20 November 2019

Overage payments and the disposal of school land

Land disposal

When disposing of land, independent schools will want to obtain the best value – apart from being a prerequisite of providing the necessary Charities Act certificate, it is also in the best interest of the school.

What is an overage?

An overage payment is a sum of money which may be payable by a buyer of land at some point in the future reflecting additional value in the land. This can be calculated in a number of ways depending on the aim of the arrangement in question. However, the most common type of overage is where there has been a rise in value as a result of planning gain.

 

Do you need help with land disposal? Contact our Real Estate team now.

 

Where a school is simply disposing of land to raise funds, it may well be that the true value of the land has not yet materialised. A playing field, for example, may be sold to a residential developer and its the market value at the date of sale is just a fraction of the eventual value once planning permission has been granted. Going even further, the developer will make their profits from selling the houses once built, so a prudent seller may wish to attempt to negotiate a proportion of the profits be paid to them.

In practice, a developer is unlikely to agree to this type of arrangement as the risk is all on them (the costs of obtaining planning permission, undertaking the build and not being able to sell the houses/sell for a profit). It all depends on bargaining power, however, and if the school possesses a unique site of interest, it may well succeed in negotiating such an arrangement.

The most common situation is where the developer will pay a percentage of the increase in market value arising from the grant of the planning permission.

When will the overage be paid?

This is a point of negotiation between the parties. The school will want the payment as early as possible and preferably once planning permission has been granted, but the developer may not have the funds readily available (planning costs can be high and they will need cash to progress the build). The developer meanwhile would prefer such payment be made on the sale of the final house, but prior to this point, there is a risk to the school if the build is never completed or where there is insufficient security for the school to enforce on if the developer becomes insolvent.

It is therefore common for the payment to be made on the implementation of the planning permission.

Overage-payments-and-the-disposal-of-school-land

 

What is meant by implementation?

Again it is for the parties to agree, with the school wanting to restrict this as far as possible and the developer wanting to retain as much flexibility to undertake certain steps without triggering payment. A ‘material operation’ as defined by Section 56(4) of the Town and Country Planning Act 1990 is often referred to, which would capture works such as demolition or the laying of foundations but not ground investigations.

What else should a school consider?

Quite often one of the main points of contention is to what extent the overage will run with the land. Where overage is triggered on the grant of planning permission, the developer may try to ensure that the arrangement only bites once, so that upon the grant of planning permission and payment of the requisite overage payment, the land be released from any ongoing obligation.

A school should be wary however that a developer could seek to approach this tactically, obtain planning permission with a much smaller uplift in value with one eye on obtaining planning permission of much greater value upon release of the overage. They would, therefore, argue that such payments should arise on the grant of any planning permission resulting in an uplift in the value of the land throughout the agreed overage period.

Overage is a complex area and schools should seek professional advice prior to agreeing on overage terms with a developer/buyer.

A Charities Act surveyor can advise on what will amount to the best terms that a school can expect in the current climate based on the potential value of the land as a development site to a prospective buyer.

Even when outline terms are agreed, there are often details therein which require greater negotiation between the respective parties’ solicitors. Overage is a good way for a school to ensure it maximises income from the sale of any land but professional advice should be sought both before and throughout the sale.

 

Do you have more questions? Contact our Education team now.

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About the Author
Morgan West, Senior Associate

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