Sellers often want a share of any subsequent uplift in the value of their land. However, agreements for a share of future profits – known as overage – present many traps for the unwary. Sellers should be careful to obtain adequate security for overage payments.
What is overage?
There are a number of definitions of the term overage, but basically it describes a sum of money in addition to the original sale price which a seller of land may be entitled to receive if the land increases in value in the future. To be entitled to this sum the seller, having sold its interest in a property, retains the right to a share in the increase in value - usually once the buyer complies with some agreed condition such as subsequent development of the land.
Since it may not be in the best interests of the buyer to trigger an overage payment, sellers should be careful when negotiating such agreements. A recent case acts as a reminder that contracts should be drafted carefully, and that adequate security for overage payments should be obtained in the first place.
The Renewal case
Renewal Leeds entered into a contract for the sale of land to Lowry for a residential development. Under the contract, revenue from house sales that exceeded an agreed 'threshold' figure was to be shared equally between Lowry and Renewal.
At the time, expectations about house prices - and therefore the amount of overage likely to become payable - were low. The contract simply provided for the proceeds from the sale of the final house to be retained by Lowry's solicitors until any overage due was calculated and paid. There was no security put in place for this payment, and indeed no express obligation for the developer to build and sell this final house or indeed any house. No overage would become payable at all until this last house was actually sold.
By 2009, the developer had build and sold 80 of the permitted 84 houses on the plot, leaving the remaining four houses uncompleted. Renewal tried to trigger the overage payment by offering to buy these four remaining houses. When Lowry refused, Renewal went to court claiming that completing the contract by transferring the houses was an implied term of the contract.
The judge in the case concluded that what the parties intended was that if Lowry carried out the planned residential development, it was obliged to complete that development and share any overage due equally with Renewal. Therefore, the judge was prepared to order Lowry to complete, market and sell the remaining houses at the best price reasonably obtainable, and to pay overage to Renewal as required under the contract once the last house on the development had been sold.
No organisation wants to rely on the court's willingness to imply terms into a contract to protect its entitlement to overage. Renewal's successful outcome was specific to the facts of the case, and is by no means guaranteed.
It is therefore important, when drafting overage provisions, to make sure that the contractual machinery for the calculation and payment of overage is as watertight as possible and that adequate security protecting a seller's right to overage is put in place at the outset.