What is an overage clause
An overage clause, or 'clawback', is a useful means to provide a seller of a property with the ability to benefit from value that may only be realised at a future date.
An example would be an area of agricultural land on the fringes of a village that, at the time of sale, would not gain consent for housing, but feasibly could in say 30 years. If the seller insists on an appropriately worded overage clause in the contract of sale, if and when planning consent is granted, the seller could then be due a percentage of the increase in the land's value.
Lawyers will draft the overage clause as part of the conveyancing documents. Some of the key elements will include -
The trigger - In most of the cases I have dealt with, the trigger has been planning permission being granted. So in the above example, the overage would be active when consent was granted for change of use from agricultural to residential land.
The length of the overage period - this will be down to negotiation between the seller and the buyer. One influencing factor could be the anticipated date of a future change in circumstances. In the above example, a new local development plan could be due within 10 years, you therefore wouldn't want to end the overage before that, knowing that the land may become allocated for housing in 10 years time.
How the overage payment is calculated - the buyer and seller will usually negotiate this, but it is commonly based on a percentage of the uplift in value. This can be based on valuation evidence at the time of the activation of the clause, or can be based on a baseline figure, with the buyer paying a percentage of any uplift in value above this baseline.
It is worth noting that, when negotiating an overage clause into a sale, if the seller insists on a clause that it too onerous on the buyer, then it may impact the buyer's ability to mortgage the property and may make the purchase unviable.
Whilst the overage agreement is a legal document, it is highly advisable that a Valuer assists you during the drafting stage, as you will need advice on the likely impacts of the detail of the clause. For example, I have seen some overage clauses that from a valuation perspective, are not very practical and may be unworkable or lead to dispute. When an overage clause is being activated, it goes without saying that you should consult a Valuer, and your appointed Valuer will produce a robust and evidence backed valuation to support your position in either paying overage, or receiving it.