/land, and then no more money comes from that deal. However, an overage clause gives a seller the possibility to make more money in the long-term, by benefitting from any increase in the value of that property/land.

How much might an overage payment be?

Overage payments are usually a percentage of an increase in value – meaning that the amount of money you receive from an overage will vary significantly according to the value of the property/land, and how much it has increased.

In most cases, the buyer of the land will want inflation to be disregarded when calculating overage payments. They will also want to deduct any costs involved in achieving the increase in value – for example, any costs associated with obtaining planning permission.

Can I remove an overage clause?

Yes, it is possible for an overage clause to be removed – but in most cases, it is only the beneficiary (the seller) who can do this.

You can remove an overage clause by either waiting until the overage has lapsed, or approaching the beneficiary to discuss removing it. A conveyancer can often be hired to undertake this process.

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