What are overage agreements and when should they be used?

• Commercial Property

Overage agreements are relatively commonplace in commercial and residential developments and land sales, but what exactly are they and when should they be implemented?

What is an overage agreement?

An overage agreement (also called a “clawback” or “uplift” clause) is a contracted agreement where the seller of land can receive an additional payment after the sale, if an agreed trigger increases the land’s value. It is most common where the land has development potential, but that potential is uncertain at the time of purchase.

An overage therefore, lets a developer pay a lower price upfront, whilst giving the seller a chance to share in the development value if the project succeeds.

Why overage agreements are used

Overage agreements are often used to bridge a pricing gap. A seller may believe the land will be worth much more once planning permission is secured, infrastructure is delivered, or homes are sold. However, a developer may not want to pay for that future value until it is actually achieved. An overage can make a deal possible where otherwise the parties cannot agree a price.

The financial impact of these agreements can be substantial, so it is always advised that a commercial property solicitor is involved in the discussions from the outset. Without clear advice, either party could face significant losses. For a developer this could make a development site completely unviable, for the land seller they could forfeit the opportunity of increasing the value of their land by thousands of pounds.

What usually triggers an overage payment?

The overage agreement must clearly define the “trigger event” (the event that makes overage payable). Common triggers include:

• Planning permission: payment becomes due when a qualifying planning permission is granted.
• Starting development: payment becomes due when development is lawfully commenced.
• Sale or disposal: payment becomes due when the land (or part of it) is sold, or when units are sold or long leases are granted.
• Sales receipts / completion milestones: payment is linked to unit sales, practical completion, or phased completions.

It is important to ensure that the agreement is clear as any grey areas could cause disputes.

Whilst drafting and negotiating the overage agreement, objective definitions such as “planning permission” and “commencement” are key to the agreement. In addition, the agreement will require permitted actions to facilitate development such as granting easements, transferring affordable housing, or intra-group transfers needed for funding or delivery.

How is overage calculated?

There are three common approaches to calculating overage value:

1. Percentage of uplift: the seller receives a percentage of the increase in value between a “base value” and an “end value” at the trigger date.
2. Fixed sum: a set amount is payable on the trigger (for example, £X per unit).
3. Sliding scale: the percentage changes depending on how much value is created.

When drafting the overage, the agreement will state how values are measured such as market valuation vs actual sale prices, what assumptions the valuer must use, and how disagreements are resolved (this is often by an independent expert valuer).

Deductions and “allowable costs”

A major negotiation point between land sellers and developers is what costs can be deducted before overage is calculated. Developers typically push for deductions for genuine project costs that reduce the real “profit” or uplift, such as:

• Planning and professional fees
• Section 106 / CIL and other infrastructure obligations
• Abnormal remediation and enabling works
• Finance costs (often with an agreed rate or method)
• Marketing and sales costs
• Affordable housing impacts (where relevant)

The agreement should say what evidence is needed, whether there are any caps, and what is excluded. If this is not clear, the risk is that both parties could end up in a dispute.

How long should an overage agreement last?

Overage should not last forever. It usually runs for a fixed period (often 10–30 years depending on the site). A commercial property solicitor acting for a property developer will negotiate a clear longstop date, after which no overage is payable. They will also consider phased releases so that once a phase is completed and settled, the title can be cleaned up for refinancing or onward sales.

Overage anti-avoidance clauses

When acting for the landowner, a commercial property solicitor will set up protections against structures designed to avoid overage (for example, extracting value through options, leases, or connected-party deals).

The commercial property solicitor acting for the developer will usually accept reasonable anti-avoidance, but developers should ensure it does not accidentally catch normal development activity, funding arrangements, or plot sales.

Anti-avoidance clauses are targeted, with clear permitted transactions and a workable consent/release process.

Security and lender issues to consider

Sellers often want security to ensure they get paid. Common tools include:

• Land Registry restriction: this prevents certain dispositions unless overage conditions are met or certified.
• escrow/retention: holds money back but ties up cash.
• guarantee: useful where the buyer is an SPV.

Developers should involve funders early, because overage security can affect lending and plot sales. The goal is to obtain security that protects the seller without blocking finance or routine disposals.

Reporting obligations in an overage agreement

Overage agreements usually include notice requirements, reporting obligations, and audit rights. Developers should keep these proportionate and protect confidential information.

If you need legal advice from a commercial property team experienced in land sales, land purchases and overage agreements, then contact GA Solicitors in Plymouth by calling 01752 203500 or email me directly via lauren.dixon@GAsolicitors.com

GA Solicitors’ commercial property team is ranked in The Legal 500 and highlighted as a leader in this specialist field.

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