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What is an ‘Overage Charge’?

What is an ‘Overage Charge’?

When land is sold, the vendor will normally do his best to sell at the best possible price – indeed, if the vendor is a public sector authority or a charity, he may be obliged to sell at the best possible price. Sometimes, however, the best possible price may only be available at some time in the future, or not at all. The most common example of this is where planning permission may be granted for a more valuable use of the land, but it is by no means certain that the permission will be forthcoming and, in any event, this is unlikely to happen for some time. Similarly, if land is sold for a particular purpose, such as for the development of 50 houses, and the developer in fact manages to build 60, then the land will obviously be more valuable with 60 houses on it rather than the original 50.

“Overage” is the term normally used, in the context of a property transaction, to mean a sum which the vendor may be entitled to receive after completion if a specified condition is satisfied; the condition may be:

  • The grant of a new planning permission; or
  • The grant of planning permission for a new (perhaps more valuable) use of the land; or
  • The construction of more than a specified number of houses, or a larger than specified commercial development on the land; or
  • The on-sale of the land in its present state, where the vendor fears that the purchaser may take advantage of a rapidly rising market to make a quick profit from the land. This will be particularly useful in the case of a vendor who is anxious not to be embarrassed by being seen to have sold at an undervalue, such as a local authority or charity.

The usual way of protecting such an interest is that the vendor will require the purchaser to enter into a overage deed covenanting to pay money  to the vendor should any of the conditions in the overage deed be satisfied to activate a financial payment to the vendor.

 

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