Overage Clauses

August 4, 2023

Overage clauses and clawback provisions are designed to achieve full value in relation to land being sold where a subsequent purchaser achieves additional value in the land at a later time. Overage clauses are typically introduced where the property is expected to be redeveloped or planning permission will be granted at a later date, entitling the seller to receive further payment. These clauses protect the seller’s right in the increased future value of the land.

The general guidance following the Herstmonceux case in 1986 provided that government land should normally be sold with planning permission. However, as there can be delays in obtaining planning, in some cases it is appropriate to sell the land early and introduce an overage clause / clawback provision, so the buyer can achieve full value in the land at a later date.

Trigger Events:

Additional value in the land generally occurs after a ‘trigger event’. The most typical trigger event is the grant of planning consent. Once planning consent has been granted over the land previously sold, any clawback provisions are enforceable. The main advantage of planning being the trigger event is that is an ascertainable event, and the knowledge of which is publicly available.

Other trigger events that may result in the uplift in value of the land include:

• Approved change of use of a building;
• Commencement of the building of a development;
• Sale of the final unit at a development;
• Any onward sale of the land within a set time period for a higher value; and
• Any demolition and/or reconstruction.

Positive & Negative Overage Clauses:

It is important to note there are both positive and negative overage clauses. A positive overage clause will set out that if additional value is received, then additional money will be given to the seller. A negative overage clause may set out that any further payment is not due if the buyer does not develop or does not have a sufficient interest in the land. Negative clauses remove specific circumstances that will not trigger the overage clause.

Payment / SDLT:

Overage clauses may set out a fixed amount for payment or may refer to a calculation that will assist with determining the final figure. The duration of overage clauses is dependent on its facts and will be decided in the contract, but typically there is no set time period for enforcement.

When dealing with Stamp Duty Land Tax and Land Transaction Tax, the best estimate of the total consideration based on the trigger event occurring should be made, and the SDLT calculated to reflect this. When the ‘trigger event’ actually occurs, a further return must then be made. However, if there is any doubt, it is advised you obtain specific tax advice in respect of overage clauses. Both buyers and sellers should be aware of the implications of overage clauses / clawback provisions in the sale of land. If you require any further information regarding overage clauses and triggers events which result in the uplift in the value of the land, please contact us at 0121 705 7571 or at enquiries@wallacerobinson.co.uk

James Sawyer
Trainee Solicitor – Commercial and Development Department

This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.