Webinar
Real Estate: The benefits of overage agreements when buying and selling development land
Real Estate: The benefits of overage agreements when buying and selling development land
There are benefits for both landowner and developer when using overage agreements as part of buying and selling development land. An overage agreement, sometimes referred to as an anti-embarrassment provision, allows a developer to minimise the initial outlay whilst providing for the landowner to share in uplift value sometime later.
In the webinar, we will cover the basics of what overage is, why we use it and some initial considerations depending on whether the overage is based on sales or obtaining a planning permission(s).
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Jenny Walker
Legal Director
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Webinar transcript
(Please note this is auto-generated and un-edited)
0:00
Hmm.
0:41
Hello. I'm Jenny Walker, a legal director in the residential development team here at Shakespeare Martineau. Welcome to today's webinar on average. Before we start, just a quick point on how this session will work. On your screen, you'll see a Q and A icon and please use this to ask questions, will respond to all of these directly just after the session.
1:05
So, today, I will explain the basics of average and why we use it. I'll then discuss Planning Overage Sales Average, how to secure average, and we'll finish on a night of our experiences during ... 19.
1:21
As you'll see from what I'm about to talk about, overage dates can actually be quite complicated. And probably one of the more complicated things that we do and they're very bespoke in nature. Therefore, it's important that consideration is given to what, exactly you're looking to achieve ahead of time stage. Sometimes, we find that, in the heads of times, there's one line reference to a fridge. And actually, you really need to be looking at more sort of a page of detail on this. And hopefully, the remainder of this webinar, you'll see why that needs to be the case.
2:03
So what is average from a practical point of view, it's a payment to a landowner by the purchaser of land. It is usually conditional. And that's a certain event happening in the future. It's contingent. And therefore, it is some sort of deferred payment. It's usually a share of an enhanced value. And I'll speak about this more when looking at the different types of overage shortly.
2:32
From a legal perspective, a bridge is a contractual relationship between a landowner and patches, and I'll speak about how it can be made to bind successes in title later in this webinar. As mentioned previously, average is contingent and conditional mean, which means that it is dealt with post completion of the sale. And that's usually in a number of months and years, rather than of days and weeks. However, note that the overage payment does form part of the consideration, and you'll need to think about this when looking at your ... Return. If it's in England stamp duty Land Tax, or, if it's in Wales, that's your LTTE, does land, transaction tax? As I've mentioned on the slide, it's not an interest in land, and I'll come back to why this is important, Lightroom.
3:24
So why do we use it? From a developer's perspective, it can minimize the initial outlay because you're only paying an enhanced Valley to effectively top-up the land price. At some point in the future, if that contingent and conditional aspect actually happens. If that does occur, the developer will be up a blind to make a further payment, for. Example, one thing I did recently, where the overage deed States, the average is only payable if you achieve more than 100 Units at Planning. Therefore, if you achieve 95, that average will never become payable.
4:11
Another advantage for the developer is that it can secure the land before investing in any planning permission. And this is important, because, as you might be aware, planning permissions can cost tens of thousands of pounds to get through the planning application stage. And this is a large expense to in-car when you haven't actually got the land under contract to purchase.
4:38
From a landowner perspective, you're securing the sale of the land and you might not have the expertise to actually develop that land whereas the developer will have. Therefore, avoiding submitting a planning permission and incurring those costs. They all say maximizing the ultimate profit by taking a share in this enhanced Bali.
5:02
As I mentioned earlier, there are two types of average that we see in the main. And these are planning a fridge and sales acreage in relation to planning overage. I've seen a couple of transactions lately that have involved a very simple formula, and I alluded to this earlier, and this is where a developer pay a set amount pre-determined for each unit that it obtains over a certain threshold. So, in the example I gave earlier, if you pay overage on anything above 100 units, and you get planning permission for 102, you'll see a formula whereby there's an amount of, say, £10000 per unit. And that is multiplied by two because it's anything over 100. And the developer would, therefore have to pay £20,000 in overage or whatever share that has been agreed. And whatever amount has been a great sorry.
6:01
An alternative to this is a formula based on market valuations. And that you are comparing the original value of the site, or the value of the site, with the value of planning permission wants to ask and obtained an agreed. Percentage of this increase is then payable, and this can be anywhere between sort of 10%, 50%. It's a commercial point, Whatever's agreed between the parties.
6:29
So when looking at this type of average, there are a number of things that you need to consider. You need to be clear exactly how the market value will be calculated, and what assumptions and disregards will be made. Is there an assumed market value on purchase, for instance, the purchase price? And how will this original market value be factored into the percentage increase? How any previous increases and therefore, previous overage payments be dealt with is usually a point in the drafting that we make and it's usually deducted, But that consideration needs to be given to this. This is more relevant when you are applying for an original planning permission, and then it gets amended a couple of times.
7:19
You also need to think about what costs are deductible, and how that increase in market value will look once you've taken off all of those costs. For example, site investigations, cost of obtaining the planning permission. And you need to think about how that risk is balanced between landowner and developer. If you think about it from the developer's perspective, it is taking all the risk of incurring the costs whilst the landowner doesn't have to take any risk at all.
7:55
So moving on to trigger events, you need to consider what this trigger event will be and how long after this trigger event the overage becomes payable. This is usually a point which is negotiated greatly between the parties. As the landowner would want the trigger to be on the actual front of the planning permission. Where, as the developer want, that triggered me on the disposal of the relevant units, And that's when the developer gets its income. one of the middle ground that we often come across is the implementation of the planning permission. As this means, the developer is keen on going about putting in to or implementing that planning permission, and it can take a count of the average costs when factoring in any site costs generally, and build costs.
8:57
Next, you need to think about duration how long the overage will apply for. Again, this is a commercial point. And sometimes we see overage just applying for a couple of years. But more often than not, you're looking at sort of 5, 10, or 20 year periods on this.
9:15
As I mentioned earlier, will that be a one-off payment, or will that be rolling average? And when I say rolling average, what I mean by that is that each time a new planning permission is granted, will the average calculation apply? In my experience, it's easier that it continues to apply otherwise, If a dining applied on the first planning permission, this could be seen as an empty avoidance measure because you would possibly get planning for lower number of units and then go back to you.
9:50
Amend this planning permission, or rather submit a fresh application to increase that number of units in each room.
10:01
So that's planning overage, moving on to sales average. So here, the trigger event is usually where an agreed base. Revenue is exceeded. Say, for example, the developer thought that it would achieve sales of, say, £500,000, but actually, in practice, it achieved sales revenue of £550,000. In this instance, there would be a share of that additional £50,000 between the landowner and the developer, again, based on some sort of agreed percentage, which is a commercial point to be agreed between the parties.
10:42
Whilst this method may appear simpler, that are a number of considerations, for both developer and landowner. Actually, I've listed some of these on my slide. You'll see that you need to calculate the sales cost, and when looking at not are you looking at the gross cost on the net cost. How the affordable housing costs to be deducted. These to be valued at cost or sales price. Making that incentive incentives and buyers extra, it's the same coin. Is this going to be valid cost? Or how much value there is to the purchaser?
11:27
Why the developers entered into particular change. And why there are unsold units. Again, consideration needs to be given to how these valued one of the main points that in my experience has been a discussion point between the landowner, and the developer is the extent to which the developer has to disclose its sensitive into information and all its accounts, et cetera.
11:56
Ultimately, the landowner will want and need the ability to look over these accounts and even possibly challenge them where the landowner thinks that the figures are quite correct. Of SDA, the developer is not going to want a landowner to scrutinize the accounts too much. And it can be quite costly to go to that party determination. So there needs to be some sort of balance between the extent that the developer has to disclose it, and how often it does. And again, that's probably one for discussion between the parties and nice, essentially, with how much bargaining power each party has.
12:43
So once you have got your details of your average, you then need to think about how it's secured. Now, I previously mentioned that overage is a purely contractual relationship. It's not an interest in land, and therefore the landowner developer need to consider how that binds feature owners because it won't automatically do it. As you can see from my slide, that various methods to do this, the most common in my experience is the positive covenant. with the restriction on title to protect it, positive covenants dont automatically run with the land, They do need that restriction on title.
13:28
However, that restriction will prevent sales of any type and say you quite often, you always find that the permit to dispose of those, and you need to be clear exactly who's going to fall.
13:48
Wouldn't this category visually see the likes of utility providers, whether that's a lease or a substation trunk square. For instance, on dates. Basement you often see affordable lettings. Disposals carved out of it. Now consideration needs to be given to plot transfers. Because essentially, that's where the developers money is. And that's where the landowner want protection because it doesn't want the non. It doesn't want the developer to be able to sell off the plots. If it if the landowner hasn't received its money So sometimes you say that there'll be a percentage, say, 25% can be permitted disposal without the overage biting. And ultimately, this point really depends on whether you've got the sales, a fridge or the planting acreage in your deed.
14:47
Alternatively, overage can be secured by way of a charge or mortgage. In this scenario, the landowner takes a legal charge following completion, again, with a restriction on title. And if the fire, if the buyer fails to pay the average, then the landowner can dispose of the land and recover the overage out the proceeds. This isn't suitable for some types of development land, particularly where that is finance being put in place because the finance house would want a fast charge over the property. And it's not suitable, usually, for this to be secured by way of a second charge, which is more often than not why you see overage secured by the Positive Covenant with that restriction on title.
15:36
As you can see from my slide, there are three other ways that you can secure average. I would say that none of these are particularly popular. The first one is a Bundle Guarantee, which is obviously only as good as the party giving up. Their second is a ransom strict whereby the ransom strip is only transferred to the developer when the overage is paid, and the third and final method. Here, that's not used very often, is the restrictive covenant, and that's to say that the land can't be used for certain activities, or even the developers not to build on certain parts of the land until the average payment is made.
16:20
So finally, I thought it might be useful to very quickly talk through our experience with a very average deeds. Since the cave in 19 pandemic began. In such an uncertain world that we're seeing at the moment, I would say the average dates are actually being used far more often. Developers are obviously wanting to expose that risk as much as possible. And landowners are still wanting to sell their land. And I think in such an uncertain world, it's a useful way of making sure that you've got a base price which the price Babylon completion, supplemented by this overage, which is payable, as I say, later down the line, instead of months or years time.
17:08
We are also saying more complicated overage dates. And that is because the landowners and developers are talking about this enhanced value and a lot more detail. They are wanting when I say they buy developer and landowner and wanting to bottom out these points in far more detail. And that's, obviously, feeding through up too much longer, average deeds with more complicated provisions.
17:44
So, you might have heard our CEO talk of the new normal. Talked about that quite a lot recently. And I really do think that head the new, normal, will remain to be the increase, in average deeds, and greater detail that nice will contain.
18:04
So, that brings us to the end of this webinar. I hope you found it useful and relevant in the current circumstances. If there's anything you'd like to discuss further, then please do not hesitate to contact me. And, in the meantime, we've launched a free helpline, given you direct access to a senior team of experts for free legal guidance over a 20 minute telephone call or video call, Whatever is easiest for you. Details are on the screen now, if you'd like to book a session. And finally, please do visit our Shakespeare Martineau on Demand pages to access this recording and any others that you might find of interest and the Smart Talks. Feel free to join in our conversation on LinkedIn and Twitter. Thank you for joining.
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