How overage agreements work in farmland sales

Overage agreements are being used more frequently in land sales across the UK, as sellers look to secure a percentage of any future increase in value.

An overage agreement is a condition attached to the sale contract that gives the seller a percentage of any uplift in value if the site gains planning permission for non-agricultural development at a later date.

This can also be referred to as a clawback or uplift agreement.

See also: Autumn GB market continues with farms, estates and forestry

High demand for housing is expected to lead to more land being developed, with the government previously setting a target of 300,000 new homes a year.

There is also huge pressure for land for development of commercial warehousing.

Overages are particularly common in land sales in areas with a high population density or on the fringe of an existing urban area.

Due to the complex nature of these agreements, they can affect the time taken for transactions to complete.

The right legal advice is also essential in order for sellers to make sure any overage clauses are watertight and enforceable.

Overages tend to be a separate legal agreement that can be costly to implement.

To prepare and negotiate an overage deed, legal fees can range from £1,500 (plus VAT) for very simple overages to £5,000 (plus VAT) for more complex arrangements.

Will Whittaker, director in the national estates and farm agency team at Strutt & Parker, says up to 50% of farm sales currently include overages, but it often comes down to what the farm or land is and where it is located.

“Overages have become increasingly common, principally as a result of a change in planning policy.

With such a high requirement for housing in this country, we are seeing housing developments appear all around our cities, houses, and villages,” says Mr Whittaker.

However, overages can be off-putting to a buyer as it is a restriction on the property and title.

Buyers are becoming more familiar with them though, especially those who are purchasing land with rollover money from previous sales, he says.

“It quite often comes down to the terms of the overage – if a seller is quite aggressive with the terms, then that can be quite off-putting.”

Negotiating

Mr Whittaker says overages can be negotiated out of contracts, and that the terms and percentage for an overage will vary depending on the offer made.

“Quite often, overages are worth 30% of any uplift in value for non-agricultural purposes and are typically in place for about 30 years,” he said. However, some clauses apply for far longer than this.

“Some buyers are willing to pay a higher price now in order to remove the overage from the title altogether and quite often clients are happy with that, because they would rather some uplift in value now, than wait for something that may or may not happen in the future.”

Claire Waring, partner in Warwickshire-based law firm Wright Hassall, says the percentage value of overages is always subject to commercial negotiation and to an extent depends on the headline purchase price at completion.

“In terms of how long they last, a planning overage would last longer than the other formats, as plot sales usually finish after the last plot is sold and turn overage is if they make a quick return and flip the land in a short period after completion,” says Ms Waring.

Triggering a payment

When a payment is triggered will depend on the type of overage in place. For a turn overage, payment will be triggered when a contract is either exchanged or completed within a certain period.

In the case of planning overages, developers will want to wait until the planning permission cannot be challenged by a judicial review before a payment is triggered, so they know that planning is safe, according to Ms Waring.

She says: “From the landowner’s [seller’s] point of view, you need to be careful that if planning permission is granted within the overage period, even if it is implemented after the expiry of the overage period, it still triggers the overage.”

Payments are usually triggered for plot sales overages when the final house on a development is sold. However, this can lead to issues if the developer does not sell all of the houses.

“In this circumstance, a calculation should be made on the market value of the site by a set date, in order for the overage to be triggered.

“You basically have a long stop date inserted, so that if the final plots are not sold by that long stop date, then you have a market valuation and put a market valuation assumption in there and do a full calculation of what the landowner is entitled to as a further payment,” says Ms Waring.

Advice

Overage arrangements are by their very nature complex and detailed and that is why a lawyer familiar with them is needed, says Ms Waring.

There is a whole raft of case law and disputes about overages that show what a minefield it can be.

“You’ve got to get the drafting right – the devil is in the detail.

“Allied to that, in order to make overage provisions watertight for the future, you have to consider how they are going to be secured. You can have a beautifully drafted overage agreement that ticks all the boxes but isn’t actually protected in any way, which can be pretty much worthless.”

Taxation

Capital gains tax (CGT) will typically be due following the initial sale of land, aside from any potential overage payments.

However, if a payment is subsequently received as a result of an overage clause being enforced, it will usually be subject to income tax, which is generally levied at a higher rate than CGT.

This is referred to under Section 756 of the Income Tax Act 2007, which relates to income treated as arising when gains are obtained from certain land disposals.

Dan Heal, adviser at accountancy firm Old Mill, says: “HMRC will aim to tax overages as income as the default position, and how to mitigate that and manage that depends on individual cases.

“Overage is a very technical area of tax, and it needs very careful planning to ensure the overage payment is able to be taxed as capital instead, so it really warrants special advice.”