Top up payment or overage overview
Where a seller wishes to share in any potential increase in the market value of the land the seller has sold, the parties often agree an overage payment from the buyer. This is the payment of an additional sum on top of the initial purchase price paid at the time of sale that becomes due from the buyer if a triggering event occurs. For example, the initial price might have been agreed on the basis that a certain planning permission would be obtained by the buyer. If the buyer subsequently obtained a more lucrative permission (such as a larger floor area or more units), the seller will share in that subsequent uplift. However, it’s not always that simple!
Potential pitfalls
Drafting the overage provisions of an agreement for sale is a highly complex exercise. It involves consideration of all the various combinations of events which might happen over the period in which the overage might become due (“Overage Period“) and a proper description of the event (“Trigger Event“) which would give rise to the payment and a method of calculating the sum to be paid (“Overage Sum“).
If the parties do not fully understand and agree what these terms are, the seller could be missing out and a dispute(s) could easily arise.
The parties also need to consider future events. A buyer might seek to avoid making a payment by selling the property on to another. The parties should consider whether the obligations should be binding upon successors and consider what happens in the event of the insolvency or liquidation of the buyer.
The overage provisions also need to be properly protected to ensure payments are made and/or those successors to the interests become bound by the terms of the original agreement. If the overage is protected by a restriction on title at the Land Registry (as is common), thought should be given to who can provide any required certificates to demonstrate compliance. Does the seller want to be involved or can the buyer police themselves? It is possible to make the removal of any restriction at the Land Registry contingent on the buyer paying the overage (should it become payable), rather than simply an automatic removal at the expiry of the Overage Period.
Careful thought needs to be given to how long the Overage Period should be. If it is too short, the buyer could essentially ‘wait it out’ before undertaking the Trigger Event simply to avoid becoming liable to make the payment.
If the drafting is not therefore extremely precise, there could be a high degree of uncertainty and no guarantee of seeing the money even if the Trigger Event is satisfied.
The devil is in the drafting
Things to consider by way of some examples:
- Trigger Event
- If the Trigger Event is based on a planning permission being obtained, is it the grant of a specific type of planning permission or any permission? Is the payment due on grant of the permission or implementation of it?
- If the Trigger Event is based on disposal of the land, the precise meaning of disposal should be set out so either party understands what it can or can’t do without making or expecting a payment.
- If the Trigger Event is based on completion of a development, the definition of completion should be described.
- Is the Trigger Event a one off – meaning just one Overage Payment – or is the seller expecting multiple bites at the overage cherry each time the buyer undertakes a Trigger Event?
- Overage Sum
- If the Overage Sum is by reference to a profit, the method of calculation of that profit needs to be specific. For example, are the costs of obtaining the planning permission, which can be extensive, an allowable deduction before the Overage Sum is paid?
Teamwork
Drafting can only get the parties so far and if either party does not genuinely trust the other, there are likely to be difficulties with overage payments as they are notoriously litigious.
For example, if someone wants to avoid making a payment, they will explore avenues to try to find a way. In Sparks v Biden [2017] EWHC 1994 (Ch), overage was triggered on the sale of the last of the newly developed units. The buyer simply did not put the last unit up for sale!
Some overage provisions contain mutual good faith clauses for just this purpose. This means the parties will deal with each other honestly, fairly, and in good faith and not purposefully seek to destroy the purpose of the agreement.
A cautionary sale
The serious risks of overage provisions became all too real in the regrettable case of Carlton Vale Limited v Gapper [2023] UKUT 141 (LC). The seller protected its entitlement to overage with a restriction on the land’s title. A five-year Overage Period passed with no payment forthcoming from the buyer, despite the seller arguing the Trigger Event had occurred. However, the relevant clause of the agreement was drafted in such a way as to make removal of the restriction independent of the buyer paying the overage, even once it became payable. It was merely contingent on the expiry of the five-year Overage Period. However, it does not end there. Take a look at the drafting of the Trigger Event:
“Within 7 days following the obtaining of a Satisfactory Planning Permission or if earlier a disposal of the Premises […] the Landlord shall pay to [x] the Payment…”
There are two potential Trigger Events here, one of which, ‘disposal,’ is left undefined. It was open to the buyer to claim the disposal had never in fact taken place, since no one knew what a disposal was! These drafting errors taken together denied the seller some £90,000 in lost overage.
Ultimately, as overage is a highly litigated area, sellers and buyers would be well advised to seek legal advice to safely negotiate and draft these complex agreements.