Blog: Overage or price top up arrangements - part two

Heather Nisbet looks at some important issues in overage deals in the second half of her two-part blog.

In my last article, I discussed some basic contract elements for overage or price top up arrangements in property deals.

Such arrangements involve the potential for extra payment(s) if a specified future event or events happen or certain circumstances arise. For example, if land is sold for agricultural use at a price which reflects that use, the purchaser might agree to make a further payment (post acquisition) if planning permission is subsequently obtained for residential or commercial development.

Today, I’m looking at two issues in overage deals that are very important to the seller or payee. Those are:

Anti-avoidance measures

If an overage agreement is not drafted tightly enough, there can be scope for the payer to engineer circumstances such that either a payment liability is not triggered or the level of payment is much lower than the payee considers is its due. When negotiating such an agreement, the seller must continually ask itself whether the buyer could manipulate the circumstances so as to avoid having to pay up.

Here are just a few banana skin areas and how a seller can avoid slipping up on them:

Securing or guaranteeing payment

Sellers who have negotiated an overage entitlement should always consider whether they should rely on the buyer’s contractual obligation to pay it (if it becomes due). Sometimes this will be enough e.g. if the buyer is a local authority or some other body that is unlikely to disappear or become unable to pay its debts.

However, if the buyer is an individual or corporate body of some sort, there is always the risk that it might default. So what options are available to the seller?

The two most commonly used methods are:

These solutions are not always available and neither method is 100% effective.

Security issues

It’s not always possible to get a charge over the site being sold - as the buyer often has an external funder, who will want a first ranking security and might prohibit the buyer from granting any other charges.

Even if the buyer will grant a security to the seller, it can be of limited use if overage is payable late in the process. If e.g. overage is due following the sale of the last house, at that point there will be nothing left secured - as the security will have to be lifted from each house as it is sold.

Another difficulty can arise if the buyer becomes insolvent before any obligation to pay overage has been triggered e.g. if it goes into liquidation before it has even commenced development. There are ways to ensure that an obligation to pay crystallises at that point - but you must be alert to the possibility in order to address it in the drafting.

Guarantee or performance bond issues

If there is a suitable guarantor available then this can be a good solution - it is simple to operate and relatively straightforward to document. As with the security route, the seller would want some early trigger of the obligation to pay if the buyer became insolvent.

The main risk with this route is that the guarantor fails or is unable to pay when called upon to do so.

If no adequate covenant guarantor is available, there is the alternative of a performance bond, usually from a bank. However, as these are expensive for buyers to obtain and the terms of them can be fairly restrictive, the bond route is often impractical.