We sometimes see cases where a developer is buying land from a landowner on the basis that the seller will be paid an initial price and then a share of the profits over a certain figure – known as an ‘Overage’.
Sometimes these contractual deals can create problems later as, much like anything else involved in property, ‘the devil is in the detail’. Sometimes the sellers don’t put the best legal brains onto the case at the outset and it is only when the profit from a build out starts to become a reality that they start to look closely at the small print of contracts that can deliberately have been set up to be as simple as possible.
So what could go wrong? Some sensible questions to ask from the outset:
- What is the trigger for the overage – the simple answer might be the sale of the development and generation of the profit. However what happens if it is a partial sale? Sometimes the trigger might be confirmation of planning permission – but is that outline planning or full planning or planning for just one stage of the development?
- What is the definition of a ‘disposal or sale’? – what happens if the developer moves the site from one of his companies to another as a strategy for the finance of the build out – is that a disposal? What happens if the developer decides to sell the site at a figure which is ‘below market value’?
- The ‘Overage Period’ – what happens if the realisation goes beyond the timescales set. It has been known for vendors to suspect that developers have dragged things out to avoid paying the Overage.
- How are the calculations done – it could be that certain costs can be deductible for example. It could be that inflation could be taken into account. How are the figures to be verified and by whom, and what happens if there is a dispute?
- What security is there to be for the vendor? – this could take the form of a legal charge but that is likely to make any finance more tricky for the developer and the developer might find it easier to allow a restriction on title to be put in place or even to allow the vendor to retain a ‘ransom strip’ – or to grant them a lease.
These might appear to be issues more appropriate for a vendor to consider – however not agreeing these issues first, and getting into the detail, can trip up developers later on.
The best practice is to ‘thoroughly test’ the formulas and the issues against real numbers, to flush out examples of what could happen, what the figures could be, and what could go wrong. Specialist development lawyers are obviously valuable in these cases (for both parties)