Overage clauses and the payment that can follow land for decades

An overage clause obliges a buyer to pay the seller further money after completion, if a defined event increases the value of the land. The related term clawback is also used. The usual trigger is planning permission. What the clause actually requires depends on the exact drafting, so this is general information rather than advice.

What triggers a payment

HMRC’s VAT manual describes an overage payment as an additional payment made by a buyer sometime after completion, intended to reflect an increase in the value of the property so that the seller also benefits. It says the trigger “may, for example, be the granting of planning permission or the completion of a development by the buyer”.

The Cabinet Office’s guidance on managing surplus government property describes overage as claiming back an element of increased value where there is a general uplift in the market or the market value of the end use is not known at the time of sale. It says any formula should be clear and explicit in the sale agreement, and that clawback levels are usually designed to diminish over time until they expire. That guidance is written for government disposals and private deals are not bound by it, but the principle is a fair test of any clause you are shown: how long it lasts, what triggers it, how the sum is worked out and when it falls due.

A worked example

Take a half acre paddock behind a house, bought for £40,000, with a 30% overage running for 25 years and triggered by the grant of residential planning permission. The figures are illustrative. Ten years later, permission for two houses takes the value to £250,000.

The uplift is £210,000 and the overage payment is £63,000. On that drafting the payment falls due when permission is granted, whether or not the buyer has the money, whether or not anything is ever built and whether or not the land is sold. Shifting the trigger to implementation, or to a sale with the benefit of permission, changes the risk considerably, which is why the trigger is the clause to read first.

Here are the figures at a glance.

How it is secured against the land

Sellers who want the obligation to bite on later owners generally look to the title. The Land Registration Act 2002 describes a restriction as an entry in the register regulating the circumstances in which a disposition of a registered estate may be the subject of an entry in the register. It can prohibit an entry until a specified event occurs, and the events it may specify include the giving of notice and the obtaining of consent.

In an overage deal, that means a seller can ask for a restriction so that a later transfer cannot be registered until the seller has given consent or confirmed that the overage terms have been dealt with. The exact wording is for the deed, so read it.

Note what cannot be done. HM Land Registry’s guidance says that a purely contractual arrangement to pay a person a share of the proceeds of sale of a registered title does not give that person a proprietary interest, and so cannot be protected by a notice.

Why the restriction is what bites

A restriction does not stop you selling. It stops your buyer from being registered as the owner. In practice that can be worse, because the problem surfaces late in a transaction, when the buyer’s solicitor reads the register and asks who is going to sign off.

Tracking down a seller from 1998, or a company that has since been dissolved, to obtain a release is slow work and can delay or derail a sale. It is better started at the point of instruction than the week before exchange.

The perpetuity claim to ignore

You may see it said that overage is limited to 125 years. The 125 years comes from section 5 of the Perpetuities and Accumulations Act 2009, which sets the perpetuity period for the rule against perpetuities. But section 1 says the rule applies only to the interests it lists: successive interests under a trust, interests subject to a condition precedent, rights of re-entry and equivalent rights on a condition subsequent, successive interests under a will and powers of appointment. The explanatory notes add that the rule does not apply, for example, to most future easements, options and rights of pre-emption.

Nothing in section 1 lists a contractual obligation to pay money, so do not assume the Act gives an overage clause a statutory backstop. A conveyancer can tell you whether the rule is relevant to a particular clause. Either way, the duration is whatever the deed says. The example above uses 25 years, but read the term rather than assuming there is a limit.

Who should be checking

Anyone buying land, a large garden, a paddock, a former farmyard or a plot with any development potential should have the register read for restrictions before exchange. So should anyone buying a house where part of the garden was sold off, or bought in, in recent decades. Overage is one of several burdens a title check can turn up, alongside restrictive covenants and rights of way. Our guides cover how to deal with a restrictive covenant and what rights of way and easements mean when you buy.

If you are selling land that carries a restriction, start the release process on the day you instruct rather than the week you hope to exchange. The person whose consent you need may have no deadline, no chain behind them and no reason to hurry. Our complete guide to conveyancing shows where title checks of this kind fall in the timetable, and you can compare conveyancing quotes to find a conveyancer who has handled land sales before.