Overages in a legacy context

This is the second article in our series on capturing the development value of land left to charities as gifts in a will.

Where land is left as a gift in a will and may have scope for development potential in the future, but the advice or strategy is not to hold the property, it is common to protect the beneficiaries by the imposition of an overage as a condition of sale. An overage is imposed through terms in the sale documentation which will bind the land to be sold for a period of years (and requires the purchaser and/or other successor owners to pay an additional payment to the seller in the future if certain trigger events (such as obtaining planning permission for the land) occur.  As a rule of thumb, the overage period is not normally more than 30 years.

Overages can at first sight appear to be a win win; you have your cake and can eat it as well, receiving the purchase price and having a chance for an additional payment on top, further down the line.  There can, however, be downsides to overages - imposition of an overage:

• Will, in all likelihood, reduce the purchase price paid up front.
• May be off-putting to some purchasers, particularly small-scale developers;
• May not result in an additional payment;
• Is complex and requires specialist drafting and advice.
• May lead to litigation and /or commercial renegotiation of the terms;
• May delay receipt of the additional consideration (until planning is obtained);
• Will result in the loss of control of the development opportunity;
• Requires ongoing monitoring and policing; and
• Is often (and almost invariably in a legacy context) unsecured, so that if the paying party were insolvent, recovery may be jeopardised.

An overage is often unsuitable:

• If the planning potential is already clear;
• There is no realistic prospect of development or change of use; and/or
• Where the land is likely to be:
  • developed by a small developer for whom the cost and hassle of an overage is unattractive; or
  • purchased by an investor who is unlikely to redevelop the land at that juncture.

Notwithstanding the above, overages can sometimes be essential to maximising the value of land and can give rise to significant additional receipts providing essential funds to charities.

Overages are particularly helpful where the likelihood of development potential is unclear and a buyer, therefore, is less likely to pay upfront for any chance of development (known as 'hope value').  Where the beneficiaries of an estate are charitable, it may also be advantageous to impose an overage to prevent 'embarrassment' if land gifted to a charity is sold at a value without uplift for development potential, but that potential is later realised, and the buyer sells for a significantly higher sum. In such circumstances, the risk is otherwise that the charity, its supporters, and/or members of the legator's family might be disappointed that better use was not made of the gift: Equally, overages can be highly contentious and have no certainty of producing an additional payment.  Knowing when to use overages and when to preserve or capture development value in another way is therefore key.  This article gives an overview of what factors personal representatives and charities should take into account in order to capture the best value.

Some key considerations to consider with your advisors if weighing up whether to impose an overage on sale are:

• The purpose of the overage (simply to avoid embarrassment or with real hope of an additional payment);
• Who the likely purchaser is;
• The type of overage to impose for your particular circumstances (such as planning overage, sales overage, turn or claw-back overage);
• The number of years the overage will be imposed for and the timing within which the additional payment will be made (the latter will be key to the acceptability of the overage to purchasers); and
• Methods of policing the overage and securing payment (including who will deal with this – usually in a legacy context this should be a lead charity beneficiary rather than a personal representative).

Overages can, therefore, be an extremely useful (if sometimes unpopular) mechanism for maximising property value:  They should be considered carefully with the assistance of a strong professional team (surveyors and solicitors). They should also be considered against other options for maximising value, including conditional contracts, development agreements, retention of ransom strips, options and rights of pre-emption, all of which may incorporate market value mechanisms to ensure that full value is captured at the point of sale. [Add hyperlinks to other articles]

For more information, contact our experts.