When buying a site that lacks planning permission, whether to self-build or as a developer, your plans and the ultimate value of the site will be heavily dependent on whether you can secure planning permission. It is therefore understandable to want to protect yourself against the possibility that planning permission is refused.
As a seller, you should also consider how much more valuable the land will be if planning permission is granted and may want to take action to ensure you see a share of any such increase in value.
For both buyers and sellers, there are several legal options you can use to ensure you don’t lose out whichever way a planning application goes. We are looking at a couple fo those options here.
Making a conditional sale agreement
If getting planning permission is considered fairly secure, then the owner may be willing to emnter a contract to sell the land on the condition that this will only complete if planning permission is acquired. If the buyer is then unable to secure planning permission, they will not be obliged to complete their purchase and can walk away having lost only the legal expenses involved in reaching the agreement and the costs involved in their planning application.
Such conditional sale agreements must be very carefully considered and drafted to ensure both parties’ interests are protected. A key point to understand is that the buyer will usually be obliged to apply for planning permission within a certain timeframe and see that the site reaches its maximum development potential. There will usually be obligations for the Buyer to pursue the planning application as diligently as possible.
However, it can be tricky to estimate the value of undeveloped land or be certain that planning permission can be obtained. In some circumstances, an alternative option may be for the vendor to sell the property without a condition related to planning permission, but instead including an ‘overage clause’ in the contract.
What is an ‘overage clause’?
An overage clause is a provision within a contract of sale that places an obligation on the buyer or developer to pay the vendor an additional sum after a specific condition is met, such as if planning permission is obtained. This is sometimes called “clawback”.
When a vendor is looking to sell land, they will obviously want to get the best price, however, knowing what the best price is for a particular plot can sometimes be difficult. This is particularly true if planning permission is required but may not be obtained for some time or where there is a lot of uncertainty over whether planning is likely to be granted.
By including an overage clause, the vendor can sell a site at its current value without planning permission, while ensuring that they will not have lost out if planning permission is later granted and the site’s value significantly increases.
Overage clauses can be highly attractive where there is uncertainty over the site’s ultimate value, for example where the developer does not yet know exactly what the development will be or how large due to uncertainty over what planning permission they will be able to secure.
Overage clauses can also be useful for developers as it allows them to acquire sites without having to pay the full potential value upfront, effectively allowing them to pay the vendor in instalments.
The disadvantage for a seller is that overage clauses are in place for a certain length of time and will therefore expire after the relevant time period.
What events can trigger an overage clause?
An overage clause requires the developer to pay an overage payment to the vendor when a specific event happens, known as a ‘trigger event’.
Usually trigger events are things such as:
- obtaining planning permission for the development of the land (or developing the land without planning permission where this should have been obtained)
- obtaining planning permission for a new (and potentially more valuable) use of the land
- the development on a site becoming larger than originally specified, and therefore more valuable
- the re-sale of the land by the developer (usually in order to make a quick profit)
It is important for the vendor to include specific details about the circumstances that would trigger overage, to avoid ambiguity and potential litigation.
For example, if the trigger event is obtaining planning permission, would outline planning permission be enough, or would a more detailed plan be required? If the trigger event requires the developer to construct ‘residential accommodation’, what constitutes residential accommodation? These details ensure that the vendor’s overage payment is secured and that the developer fully understands what is expected of them upon purchase of the land.
There are other ways that a vendor can protect their overage, such as using a positive covenant in the contract, protection by legal charge on the title or the use of restrictive covenants. This is a complex area of property law so vendors and developers should seek independent legal advice before entering into any contract.
Get expert advice on buying and selling land for development
At Bird & Co, our property lawyers are experts in dealing with all aspects of property law, including drafting of conditional sale agreements and overage clauses for landowners and developers.
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