Seek advice over complex area of law

Feb 17 2009 by Iain Laing, The Journal

IT is not unusual for sellers of land to need what is known as 'overage' or 'clawback' provisions in the sale contract. Overage is the potential right for a seller to recover an additional sum from the buyer on the occurrence of a future event.

Overage is likely to be a contentious subject in the current economic climate. Sellers are reluctant to sell their land at low prices and are therefore more likely to want to include overage, whereas buyers are in a strong bargaining position to refuse to buy land that is subject to overage.

However, this is not to say that there will be no common ground to be reached. A seller and buyer may negotiate and reach an agreement to enable the seller to benefit from an increase in value to the land, but which also allows the buyer sufficient profit from the increase in value to make the transaction worthwhile. Key to this is the amount or share of the increase which the parties agree.

Some overage provisions may also be unacceptable to lenders, which makes it even more unattractive for buyers to buy land subject to overage.

Buyers are only likely to agree to overage provisions in the current market where they are buying the land for themselves and have no intention to develop or dispose of the land in the near future.

Notwithstanding the above, there are situations where a seller may include overage provisions:

Where there is a potential for the future grant of planning permission for development or a change of use, which may significantly increase the value of the land

Where a low sale price has been agreed to reflect a problem with the land that may later be remedied, such as potential contamination

Where the property market is suffering from a downturn, which would make a seller reluctant to sell unless they could benefit to some extent when market conditions improved

For both parties the negotiation and drafting of overage provisions is complex and high risk, which can prove to be costly if the provisions do not work or do not reflect the parties’ true intentions.

Sellers and buyers should seek advice from their surveyor and solicitor during negotiations and throughout the drafting process.