Buying agricultural land with overage

It is becoming increasingly common to see agricultural land being sold subject to “overage”. Overage (sometimes also referred to as “clawback” or “uplift” agreements) allows the seller to receive an additional sum of money (normally a percentage of an uplift in value) on the occurrence of a specific future event – usually related to the acquisition of planning permission.

What sounds like a fairly simple mechanism is often a bone of real contention between the parties and can significantly frustrate the transaction.

Here are five key considerations when buying agricultural land subject to overage.

1. Overage term 

20-40 year terms are common, but terms of 80 years or more are not unusual. Careful consideration should be given, alongside the advice of an appropriately qualified land agent. 

Whilst a longer term may benefit the seller, a cautious approach should be adopted by the buyer. Overage will often be protected by a ‘restriction’ on the HM Land Registry title to the subject land throughout its term, preventing any disposal or dealing without the consent of the seller (or their successors) or otherwise in accordance with the overage terms. 

Longer terms can also lead to greater disparity between the original intentions of the parties and its interpretation (possibly) many decades later, whilst as time passes the eventual beneficiaries may become harder to trace.

2. Trigger event 

The “trigger event” gives rise to an obligation to make an overage payment. It is often either the date on which planning permission is granted, when the planning permission is implemented, or when the development is sold. 

A buyer should carefully consider the cash flow consequences if the trigger event is the grant of planning and consideration should also be given as to whether this is outline or detailed planning and how any conditions are to be dealt with, as well as the General Permitted Development rules. If the trigger event is implementation, what acts constitute “implementation” should be carefully considered.

The overage agreement and the parties should be clear as to what type of planning permission will create a trigger event. Should it be any planning permission, or just a specific type – e.g. planning for residential purposes? Should agricultural or equestrian planning permissions be specifically excluded from causing a trigger event?

3. Dealings outside of overage  

The grant of a legal charge, a short-term Farm Business Tenancy (or other occupational arrangement) or the granting of an easement are rarely intended to be caught by the overage provisions – but they often are. This can cause delays and additional expense and can even sterilise the overage land from being used as security for lending. 

Thought should be given to what happens when a developed unit or plot is completed and sold. Overage is likely to have already been paid, so should the completed unit/plot then be free of the overage moving forward? A lender is unlikely to look favourably on lending against a property subject to overage. 

4. Payment

The quantum of the payment is typically an agreed percentage of the difference between the value of the land before and after planning permission has been granted. The agreed percentage is a commercial decision, and a land agent or surveyor should be consulted and is usually somewhere between 25-50%. All parties need to be aware of the payment obligations and timeframes to prevent incurring a penal interest rate on a late payment.

A buyer would also be well advised to seek a deduction to the overage payment in respect of the professional and planning costs incurred in obtaining the relevant planning and/or facilitating the development.

5. Release from the overage

An express obligation should be imposed on the seller to remove the overage provisions from the HM Land Registry title to the land at the end of the overage term, together with a provision allowing the buyer to do so in the event the seller does not act promptly.

Whilst overage can protect a seller from potentially selling land at an undervalue, overage agreements contain numerous pitfalls which require careful consideration at the outset so as to avoid the terms having a debilitating effect on the use and value of the land – even if the buyer has no intention of development.

Overage can slow down a transaction and increase costs and to avoid this both buyer and seller, together with their agents and lawyers, should discuss the finer details of the overage agreement at an early stage. A buyer should not shy away from considering, with the advice of their agent or valuer, whether it is worth paying a larger initial purchase price to acquire the land free of overage.

At Birketts we are experienced advising on overage agreements from both buyer and seller perspective, whether it is a new overage or a sale or purchase subject to an exisiting agreement.