Clawback and Overage Agreements
When selling land that may gain value in the future, you could get a cut of the profit by using a contract known as an overage agreement.
If you are selling a property or some land, it can be possible to stipulate provisions in which you will be able to gain financially if in the future the land or property gets planning permission and as a result of this goes up in value.
An example of this would be if you where the owner of some farmland on the outskirts of a town which you needed to sell immediately but that you thought might increase in value in the future. You can base these thoughts on other developments that you have seen around your town. Although you need to sell the land, you might worry that by selling the land now, you stand to lose out on the increase in value that would occur if the land somehow got planning permission.
There is a way in which you can profit from any increase in value to land that you sell and which subsequently gets planning permission. This comes in the form of a contract which specifies that as a part of the sale, the original owner is entitled to a part of any future financial increase in the value of the property. This can be specified not just for the current new owner but for all subsequent owners of the land until an increase occurs as a result of planning permission being granted. This example is appropriate as residential land tends to be a lot more valuable than land with a designated agricultural use put in place. There are however other situations that will also be appropriate for an overage agreement.
For the clawback principle to work, the correct legal framework will need to be put in place to ensure that the party making the arrangement stays protected. This will need to be firmly in place at the time that the sale takes place in order to make it legally binding.
The right to overage on a property can cover a certain section of the land for a designated period of time. The amount of overage that can be clawed back will depend upon the agreement made between the past and current owner. This may be an equal split or a percentage which is decided between the parties involved. The basis to the agreement will be whether those involved believe that there will be an increase in the value of the land due to planning permission being granted.
As obtaining planning permission or a change of use to land can be very expensive, the costs of this will be deducted from any increase in value before an overage amount is decided.
If you feel that this is an avenue that you would like to explore you should ensure that you get legal help in order to draw up an agreement and get guidance throughout through the process. It is important that the correct procedures are followed to ensure that the agreement is legally binding.