If you own land and are thinking about selling to a house builder or another kind of developer, the terms clawback and overage will probably be raised. The idea behind them is simple and can help you get fair value for your land.
In straightforward language, clawback or overage are ways for an owner of land, in some circumstances, to get a portion of any rise in the land’s value that could happen after a sale.
Clawback and overage are often used interchangeably in land development deals and generally refer to different forms of price uplift after a sale. The classic example is planning permission granted for development. If you sell purely at today’s agricultural price and the purchaser secures planning consent after that sale, the land may significantly increase in value. A clawback or overage agreement allows you to “claw back” some of that value.
How clawback and overage agreements work
You agree a sale price based on the land’s current use and enter into a contract for sale on that basis. Separately, you and the developer/buyer sign another agreement that sets out when and how you will receive extra money on certain specified trigger events.
A common trigger is the grant of planning permission for a more valuable use – for example, turning a field into plots for residential houses or getting consent to build a wind farm or some other renewable energy project. Another common trigger is the buyer selling the land on to a third party at a higher price.
Clawback agreements are sometimes called anti-embarrassment agreements because they protect you from the ‘embarrassment’ of having sold for less than the buyer achieves in an onward sale to a third party. Such agreements will typically set a time limit, often 5 to 20 years, after which the agreement ends and you would be obliged to discharge any rights you have remaining under the agreement.
The landowner is usually entitled to only a part of the increase in value. For example, if the trigger is the grant of a planning permission, then you would commonly compare the land’s value without planning consent to its value with the planning consent. The landowner gets a part of that difference, after (usually) deduction of the costs reasonably incurred by the developer in obtaining the planning consent.
If well drafted and secured, the agreement will be set up to bind not just the original buyer but any successors to their ownership, so the right to the payment is protected even if the buyer sells it on to a third party without triggering a payment.
Clawback and overage benefits for the rural landowner
For many sellers and landowners the biggest advantage is peace of mind. You receive a fair price today that reflects your land’s current use, plus you get the chance of more money if development goes ahead. This can be helpful if you need money now but want to reserve the right to obtain future value if the land becomes zoned for development down the line.
In Scotland, planning and development is inherently speculative, takes time and there is a significant cost investment required. Clawback or overage gives you a practical way to capture some of that speculative value without having to go the cost and risk yourself of obtaining planning consent.
Things to consider
Every piece of land and commercial deal is different, so the exact terms need careful negotiation and consideration. You will want to be specific on the trigger events, that is, when a payment becomes due, how the price uplift or the increase in value is calculated, how long the clawback or overage period lasts, and what reasonable costs the developer is permitted to deduct before the calculation of the overage or clawback share due to the landowner.
You should seek professional advice from a land agent familiar with rural markets to negotiate the main commercial terms of the deal including any clawback or overage and engage a solicitor experienced in Scottish development and rural property work to draft the agreement in a manner that protects your interests (while remaining commercially viable for a developer). A lawyer can also advise you on how best to secure the agreement against the title of the property so that the agreement remains enforceable against third parties if your buyer goes on to sell.
How we can help
If you have any questions on clawback or overage or wish to have a conversation about selling your land for development, please get in touch with Neil Fraser, Kieran Reilly or one of the other experts at Anderson Strathern.