In part I of this series of Articles, we looked at what an Overage Agreement is and why a seller of a propertymay consider entering into an Overage Agreement. In summary, an Overage agreement is entered into by the Seller to secure their interest in any future increase in the value of the land they are selling. In this article we look at the pitfalls of entering into an Overage Agreement, the issues involved and reasons why entering into an Overage Agreement may not be the best option for a Seller.

The Overage agreement is a contractual obligation and as such is only enforceable against the parties to the contract. Without careful consideration by the Sellers Conveyancer, an Overage can very easily be lost.  If the terms of the Overage agreement are restricted to the contract, they will be unenforceable against subsequent owners of the land; thus 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 will not get paid.

Protecting the Overage Agreement

There are various mechanisms to secure the long-term enforceability of the Overage Agreement :

• The Original Seller may register a Charge against the Property – This can be problematic if the buyer is using mortgage finance to purchase the Property. The lender is unlikely to allow another Charge on the title and if they do it will be a ‘Second Charge’ and will be subject to the rights of the lenders charge which will be ‘a First Charge’. This means that if the buyer defaults on their mortgage, the lender may repossess and sell the property and in doing so overreach the Original Sellers Second Charge – without any obligation to the Seller.
• The Original Seller may include a ‘positive covenant’ (a covenant to carry out a task )to pay the Overage in the Transfer – In land law, positive covenants do not ‘run with the land’ and as such are not enforceable against subsequent owners of the land; this means that as soon as 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 subsequent owner of the land has to covenant directly with the Original Seller to abide by the Overage agreement. The Deed of Covenant must then be backed up by a Restriction on the Title whereby the title to the Property cannot be registered in the name of the new owner without a certificate from the Original Seller confirming that they have received the duly executed Deed of Covenant. Although very effective, this is a very cumbersome mechanism which can impose a heavy administrative burden on the Original Seller; and if not administered correctly, can cause difficulties for subsequent Sellers especially if the Original Seller does not update their contact details or dies.
• The Original Seller may include a ‘restrictive covenant’ in the Transfer (a covenant forbidding an action) i.e. not to develop the land without paying the Overage to the Original Seller – This is a commonly used option. Covenants in the Charges Register of a title which state that the owner of the land cannot build without paying a fee to the developer – are in a sense, an Overage. This method of securing an Overage brings with it a number of pitfalls, not least the powers of the Lands Tribunal and Section 84(1)(aa) of the Law of Property Act 1925 which can overturn a restrictive covenant if it is seen to be preventing the reasonable use of the land.  If the owner has already obtained planning consent, it is difficult to see how the development cannot be seen to be a reasonable use of the land.

Another difficulty with restrictive covenant is that they are generally imposed to protect the interests and use of the sellers retained land and as such 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 near or abutting the land, it is difficult to see how any breach of covenant can be seen to be interfering with their use and enjoyment of their land. A way around this is for the Original Seller to retain a small piece of land or a ‘Ransom Strip’,

However,any compensation paid due to 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 commonly used 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 buy the Freehold as a whole from the local authority at a price reflecting the increased value of the land due to the 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 could be said that Overage Agreements can create more problems for the Seller than they solve. A far easier solution, providing the Sellers is not in a hurry 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 buyer obtains the planning they have to purchase the land at a higher price reflecting the development potential of the land.

For more information on Overage Agreements see Part I of this series 'What is an Overage' at  http://www.iconvey.co.uk/articles/what-is-an-overage-1263668/index.php