Whether you’re selling land in an uncertain property market or to a developer, having an overage agreement in place is a great way to ensure additional payment if the value of your property increases.

But how exactly do they work? What are the risks? And what are the tax implications?

In this month’s Legal Q&A, Sarah Heath, Commercial Property Partner  at Frettens, answers those questions and more.

What is an overage on property?

Overage is a contract that requires the buyer of a property to pay the seller additional funds after the sale is complete. It is most commonly used where a property has increased in value since it was sold.

For example, a property may have been sold for £500,000 and the buyer subsequently obtains planning permission that significantly increases its value. Overage provisions ensure the seller has the right to a further payment in such circumstances.

It is a great mechanism for getting a share of any uplift in value after completion of the sale.

Related: A checklist to get your commercial property ready for sale

What triggers an overage clause?

An overage clause may be triggered by:

• Planning permission being granted
  • For a change of use,
  • The construction of another property, or
  • The demolition and re-building of a more intensive development
• Redevelopment taking place
• The sale of a completed development

Overage can also be agreed beforehand without any of the above triggers, perhaps due to expected changes in the property market, if both buyer and seller agree.

Related: How to sell land to a developer

What is a typical overage percentage?

Typically, an overage agreement sets out a set payment of 25-50% of the additional market value of the property. So, if the property increases in value by £50,000, overage could be £12,500 – £25,000.

Alternatively, an overage agreement could specify a set amount or provide a formula to calculate the amount payable; perhaps based on the property’s value according to a price index.

How much does an overage agreement cost?

In short, it depends. You may incur valuation, surveying, negotiation, administration and legal fees as part of drawing up an overage agreement.

Its best to get a quote from all the relevant parties to ascertain how much an overage agreement is likely to cost before proceeding, especially if the perceived increase in property value is relatively low.

At Frettens, we would be happy to provide a tailored quote for our legal fees in drafting and negotiating an overage agreement. We aim to price our services fairly. You can get speak to a member of the team and get a quote by calling 01202 499255.

How are overage payments taxed?

Depending on your circumstances, and whether the property is residential or commercial, the following tax may apply:

• Capital Gains Tax (CGT)
• Income Tax
• Corporation Tax
• Stamp Duty Land Tax (SDLT)

For tailored advice on your tax obligations, please contact the team.

Related: Selling your house – what documents do you need?

Overage Solicitors

In the full article, Sarah goes into much more detail and answers questions on how long overage lasts, whether it can be removed and more. Read it here.

If you have any questions following this article, please don’t hesitate to get in touch with our bright Commercial Property Team.

We would be happy to provide you with advice tailored to your circumstances and draft a overage agreement for you.

Call us on 01202 499255 for a free initial appointment.