Planning Overage Obligations in Land Transactions – Ten Questions a Seller Should Consider at the Outset of a Proposed Transaction
Published March 2021
Please note that this Briefing Note is not maintained, and reflects the law as at the date of publication or update
This Briefing Note should not be relied upon as legal advice and you should contact us for advice on your specific circumstances.
There are many different types of overage obligations relating to land, but one type in particular – overage obligations tied to the grant of a planning permission – has become an increasingly common feature in land transactions of late. The basic idea is that, where land is being sold subject to overage obligations (referred to as ‘Overage Land’ in this Briefing Note), the buyer is obliged to make a further payment to the seller if a planning permission is granted on the Overage Land in the future.
Most commonly planning overages are based on the seller receiving a proportion of the increase in market value of the Overage Land derived from the grant of a planning permission and this is the scenario we briefly focus on in this Briefing Note.
Overage obligations are bespoke to the unique circumstances of each particular transaction. Planning overages (as with other overages) can be complex and time-consuming to negotiate. Getting the right advice early, at the stage where the terms of a transaction are being negotiated between the parties, can make the difference between a transaction which proceeds smoothly and one which is fraught with difficulty.
The following are ten questions that a seller should consider with their land agents and legal advisers when contemplating a planning overage based on market value increases derived from future planning permissions. These questions are by no means exhaustive and the particular circumstances of the transaction will give rise to different points to consider.
1. Is the seller depending upon receiving future overage payments as part of the consideration for the land sale transaction?
If so, then relying on overage provisions is unlikely to be the correct approach. Overage payments are never guaranteed. The overage period may simply expire without an overage payment being triggered. Overage obligations can be difficult to monitor and enforce. Even a change in planning policy or the law, which cannot be foreseen when the documentation is prepared at the time of the sale transaction, may undermine the effectiveness of the overage provisions. A seller must carefully consider the possibility that an overage payment may never be received.
2. Has the seller taken professional land valuation advice?
We strongly recommend that professional valuation advice is obtained by a seller early in the process, particularly where the Overage Land could be subject to significant development. This helps in gaining and understanding of what could be achieved from using an overage, and will also assist with negotiation of proposed terms for the overage arrangements. Even where development of the Overage Land is unlikely in the short-term, professional valuation advice is helpful in gaining an understanding of whether or not it is worth the time, complexity and expense of including overage obligations in the proposed transaction.
3. Has the seller taken legal advice?
Overage provisions are complicated and the legal work involved is usually significant. The Heads of Terms need to set out, in as much detail as possible, what has been agreed between the parties to the proposed transaction. A seller should engage their solicitor early in the process to work with the selling agents in respect of the terms of the overage so that key points can be covered before the legal drafting takes place. This should help to keep the negotiation of the overage documentation on track between solicitors (and therefore in keeping legal costs under control).
4. What is the trigger for an overage payment to be?
In a planning overage, the trigger event is obviously connected to the grant of a planning permission (usually once the planning permission has passed through the judicial review period without challenge). But precisely what constitutes the trigger for the overage needs careful consideration. For example, is it the grant of any planning permission, or just a planning permission for certain types of development, or for development above a certain size and scale?
In addition, should the overage apply to each and every planning permission obtained during the overage period, or just the first? Should the overage be triggered on the grant of an outline planning permission, or only on approval of its reserved matters (as well as on the grant of a detailed planning permission)? The trigger event needs to be clearly defined.
5. When should an overage payment be made?
Should payment be made upon the grant of the planning permission? Many buyers argue that they will not have the funds available to make the overage payment at the point that planning permission is granted. It may be agreed that an overage payment is to be made on the earlier of: (a) implementation of the planning permission, (b) the date of completion of a sale of the Overage Land with the benefit of the planning permission, or (c) a fixed number of days after the grant of the planning permission.
It must be absolutely clear when an overage payment is expected to be made.
6. How long should the overage obligations last?
We’ve seen overage periods ranging from one year to fifty years. If the overage period is too short, then a buyer may simply wait for the overage period to expire before making a planning application in order to avoid triggering the overage payment obligations, whereas a long overage period may have a suppressing effect on the purchase price being paid at completion of the sale of the Overage Land.
What is the planning situation in respect of the Overage Land (and the surrounding land)? Is there a prospect of development in the relatively near future, or is the overage more speculative in nature, necessitating a longer overage period? Care needs to be taken in assessing what length of overage period is suitable for the particular circumstances of the transaction, bearing in mind the potential impact on the price to be paid at completion of the sale of the Overage Land.
7. Should the overage obligations take into account other land?
A planning permission may of course be granted in respect of the Overage Land as well as other land. If the Overage Land is likely to form part of a larger development site, should the valuation provisions have regard to the increase in value of all of the land to which the planning permission relates (rather than just the value of the Overage Land alone)? Provisions may be needed to ensure that the increase in value derived from the planning permission is shared equally across all of the land comprised in the planning permission to avoid disparity between high and low value elements of the proposed development (where such disparity could reduce the size of the overage payment).
8. How is the overage payment to be calculated?
When dealing with an increase in land value, what is to be the basis of establishing that increase? Should the provisions relating to the calculation of the open market value take into account certain matters and disregard others? Should certain costs, which are not already taken into account in the open market value calculation, be deductible from open market value figure? These are complex issues and valuation advice will be important in guiding the drafting.
When the increase in land value has been calculated, what is to be the seller’s share of that increase? Typically we are currently seeing sellers take anywhere between 20% and 50% of any increase in open market value. Is the seller’s percentage share to remain static throughout the overage period, or vary as time passes?
9. How is the overage to be secured?
The overage obligations must not only bind the immediate buyer from the seller, but successive owners of the Overage Land (with a few exceptions). A balance needs to be struck between, on the one hand ensuring that the Overage Land remains attractive for development and, on the other hand ensuring that the seller can enforce the benefit of the overage obligations against the buyer (or future owners of the Overage Land).
Overage obligations which are too tightly drawn can be self-defeating in that they may be harmful to the prospects of an overage payment ever being triggered if they make the Overage Land unattractive for development and onward sale. Provisions which are too loosely drawn risk undermining the ability of the seller to claim an overage payment from the buyer (or future owners of the Overage Land).
Detailed legal advice will be needed to explore the options for securing performance of the overage obligations and to assist in selecting the most suitable.
10. How are disputes to be resolved?
Thought needs to be given as to the method of resolving disputes between the parties, such as referral to an independent surveyor if agreement cannot be reached within a particular timeframe and how the costs incurred in settling disputes are to be paid. The parties should seek to agree a method of resolving disputes without recourse to expensive litigation.
There is a great deal of detail that needs to be considered when contemplating overage obligations as part of a land sale transaction. Overage can be an effective tool in capturing additional value following the sale of land, but it is imperative that time is spent at the outset of a proposed transaction considering the precise nature of the overage obligations to be included in order for the overage obligations to stand the best chance of producing a successful outcome for the seller.