Overlooking Overage – What are Claw-Back Clauses?

Overage isn’t a word that many people in property come across, but if you’re buying or selling a property that has future potential, it’s something that you shouldn’t overlook.

Let’s say that you’re selling a house that is on a large plot of land.  You have the option of applying for planning permission, getting permission to build some houses on the land and then sell the land with planning permission, which makes it much more valuable.  However, this can take a long time (a year or more) and involves considerable costs.  You will need plans to be drawn up.  There will be fees to the Council and you will need a surveyor or architect to help you.  What’s more, if the planning permission is refused, it could actually devalue your property.  It’s a bit like buying an old car – if it hasn’t passed its MOT, there is always the chance it will get through.  If it’s already failed, then people know it’s not roadworthy.  So the same is true of a property.  If they think it has potential to be redeveloped, then that potential has a value (often referred to as Hope Value).  If the application has been dismissed, it means it has less potential.  This means you’d then either have the risk of selling for less, or have to go through the drama of appealing the decision.

You also have to decide what your application is going to be for.  Do you go for the maximum number of dwelling you can get, which will further increase the value of the property, but will take longer and possibly cost more.  Or do you just keep it simple and prove that planning permission is possible, but whoever buys the property will almost certainly want to change the application to maximise their investment, so you won’t get top dollar for your property as there will still be an element of risk for the purchaser.

If you’re up for the challenge, and you have the time, then going through this process should mean that your property increases in value assuming you have the right professional advice on making your application.  If you are feeling really adventurous then if you get your planning permission you might even want to think about doing the development yourself.  There are plenty of developers out there who might be interested in doing it with you as a joint venture agreement.  This is where you effectively form a partnership where your contribution is the land, and they contribute their knowledge and the funding, and you spilt the profits.

However for many people this is just not an option. The time that it takes.  The money that is involved.  The knowledge and expertise that is needed – even if you are going to go to professionals, you still need to know who to go to.  Not to mention the risk – nothing is ever guaranteed in the property market.

So does this mean that you have to sell your property for its market price, and leave someone else to make all the money?

Not necessarily, because this is where overage comes in.

Overage (which is sometimes known as a claw back) means an extra payment (in addition to the purchase price) on the happening of a specific event.

Let’s imagine that your house and land, without planning permission is worth £500,000, but with planning permission could be worth as much as £1m, depending on how many dwellings the council will agree to.  You have the right to sell the property for £500,000 plus an overage of, for example, 10% of the increase in value if planning permission is obtained.   So if the person buying it then applies and obtains planning permission, then under certain criteria, you would be entitled to a share of the increase in value.

Overage is something that the parties negotiate as part of the sale arrangement.  Each overage is different and whatever terms you agree, we can incorporate it into the contract.  The kinds of points we need to agree on include the following

1. How long is the overage is going to last. There will usually be a time limit, so that the overage payment is only due if planning is obtained within a particular period of time, such as within five years of the sale taking place.
2. What type of planning permission is covered by the overage? For example, if it related to a house on a large plot where more houses could be built, would it still apply if all the new owner does is get planning permission to extend the main dwelling?  Or what happens if the purchaser only gets planning permission for one house, pays off the overage provision, and then resubmits their application for planning for 10 houses.
3. How much is the overage going to be for? That might sound obvious, but it’s important to have a clear definition.  For example, if it’s 10%, 10% of what?  That could be 10% of the value off the property with the overage.  Or it could be 10% of the increase in value.  If so, is it the value from when it was bought, or at the time that planning permission is obtained?   So if you bought the property for £500,000, but by the time you obtain the overage, the property has already increased in value to £600,000 because it’s a rising market, is that taken into account?
4. When is the valuation taken from? It would normally be from the date the planning permission is granted, but other dates could be set, such as the date the works commence, or even the date the works are finished.
5. Are any of the costs of getting planning permission taken into account? So if the planning permission increases the value by £100,000 but the costs of getting that permission was £10,000, if the original owner has an overage of 10% of the increase, is that 10% of £90,000 or £100,000.

Overage does make a property transaction a bit more complicated than a normal sale.  For a start, we have to negotiate all the terms relating to the overage.  We also need to protect the seller by making sure that the overage is registered against the property at the land registry.  This ensures that the property cannot be sold or refinanced without the seller’s input and puts everyone on notice of the seller’s claim.  However, the seller would have no other rights over the property and (unless the parties agree otherwise) the seller cannot have any involvement in the application for planning permission.

If you have a property that you think has redevelopment potential, but you don’t have the time, money or expertise to do the work, you can talk to us about how you might sell it with an overage.  If you are interested in buying a property where the seller is offering it with an overage and you want to understand what that means and what the consequences are for us, let us know, and we’ll be happy to talk you through the options and how it will work in practice.

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.  If anything in this article may affect you, please contact us for advice that is specific to your circumstances.