What is overage and when will I have to pay it?
Overage is frequently used by landowners to enable them to receive additional post-sale value from their land when it has increased in value due to improved planning permission being granted or certain development taking place.
Landowners need to weigh up whether they might achieve better value with a clean break sale and the tax implications of that with current known rates versus in the future, when rates may have changed, as Corporation Tax, Income Tax and or Capital Gains Tax could all be triggered, depending on how the land is owned and sources of other income.
It’s important to get the overage terms right to be able to secure the extra value from the new owner in the future. Important considerations include:
- A defined period. Overage must be for a defined period, but if those periods extend to decades, then it can be difficult to keep track of for the beneficiaries. Where a site already has planning permission, then it is typical for the defined period to be shorter and for it to run for the length of the development phase. Overage should take into account un-built and un-sold units in case a developer chooses to build out the scheme at a slower rate.
- Triggers for payment. It is typical for overage payments to be implemented on the future sale of the land. It could also be implemented on the grant of planning permission or at the commencement of development works. It’s therefore important to look at all the potential scenarios and to structure the deal accordingly.
- Calculation of overage. Overage is typically a percentage share in the uplift in value or profit, but you need to check whether the developer is entitled to make deductions of costs and whether these should be agreed in advance or even capped. A clear formula agreed by both sides in advance of the initial transaction will help to reach a mutually agreed figure and will help to avoid disputes. It might be agreed to appoint an independent third party to make the calculation in the event the parties cannot reach an agreement.
The most important point for all landowners is whether the terms of the agreement can be enforced in the future. This may be done by a restriction to the title of the site which prevents its sale to a new owner without them entering into an agreement with the previous landowner and which binds them to the overage terms.
For shorter overage periods the landowner might enter a legal charge on the land however this is sometimes resisted by the new owner as it can make funding for the purchase more difficult to obtain.
Before you sell any land, speak to your solicitor about what you would like to achieve from the sale, to help you to formulate the most effective and valuable disposal.