In part I of this series of Articles, we looked at what an Overage Agreement is and why a Seller of a property may think about entering into an Overage Agreement. To summarize, an Overage agreement is entered into by the Seller to safeguard their interest in any future rise in the value of the land they are selling. In the following paragraphs we look at the downsides of entering into an Overage Agreement, the issues involved and reasons why entering into an Overage Agreement might not be the best longterm option for a Seller.
The Overage agreement is a contractual obligation and therefore is only enforceable against the parties to the contract. Without careful consideration by the Sellers Conveyancer, an Overage can very easily be lost. If ever the terms of the Overage agreement are restricted to the contract, they’re going to be unenforceable against succeeding owners of the property; hence if the buyer sells the property on to another party and that other party develops the land, the original Seller will not be able to enforce the Overage agreement and won’t get paid.
Safe guarding the Overage Agreement
There are numerous mechanisms to safeguard the long-term enforceability of the Overage Agreement :
- The Original Seller may register a Charge against the Property - This may be problematic in cases where the buyer is using mortgage finance to buy the Property. The mortgage lender is unlikely to allow an additional Charge on the title and in the event that they do it will probably be a ‘Second Charge’ and will be be subject to the legal rights of the lenders charge which will be ‘a First Charge’. This usually means that if the buyer defaults on their mortgage, the lender may take back and then sell the property and in doing so overreach the Original Sellers Second Charge -without any obligation to the Seller.
- The Original Seller might include a ‘positive covenant’ ( a covenant to carry out a task )to pay the Overage in the Transfer -In property law, positive covenants do not ‘run with the land’ and as a result will not be enforceable against succeeding owners of the land; which means that once the buyer sells the land on, the Overage would be unenforceable. A positive covenant can be made enforceable by the introduction of a ‘Deed of Covenant’, where by each succeeding owner of the land has got to covenant directly with the Original Seller to adhere to the Overage agreement. The Deed of Covenant will have to then be protected by way of a Restriction on the Title whereby the title to the Property can not be registered in the name of the new owner without having a certificate from the Original Seller affirming that they have received the duly executed Deed of Covenant. Although quite effective, this can be a very cumbersome mechanism which can impose a heavy administrative burden on the Original Seller ; and if not administered correctly, can result in difficulties for subsequent Sellers particularly if the Original Seller does not update their contact details or passes away.
- The Original Seller could include a ‘restrictive covenant’ (a covenant forbidding an action) in the Transfer i.e. not to develop the land without paying the Overage to the Original Seller – This is a frequently used option. Covenants in the Charges Register of a title which state that the owner of the land are not able to build without paying a fee to the developer – are in a sense, an Overage. Using this method of safeguarding an Overage brings with it various pitfalls, including the powers of the Lands Tribunal and Section 84(1)(aa) of the Law of Property Act 1925 which may overturn a restrictive covenant if it’s seen to be preventing the reasonable use of the land. In the event that owner has obtained planning consent, it is hard to see just how the development cannot be seen to be a reasonable use of the land. An additional difficulty with restrictive covenant is that they are generally imposed to guard the interests and use of the sellers retained land and as a result are only enforceable if the breach interferes with the use and enjoyment of that land. If the Original Seller who imposed the restrictive covenant to protect the Overage does not retain ownership of any property in the vicinity of or abutting the land, it is hard to determine how any breach of covenant can be seen to be interfering with their use and enjoyment of their land. A means around this is for the Original Seller to keep hold of a small piece of land or a ‘Ransom Strip Having said that, any settlement paid as a result of any breach of the restrictive covenant would be based on the value of the Ransom Strip and is thus unlikely to compensation for the loss of the Overage payment.
- Development or Building Lease - This is typically employed by local authorities when selling land to developers for large housing developments. The local authority leases the land to the developer who then builds the housing estate on the land. The Overage terms are incorporated into the lease and if the developer breaches these terms, the land is forfeited (subject to the Courts powers to avoid forfeiture). The developer can then purchase the Freehold in its entirety from the local authority at a price reflecting the improved value of the land as a result of development or the local authority may sell the Freehold of each part of the estate directly to the end user upon payment by the developer of the appropriate Overage payment.
It can be said that Overage Agreements may make more problems for the Seller than they solve. A far easier alternative, providing the Sellers is not in a rush to sell, would be a conditional contract. A condition is added to the contract whereby the buyer will only have to complete the purchase if they are granted the planning consent required to develop the land. If the purchaser gains the planning they must buy the land at a higher price reflecting the development potential of the land.