When undertaking valuation work or looking at potential development prior to sale we often get asked about overage clauses or potential to realise value if planning permission is granted in the future. Overage clauses and clawback provisions aim to achieve full value in relation to land being sold where a later purchaser achieves additional value at that later time.
HM Treasury guidelines state Government land should normally be sold with planning permission, but sometimes planning delays make it more expedient to dispose of the land early with clawback provisions to maximise value. Private land sales can depend on the objectives of the seller as well as the ability, for example, to fund obtaining permission prior to sale as well as the timings of Local Plans, policy etc.
Overage can be positive, so the seller receives additional money if additional value is received. It can also be negative if the purchaser won’t develop or has does not have sufficient interest in land, in which case an overage clause isn’t required because the seller controls the situation. Stamp duty land tax (SDLT) and land transaction tax (LTT) will add to positive and developers should consider any SDLT when tendering for sites. The duration of overage clauses can be very lengthy! Some clauses state 80 years although this may be regarded as excessive.
The clauses are enforced through a contract between the original parties. Third party purchasers must take benefit of the assignment by an express assignment. Covenants may be automatically annexed to the land but the problem here is that later purchasers are not contractually assigned to the original agreement, so there needs to be some form of property rights created that are binding on the purchaser. This can be achieved though positive covenants and restrictions, restrictive covenants, ransom strips and a charge or mortgage.
Positive covenants and restrictions are not ideal and if the land is freehold they will not burden third party purchasers. Although, there are ways round this such as estate rent charges. With direct covenants and restrictions, each new purchaser enters into a direct covenant with the original seller (or successor) so they are contractually bound. A restriction should be placed on the land registry that the lands should not be disposed of without such deed of covenant.
Restrictive covenants are less effective as they may subsequently be discharged as obsolete (limited damages may be awarded), or if they prevent reasonable use and enjoyment of land.
The Trigger Event
Usually, this is when planning permission is granted, which is a publicly availably event, although it does not in itself give the landowner money, although money could be borrowed against the security of the extra value. Major developments are likely to secure outline planning subject to a later detailed consent, which would be easier to value and would overall be a better overage link value.
At the opposite end of the scale some developments within the curtilage of a property are allowed without planning permission under permitted development rights. Changes of use within the use classes order as amended (see below) will be exempt. It will need to be decided if these trigger overage, as there may be special circumstances linking overage to them. Drafting of legal documentation needs to be clear, and careful, as to whether permitted development or prior approvals can be trigger events too.
From 1 Sept 2020 in England Class A1 shops, Class A2 financial and professional services, A3 restaurants and cafes and B1 business are all included in a new Class E. Class E will includes (paraphrased) display/sale of goods (not hot food) mainly to visiting members of the public, sale of food and drink, mostly consumed on the premises, provision of financial or professional services or any other service which it is appropriate to provide in a commercial, business or service environment, the provision of health or medical services (with some exceptions). Any change of use involving drinking establishments, takeaways (old classes A4 and A5), cinemas and live performance venue still require planning permission. There is a new Class F1 applying to residential and non-residential institutions, and a new Class F2 applies to community uses.
Apart from development not requiring planning consent, there is also unauthorised development where development is carried out anyway. Such development may be exempt from enforcement after 4 years, and if there is a change of use or breach of planning condition it could be exempt after 10 years, unless there is deliberate concealment of the breach in which case the time periods continue. In such cases the landowner may still be able to realise the value if the Local Authority decides not to pursue enforcement or is unaware of the development.
Another issue relating to the uplift in value might occur if the land is part of a bigger parcel of land, perhaps providing access to another plot (ransom strip) or may need to be taken into account as provision of public open space without itself being used for development. On trigger for part of a property it would be advisable to determine a new base value.
Thus, overage is sometimes linked to implementation of planning consent. If lands becomes available for development or is involved in a larger development or development starts with the blessing of the lands owner, then overage becomes payable. It may be advisable for the overage to be linked to anyone having an interest in the land, whether derived from the grantor or not, so that restrictive covenants remain binding, even on ‘squatters’ on the land.
Alternatively, overage payment may be triggered when cash accrues to the landowner. This will not normally be any sale, but may not invariably be the case and a resale at increased price could trigger a payment.
Overage Charges
Overage can also be applied by way of a charge, whereby the grantor gives a charge to secure the amount of overage payment. When a trigger event occurs (e,g. planning permission) the charge will then automatically secure the payment. If the payer does not pay the recipient can sell the land to recover payment and has the same rights and remedies as any other mortgagee.
The overage owner will require priority of payment over other charges. This may ultimately mean overage charges are less important for residential properties or properties where financing is required. The proviso would be, in registered land, that priority is based on restriction date and no distinction between legal and equitable charges, although legal charges have the benefit of enhanced remedies as the power of sale may automatically arise and become exercisable without application to the courts. Lenders may require priority to be given to a subsequent charge. Usually there may be provision that such charge would be consented to if reasonable.
As you can see, from above, in considering overage changes or clawback provisions it is key that appropriate advice is taken from key professionals including for example, planning consultants, solicitors, tax advisors and valuers. The combination of advice, combined with the objectives of the potential overage or clawback will dictate the wording and type of any agreements as part of a sale.