Overage Clauses Explained: How Landowners Share in Future Uplift
An overage clause (also called clawback or an uplift clause) gives the seller of land a right to an extra payment after the sale if something specified happens that increases the land's value, most often the grant or implementation of a better planning permission, or a resale at a higher price. The payment is usually a share of the increase in value, and it's normally secured by a covenant from the buyer protected by a restriction on the title.
It's the landowner's insurance against selling too cheaply. It only works if the drafting is tight.
When overage makes sense
Overage is worth considering when you sell land or a building:
- without planning permission, or with a permission that falls well short of what the site could take
- to a developer or promoter who expects to add value through planning
- as a public body or charity that must be able to show it got the best price reasonably obtainable
- at a price reflecting existing use, where both sides disagree on hope value
The alternative routes to the same goal are an option, a promotion agreement or a joint venture, where you stay involved until planning is achieved. They're compared in option vs promotion agreement vs JV. Overage is the simplest of the four: you get your money now and keep a share of the upside.
Positive and negative overage
| Positive overage | Negative overage | |
|---|---|---|
| How it works | The buyer promises to pay an extra sum when a trigger event happens | The seller imposes a restriction (for example, no development) and charges to release it |
| Security | Covenant plus restriction on title, legal charge or guarantee | Restrictive covenant, which needs retained land that benefits |
| Main weakness | Depends on enforceable drafting and a buyer who can pay | A restrictive covenant can't secure a positive payment and can be challenged at the Upper Tribunal |
Most land sales use positive overage.
The trigger events
The trigger is the event that makes the payment due. Common triggers:
- Grant of planning permission for a defined development.
- Implementation of that permission (starting works).
- A better permission replacing an existing one, for example more units.
- Disposal of the land, or part of it, with the benefit of a permission.
- Sales revenue from the completed scheme passing an agreed threshold.
Developers usually resist a trigger on the grant of permission, because they may never build it out. Landowners usually resist a trigger only on implementation, because the land can be sold on with planning and never built by that buyer. A trigger on disposal with planning is a common middle ground.
Where the buyer is a single-purpose company, add a trigger on a change of control or a sale of shares. A restriction on the title can't stop the shares in the owning company changing hands.
How the overage payment is worked out
There are two broad methods.
- Value-based. The land is valued with and without the new permission at the trigger date, and the seller gets an agreed share of the difference.
- Profit or revenue-based. The seller gets a share of the developer's profit or of sales above a threshold. It needs open book accounts and an agreed list of what costs can be deducted.
The share and the period are commercial points, negotiated each time. There is no standard percentage and no standard length.
Test every formula with real numbers before you sign. In one well-known case, a missed element in a complex formula gave the seller a far larger payment than either side intended.
How overage is secured
An overage payment is only as good as your ability to collect it. The usual options:
| Security | How it works | Watch out for |
|---|---|---|
| Positive covenant + title restriction | The buyer covenants to pay; a restriction on the register stops a sale without your consent or a deed of covenant from the new owner | Most common; doesn't stop a share sale |
| Legal charge | A mortgage over the land for the overage sum | Developers' funders usually want a first charge, so it's often refused |
| Parent company or third-party guarantee | Someone with assets guarantees the payment | Only as good as the guarantor's finances |
| Ransom strip | You keep a strip the development needs for access | Must be monitored; doesn't secure payment on its own |
| Restrictive covenant | You charge for its release | Needs retained land; can't secure a positive payment |
Drafting traps landowners fall into
Courts see the same disputes again and again. The lessons:
- Define "planning permission". Outline or detailed? Does permitted development count? Who has to apply? In one case the court calculated overage on the developer's permission, not the one the seller had in mind, because the contract was silent.
- Define the development. Generic words like "residential accommodation" have been held to catch a care home scheme the developer argued was a different use.
- Long leases are disposals. A long lease at a premium can move the value without a sale. Include it.
- One-off or continuing? A one-off trigger lets a buyer obtain a modest permission, pay a small overage, then apply for the scheme it really wants.
- Control the deductions. Limit costs to those "reasonably and properly incurred", and cap or approve the big ones.
- Dispute resolution. Name an independent valuer or expert and the timetable.
Tax: how HMRC treats overage
Two points to raise with your tax adviser before you agree heads of terms:
- Capital gains. Where the future overage can't be quantified at the sale, HMRC's guidance is that the value of the right to receive it is included in the sale proceeds at completion, and the later payment is treated as a disposal of that right. Individuals can in some cases carry back a loss on that right; companies can't. If the transactions in land rules apply, the gain can be taxed as income instead.
- Stamp duty land tax (buyer's side). Overage is contingent consideration for SDLT. A buyer can apply to defer SDLT on contingent or uncertain consideration payable more than six months after completion, but the application must reach HMRC within 30 days. It affects how the buyer prices the deal.
Before you agree overage
- Know what the land could be worth with planning before you set the price.
- Choose triggers that match how this buyer will make money.
- Add a change of control trigger for company buyers.
- Fix the share, the period and the valuation method in the heads of terms.
- Run the formula with three sets of numbers.
- Agree the security and check the buyer's lender will accept it.
- Take tax advice on the structure before exchange.
The first point is where most landowners lose money. Our land value uplift and planning gain work tests what a site could realistically achieve, and a development feasibility and site appraisal puts numbers on it. At Allitsen Road in St John's Wood, four design options for a vacant building in a conservation area were tested against planning policy and viability before any was recommended.
If you've decided to sell, see how to sell land to a developer and our land acquisition, option and promotion service.
Thinking of selling land or a building in London? Send us the address. We'll tell you what could be built there and what it could be worth.
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