When Managing Trustees are considering disposing of property, it is vital to consider the structure of the sale and how the Charity can obtain the best possible deal. At TMCP, we frequently see transactions where the Managing Trustees’ professional advisers are negotiating, and agreeing, to sales of property with overage provisions attached. That is an obligation on the Buyer to make additional payments if certain conditions are met in the future e.g. a percentage of the uplift in value if planning permission for change of use is obtained by a future owner.
Overage provisions are one way Managing Trustees can obtain the best price out of a property sale. However, overage is a concept that can be misunderstood. This article explains what overage is, how it works, the benefits of including overage provisions in transactions, risks associated with overage and the points that Managing Trustees should be aware of when negotiating heads of terms.
What is overage?
In a simple sales transaction, the Buyer provides consideration, usually in the form of money, to the Seller, and the Seller transfers the property to the Buyer. No further money or consideration is payable to the Seller in such a transaction. Alternatively, in some more complex transactions (but not all), the Parties may agree an additional payment, known as overage, which is payable to the Seller once specified conditions have been satisfied after the completion date.
But why would parties consider entering into an overage deed? Generally, this is because Managing Trustees are looking to obtain the best possible price for the property they are selling in accordance with Model Trust 16(1)(b) and their surveyor advises that selling for an agreed price now subject to overage is the best way to achieve this. An overage deed allows the Seller to sell the property with the promise that if certain conditions are met, they will receive an uplift (a payment) dependent on the increase in value of the property.
It is important for Managing Trustees to bear in mind that the initial purchase price in such instances may be lower because of uncertainties surrounding the satisfaction of conditions within the overage deed. There may for example be uncertainty over how the planning situation will change over the course of the overage period (the time during which events would trigger payment of overage) or changes in the market and therefore the value of the Property used to calculate the overage payment. Further examples of such uncertainties that may arise when entering into an overage deed are discussed in more detail below. Therefore, the advice of the Managing Trustees’ surveyor will be critical as to whether entering into an overage deed is in the best interests of the Charity.
How does overage work?
Typically, overage provisions allow for a percentage of any uplift in value, or set amount, to be paid to the Seller on the occurrence of certain conditions (overage triggers) during a set period from completion of the sale (overage period). Your surveyor will advise the Managing Trustees on these aspects.
Overage conditions or triggers
There are several different types of conditions which trigger overage payments. Examples include the grant of new planning permission, a change in use the of the property, or even where the buyer constructs over and above an agreed number of commercial and/or residential units. The Managing Trustees’ surveyor will advise what type of conditions to impose to secure best price.
Overage payment
Overage can be structured so that once a condition is met a single payment is made or, alternatively, so that multiple overage payments should be made during the overage period i.e. each time a specific condition is met. This means that if an overage payment is due on the grant on planning permission, it could either be structured so that one payment is due on the first grant of planning permission or so that an overage payment is due on each and every grant of planning permission during the overage period. The first scenario could lead to an initial planning permission being obtained resulting in an artificially lower overage payment and subsequent planning permissions being obtained to maximise the value of the property, but which would not attract overage.
Further, the value payable may be a fixed amount, or a percentage calculated using specific trigger conditions.
One risk attached to overage is that in the event where an overage condition is not met, the Buyer would not be liable to pay the overage payment to the Managing Trustees. A Buyer could wait until after the overage period has ended to obtain planning permission or seek to maximise the value of the property without triggering an overage payment. However, an experienced professional adviser will seek to limit any wiggle room for Buyers to argue a condition has not been met.
Overage period
The amount of time that an overage agreement runs for will depend on the specific terms agreed between the Parties. For example, when Managing Trustees are selling a property to a developer who intends to apply for planning permission immediately, the overage period may be shorter than in another example where the Buyer states they wish to use the property as it is and has no intention of applying for planning permission or where building conditions must be met for overage to become payable (such as achieving practical completion on a development).
Surveyor advice
With several different options available to Managing Trustees on how to structure overage agreements, it is important that the Managing Trustees’ surveyor advises on what are the reasonable overage conditions for the type of property being sold, and how a deal can be structured so that it is in the best interests of the Charity. Managing Trustees should direct their surveyor to the QSR Focus Note and the Template QSR to ensure that all appropriate details are included in the Surveyor’s report.
The specified conditions, timescales, type of payment, mechanism of payment and length of agreement are all examples of points which will need to be negotiated with your Buyer in accordance with the advice of your surveyor
What points do Managing Trustees need to consider?
To guide Managing Trustees on their approach to overage deeds and conditions, please see the below information which should be kept in mind:
- best interests - due to the level of uncertainty surrounding the receipt of overage payments, and the conditions to be met, Managing Trustees should seek advice and consider whether this form of arrangement is in the best interests of the Charity in their roles as prudent Charity trustees and also in accordance with Methodist Church best practice. We recommend that Managing Trustees also review our Sales Guidance for Managing Trustees for further information on sale generally;
- experienced professionals - it is important for Managing Trustees to be appropriately advised by their surveyor and solicitor regarding the terms of overage provisions and how best to protect their continued interest. TMCP would recommend that Managing Trustees appoint professionals who have experience of drafting and negotiating overage agreements. Our panel of solicitors all have vast experience in drafting and negotiating overage deeds. Please refer to the Panel Solicitor page on the TMCP website;
- worked examples – it is usual for any overage payments to be calculated using mathematical formulas. We would recommend that your surveyor supplies the Managing Trustees’ solicitor with any calculation(s), along with a worked example of how their calculation(s) would work in practice. This is to ensure that all parties understand the mechanisms for triggering overage and to avoid potential disputes in the future;
- tax considerations - before entering into an overage deed, we strongly recommend that Managing Trustees obtain tax advice from a qualified tax specialist to confirm whether there are any tax consequences for the arranged overage provisions.
Overage is an unusual concept as it goes against the traditional image of selling a property since the Seller may receive further funds after the date of completion when specific conditions are met. TMCP are currently liaising with the Methodist Church’s Panel of Solicitors regarding template provisions to include in overage deeds, which Managing Trustees can utilise to assist them in negotiating overage terms. However, even with these template provisions, Managing Trustees should rely on the advice of their professional advisers. Should Managing Trustees need any guidance on overage, we are happy to help and provide additional guidance.
If you have any queries in relation to the guidance in this document please contact TMCP Legal for further assistance.