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Removing an Overage Clause

Removing an Overage Clause

Removing an Overage Clause

Overage clauses are common provisions of real estate transactions, especially where there is a realistic prospect of a piece of land or a site significantly increasing in value in the foreseeable future.

Overage clauses provide comfort to the seller that they may still benefit if the land does become more valuable in the future whilst allowing the buyer to purchase the land at its current value, rather than a higher price based on a possible future increase in value that may never be realised.

While overage clauses can be beneficial for both buyer and seller, they can also cause issues for the buyer in the future. For this reason, buyers may later find themselves wondering if an overage clause can be removed and, if so, how this can be done.

In this article, we will cover some of the key questions people tend to have around this issue, including how overage clauses work, why you might want to remove an overage clause, whether overage clauses can be removed and how this is done.

While we hope this information will be helpful for anyone interested in the subject of removing overage, please note that it should not be taken as specific legal advice. Every situation is unique, so we strongly recommend speaking to an expert in real estate law matters at an early stage.

If you would like immediate advice on removing an overage clause, please contact the IBB Real Estate team on 03456 381 381 or email enquiries@ibblaw.co.uk to set up a meeting.

How do overage clauses work?

Overage clauses will generally state that a certain payment will be made by the buyer to the seller if, after the sale is complete, a certain event occurs. Most commonly, this event would be if the buyer secures planning permission for the site, thereby making it much more valuable.

The payment or ‘overage fee’ will normally be in the form of a fixed sum or a percentage of any increase in value. There may also be a provision for the buyer’s costs (such as the cost of securing planning) deducted from the overage fee.

An overage clause should state what event or events would trigger the need for a payment, how that payment should be calculated, how long the clause will remain in effect after the date of sale and any security that will be offered to the seller, such as a charge on the property title.

For further background information on overage agreements, please read our blog: What is an overage agreement?

Why would you remove an overage clause?

While overage clauses can be helpful to the buyer at the point of purchase, allowing them to set a lower immediate price for land, they can sometimes cause problems further down the line.

Some of the common issues that overage agreements can cause include:

  • Making it harder to secure finance against the land (as many lenders will not want to lend on land affected by an overage agreement)
  • Costing you more than you were expecting (if the increase in the land’s value or expected future increase is more than you were originally anticipating, the terms of the overage agreement could be more onerous than you had at first imagined)
  • Making it harder to resell the land (having an overage agreement in place could affect the value of the land and make it harder to sell at auction)
  • Generating uncertainty over your exact obligations (if the terms of the agreement are ambiguous or do not mean what you originally thought, then it may be preferable to remove the overage clause rather than face uncertainty over exactly how they would be applied if the trigger event occurs)
  • The term of the overage clause has expired (in which case, you should have any charge on the property title removed)

These are just some of the issues that can arise in relation to overage clauses. If you do have any concerns about the impact of an overage clause or want help removing an overage clause, we recommend speaking to an expert in real estate law as soon as possible.

Can an overage clause be removed?

Yes, removing an overage clause is possible but, assuming you are still within the overage term, then you will need to negotiate this with whatever party holds the benefit of the overage e.g. the original seller.

How is an overage clause removed?

Overage clause removal is achieved through entering into a Deed of Release with the party who benefits from the overage clause.

If you do not know who the beneficiary is, this should be contained in the Overage Deed or Transfer Deed that sets out the original overage provisions. Sometimes, some investigation may be required to find out who the beneficiary is e.g. if the original beneficiary was a company that no longer exists as it may have been bought by a different company that now holds the interest or could have reverted to the Crown. This is one of the things that your solicitor can establish for you. If the interest has reverted to the Crown, then your solicitor would need to contact the Treasury Solicitor to secure a Deed of Release for removing an overage.

Once you know who currently holds the benefit of the overage, you (or more normally your solicitor) will need to approach them to investigate whether they are open to removing the overage clause.

There is, of course, no guarantee that the other party will be interested in doing so, but they may be willing to accept a fixed payment now rather than wait on the possibility of a higher payment if they wait. This is more likely to be true if the presence of the overage clause is causing issues with your plans for the land that make it less likely it will increase in value e.g. if you are struggling to secure finance.

If you are able to negotiate terms for removing an overage clause, your solicitor will need to draft the Deed of Release and the other party’s solicitor will need to review this. It is critical to make sure that the Deed of Release is drafted in such a way that all overage obligations are fully extinguished to avoid future issues. For this reason, it is strongly recommended to work with a real estate lawyer who has specific experience with these matters.

How to remove an expired overage charge on a property title

Where the term of an overage clause has expired and there is a charge on the property title in relation to the clause, then your solicitor can apply to the Land Registry to have the charge removed. The Land Registry will then contact the holder of the charge and give them 15 days to respond. If no response is received within this 15-day time period, the charge will be removed.

How IBB Law can help with overage clause removal

The Real Estate team at IBB Law can advise on all aspects of property law, including in relation to removing an overage clause.

Our expertise has been independently recognised by leading client guides Chambers & Partners and the Legal 500. Our lawyers have strong negotiation skills, alternative dispute resolution and court proceedings, so can give you the best chance of getting an outcome that suits you in the right way for your circumstances and priorities.

To discuss how we can help with overage clause removal, please contact the IBB Real Estate team on 03456 381 381 or email enquiries@ibblaw.co.uk to set up a meeting.