Selling public sector land with claw back

Cutbacks iStock 000013353612XSmall 146x219Phil Lawrence provides some top tips on imposing overage on a sale of public sector land.

Public sector bodies are very large land owners. There is a broad framework of rules on how this land can be sold off. They also have duties towards their stakeholders and beneficiaries to achieve the best value for any land sold. There can also be specific legislative provisions. For instance, section 123 of the Local Government Act 1972 puts obligations on local authorities (unless they have the consent of the Secretary of State) not to dispose of land unless it is for the best value that can reasonably be obtained.

Achieving best value?

What is best value? There are considerable valuation issues relating to this and these are addressed in many ways. An increasingly common feature of land sales has been the use of overage. Overage can come in many shapes and sizes of this and have a variety of names including "claw back", "uplift" or "kicker".

The concept is simple. After the land is sold the seller retains a legal right to share in any increase in value. So the seller of the land creates an entitlement for future payments to it should the land be enhanced in value. Typically the increase comes from a grant of a planning permission but can also be if the buyer achieves an unexpected level of development profit. This can be appealing in times of difficult market conditions, when falling values and a scarcity of comparables, mean that the implementation of overage is seen as ensuring best value is achieved beyond the short term.

However, overage is a legal mine field. As it is often being used creatively the legal drafting must capture a unique commercial situation. This can be difficult to get right. Even a large public body may have difficultly in relying on rolling out a "standard" overage arrangement, where one size will fit all. There are also inherent problems in such contractual provisions, in that a buyer or developer is unlikely to be keen to pay overage, where there might be considerable sums of money at stake, raising the prospect of disputes or litigation.

Top tips to bear in mind

When considering imposing overage on a public sector land sale we would have the following top tips:

  • The commercial context is key:  It is fundamental to identify where the land is in the general development timeline. Is this bare agricultural or industrial land where there is a long term (but currently remote) prospect of development? Or is this land within the planning allocation but there is uncertainty as to discrete issues such as infrastructure or remediation costs? This will impact on the legal drafting and structure of any overage clauses.
  • Overage trigger: It is important to consider what will trigger any overage being payable. Will this be the grant of a planning permission (and if so will it be a detailed, outlined or reserved matters permission)? Alternatively will it be the actual implementation of planning permission or the sale of the property to a third party with the benefit of planning permission? The drafting of the trigger provisions in an overage clause can be extremely technical and so this point should be considered at an early stage.
  • Number of payments: Will there be "one bite of the cherry" or will there be a number of incremental overage payments as the planning status of the land is enhanced? This could be over many years and would require careful consideration at the outset and consultation with any relevant stakeholders.
  • Monitoring the land: It should be considered that the prospect of any overage being paid might be sometime off. Will the overage provisions require open book accounting and access to the buyer's records? Consideration should also be given as to whether it is practical to take on the monitoring burden. A busy public sector estates team may not have time to monitor the buyer's activity on a disposed site to check regularly if any overage has arisen. 
  • Overage calculation: There is a often a complicated mathematical calculation to ascertain what overage might be due. This can impact on what planning or other development costs are to be deducted before the overage distribution. This can be subject to future dispute and considerable uncertainty as to outcome. Anybody considering such provisions needs to be clear on what it is seeking to achieve so that in the legal drafting such arrangements can be made as clear as possible.
  • Security mechanism: Where there is the possibility of a future payment then how such payments will be secured needs to be considered. Overage provisions on a sale will not necessarily pass automatically to any buyer's successors in title. There are a number of ways of imposing this obligation including a restrictive covenant, the imposition of a legal charge or sometimes the retention of a "ransom strip" to unlock development on the payment of overage. Careful thought as to the mechanism to be used is recommended early in the process.

Phil Lawrence is an associate at Veale Wasbrough Vizards. He can be contacted on 0117 314 5441 or by This email address is being protected from spambots. You need JavaScript enabled to view it..