An overage agreement on land is a legal agreement that is made between a buyer and a seller of land. It is also known as a ‘clawback’ agreement, a ‘deferred payment’ agreement, or a ‘future payment’ agreement.
What is an overage agreement on land?
An overage agreement is put in place to protect the seller’s interest in the land, in case the value of the property increases in the future. This agreement allows the seller to receive a percentage of any future increase in the property’s value after it has been sold. This means that the buyer will have to pay the seller an additional sum of money if they sell the property for more than they originally paid for it.
An overage agreement is usually put in place when the seller believes that their land has the potential to increase in value in the future. For example, a seller might believe that a new development is likely to be built near their land, which would increase its value.
Why is an overage agreement important?
An overage agreement is essential for the seller, as it ensures that they receive a fair price for their land. Without an overage agreement, the buyer could potentially make a large profit from the property in the future, without sharing any of this profit with the seller.
An overage agreement is also important for the buyer, as it allows them to purchase the land at a lower price initially, while still retaining the potential to make a profit from any future increase in the property’s value.
How does an overage agreement work?
An overage agreement typically involves the seller and the buyer agreeing on a percentage of any future increase in the property’s value that the seller will receive. This percentage is usually around 25% to 30% of the increase in value, but it can vary depending on the individual circumstances of the sale.
The agreement will also include a ‘trigger event’ that will cause the overage payment to be made. This event could be the sale of the property, the granting of planning permission for development, or the completion of a development project.
Once the trigger event has occurred, the buyer will be required to pay the agreed percentage of any increase in the value of the property to the seller. This payment is usually made within a set period of time, such as 28 days from the completion of the sale.
In conclusion, an overage agreement on land is an essential legal agreement that protects the interests of both the buyer and the seller. It is particularly important in situations where the seller believes that their land has the potential to increase in value in the future. The agreement ensures that the seller receives a fair price for their land, while still allowing the buyer to benefit from any future increase in the property’s value. If you are involved in a land sale, it is important to consider whether an overage agreement is necessary to protect your interests.