'Overage' deal could solve the problem; PROPERTY BRIEFING.

Byline: RICHARD FREEMAN

THERE is something in the air. House builders are stirring once again and are looking for land to buy. Any deal that is struck now will be on very different terms, compared to a couple of years ago.

If deals are to be struck, the first obstacle will be the price. Those willing to buy are still driving a hard bargain and house builders' margins remain thin. What they are prepared to pay may be very different to what the seller will accept. How can the circle be squared? Perhaps overage payments are the answer. Overage (also called "claw back") is a sum of money over and above the original sale price that a seller of land may be entitled to receive following completion of the sale, if a certain event takes place.

For example, a farmer may sell a piece of land to a developer who is likely to obtain planning permission for 30 houses.

However, the landowner may be anxious that once the sale has taken place the developer will obtain permission for 40 houses. The parties may agree that a certain price will be paid on completion, but if the developer gets planning permission for more units, the seller will receive more money.

Overages often seem the perfect solution to persuade a reluctant landowner to part with his property. In practice, however, overages can cause problems. The inclusion of an overage can lengthen negotiations and the time taken to move towards exchange. The application of overages can also lead to disputes.

When negotiating overage, consideration should also be given to triggers. The triggers will determine when the overage payment will be made. Some common triggers are: Grant of a planning permission. Completion of a development. The construction of more than a specified amount of development (houses, etc).

A developer will not want the land to be bound by the overage for longer than necessary and will try to cover all eventualities that may occur. It may be that an overage is to be released when the land has been fully developed. If so, what happens if part of the land is not developed? When negotiating the lifespan of the overage provisions, a balance needs to be struck between protecting the seller and not restricting the buyer for too long a period. If too short then there is a danger that the buyer will retain the land until the overage provisions have expired, but the longer the arrangements last the more burdensome they become.

As a seller you will want to make sure you have thought of every possibility and covered all eventualities to ensure that you do not lose out on future payments. As a buyer you will want to try and control the circumstances in which an overage is payable to specific time-limited circumstances so the land is free of the overage obligation as soon as possible.

Overage can be a useful device, allowing transactions to proceed on terms that are commercially acceptable to both parties, when present circumstances make it less than perfect for one of the parties.

Richard Freeman-Wallace is head of property at Watson Burton, Newcastle