What is an Overage Clause?

In the UK, property owners often look to invest in properties that increase in value.

However, sellers sometimes want to benefit from an increase in value, too.

But how is this possible? What can sellers do to benefit from future property or land value increases?

An overage clause provides an elegant solution to this problem.

What is an overage clause in property transactions?

An overage clause is included in a property transaction if the seller wants a share in the future value of a property or land.

An overage agreement will outline how the seller will benefit from any future increases in value, and the buyer can decide whether to agree to this.

Overage clauses are a lesser-known but important aspect of some property transactions.

How common are overage clauses?

Most sales do not include them, but some do. If you are going down this route, you should seek expert legal support.

Overage clauses are most commonly seen when a property developer purchases land, as the seller may want to benefit from any new developments built there.

What triggers overage clauses?

In an overage clause, there are usually specific ‘triggers’ which will initiate an overage payment. Examples of these triggers include:

Demolition and reconstruction of a larger building
Gaining planning permission for vertical or horizontal extensions, extra dwellings or other value-add purposes
Disposal of the property at a higher price within a fixed period
Sale of the property or land after pre-planning conditions have been met

There are many, many more triggers that could potentially feature in an overage clause besides the ones listed above.

You should consult with a legal expert to ensure that ‘all bases are covered’ and to get a more comprehensive list of potential triggers for an overage.

Find the right experts

Remember that not all conveyancers have experience dealing with overage clauses, which are uncommon.

You can find legal experts who specialise in this area, and you may therefore wish to consider hiring them.

Finally, you should remember that overage clauses complicate a buyer’s tax position, as they may have to pay more Stamp Duty Land Tax.

Depending on the circumstances, the seller may also be required to pay tax on overage payments further down the line.

What do buyers gain from an overage clause?

A potential buyer may be willing to include an overage clause if they suspect that the purchase will not proceed without one.

For example, some property developers will incentivise someone to sell by offering an overage clause, which will hopefully act as a financial reward further down the line.

What do sellers gain from an overage clause?

In a typical sale (without an overage clause), the seller receives an up-front payment for the property/land, and then no more money is generated from that deal.

However, an overage clause allows a seller to make more money in the long term by benefiting from any increase in the value of the property or land.

How much does an overage payment cost?

Overage payments are usually a percentage of the increase in value.

So, the amount you receive from an overage will vary significantly according to the value of the property/land and how much it has increased.

In most cases, the land buyer will want inflation to be disregarded when calculating overage payments.

They will also want to deduct any costs involved in achieving the increase in value – for example, any fees associated with obtaining planning permission.