They may have the option of clawing back some of the profits made – even years after the sale – in the form of overage.

Property practitioners are reporting seeing a rise in the use of overage agreements in recent times and, though sporadic, case law is highlighting some of the risks around such agreements.

Overage arises where there is a sale of land or property which is expected to rise significantly in value post-completion. For instance, building developers purchase a piece of land, build a housing development on the land and then sell for significant profit. The contract of sale of the land will include conditions which may entitle the seller to a share of the profits.

The four key ingredients of an effective overage agreement are:

Fixed duration, eg a set number of years
Events triggering the buyer’s obligation to pay overage, often the grant of planning permission
How overage will be calculated, eg a fixed sum or a percentage of the increase in value
How the obligation to pay overage is secured, eg a restriction or charge registered against the title (depending on whether or not there is a lender)

The rise in overage agreements is likely to precipitate an increase in disputes. Practitioners involved in drafting overage conditions must ensure they take great care in drafting and advising to minimise the risk of problems arising.

A recent ruling involving overage was actually brought in relation to the termination of a conditional fee agreement. In Escalate Law Limited, Bermans (2012) Limited v Kennedy [2021] 8 WLUK 99, the defendants bought a piece of land in Leicestershire from the local diocese, subject to an overage agreement in the seller’s favour. The buyers used a local firm of solicitors.

The purchase was completed in 2013, and in 2017 the buyers secured planning permission for a single dwelling house. Development had to begin within three years of planning permission being granted.

Concerns arose around the effect of the overage agreement, particularly there were two serious flaws. First, no deductions were allowed for planning, legal and building costs; second, it provided for repeat payments for effectively the same increase in value which would substantially reduce the value of the land for development, if not sterilise it completely.

Under a CFA, Bermans solicitors was instructed to bring proceedings against the firm. The original firm sought to have the overage agreement rectified at its own cost, though mediation between the parties failed. Bermans then renegotiated the overage agreement with the effect that a fixed sum would be payable either on the sale of the undeveloped land or when development had in fact commenced.

However, it turned out that the claimants had failed to clearly advise Bermans whether the development works had actually commenced (important because of the looming expiration date of the planning permission) and whether they had the funds to make the overage payment. Bermans also believed they had been misled as to whether the defendants would have built five houses on the land if it were not for the original solicitors’ negligence.

Bermans therefore terminated the CFA and brought breach of contract proceedings against the defendants claiming £75,000 in costs. They won.

Drafting errors

While the case itself was a contract case, it is useful to highlight the specific drafting issues referred to in the judgment (these were set out in a referral document prepared for and signed by the defendants which referred to the dispute as a potential professional negligence claim against the original solicitors):

The two key flaws were described as “extremely damaging” to the defendants
The second problem relating to repeat payments could have been a typo mistake or was simply wrong

These appeared to be clear drafting errors in the original agreement, risking losses to the defendant.

There was also the issue of the defendants’ obligation to pay under the overage agreement. At the relevant time, the defendants were very aware of the date when planning permission would expire if they failed to make a material start. The court found that they must have been aware that an agreement to that effect would involve making a £70,000 payment on or shortly after if planning permission was to be preserved.

It’s a clear reminder that buyers subject to overage conditions are clearly advised as to the impact of overage and at what point payment falls due.

Key takeaways

Overage agreements are, by their very nature, complex. Practitioners advising clients on property transactions where overage agreements are involved need to ensure all conditions are robust, unambiguous and do not risk potential losses to clients.

Typo errors of the type suggested in this case, for instance, may have been capable of rectification – but that involves cost, potential delays and inconvenience to the parties. Even where rectification is possible it may only deal with part of the problem.

Taking additional advice from other professionals, such as tax advisors, accountants, planning experts, and valuers and surveyors, may be necessary – dependant on client resources.

Effective processes to identify and resolve issues before agreements are drafted and agreed by the parties mitigates the risks of future disputes, and the costs involved in remedial action.