Overage shares the value a better planning consent adds to land; how the clause measures that value decides whether the payment is fair or ruinous.
Value the land twice, once with the consent it was sold with and once with the new consent, on the same date and the same assumptions, deduct the agreed costs of getting the new consent, and pay the seller its share of the difference. On an illustrative site sold with consent for 40 homes, a new consent for 52 lifts residual land value by 688,800; a 50 per cent overage after 120,000 of planning costs pays 284,400. Draft the clause on extra sales less build cost instead, and the same 50 per cent pays 780,000.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A landowner sells a site with an outline consent for 40 homes. The buyer, a developer, thinks a better layout will get 52 through planning. The landowner suspects the same, and agrees the price only with an overage: 50 per cent of any increase in land value from an improved consent obtained within the overage period, after the buyer's reasonable costs of getting it. All figures are illustrative and the appraisal is deliberately simple.
| Item | Value |
|---|---|
| Homes: original / improved consent | 40 / 52 |
| Average sale price per home | 350,000 |
| Build cost and fees per home | 210,000 |
| Developer's profit | 20.0% of GDV |
| Finance | 6.0% of cost |
| Overage share / planning costs deductible | 50.0% / 120,000 |
| Line | 40 homes | 52 homes |
|---|---|---|
| GDV | 14,000,000 | 18,200,000 |
| Build cost and fees | 8,400,000 | 10,920,000 |
| Developer's profit | 2,800,000 | 3,640,000 |
| Finance | 504,000 | 655,200 |
| Residual land value | 2,296,000 | 2,984,800 |
The method is the standard residual, set out in how to calculate residual land value. The land sells at 2,296,000.
Uplift = 2,984,800 − 2,296,000 = 688,800
Net of planning costs = 688,800 − 120,000 = 568,800
Overage = 50% × 568,800 = 284,400, or 23,700 per extra home
In Excel: =Share*(RLV_new-RLV_old-PlanningCosts)
The developer keeps the other 284,400, plus its 20 per cent profit on the twelve extra homes, which the residual has already paid it. That is the point of measuring on land value: the developer's return for building is protected, and only the windfall is shared.
The clause must also say when the payment falls due. Payable on the grant of consent, the developer funds 284,400 before it has sold a home. Payable on implementation or on each disposal, the seller waits and carries the developer's credit risk, but the payment then tracks what was actually built. If the developer sells the site on with the new consent instead of building, the trigger should catch that too.
Overage clauses measure the uplift in very different ways. On the same twelve extra homes:
| Basis of the clause | Payment |
|---|---|
| 50% of the uplift in residual land value, less planning costs | 284,400 |
| Fixed 25,000 per additional home | 300,000 |
| 50% of extra GDV less extra build cost and planning costs | 780,000 |
The per-home payment is close to the residual answer here, but only by coincidence of the numbers; it does not move with prices or costs. The third basis looks reasonable, sales less costs, but it leaves out the developer's profit and finance on the additional homes. It pays 2.74 times the land value basis: the seller takes half of the developer's margin on the extra homes as well as half the windfall.
Suppose house prices rise 10.0 per cent, to 385,000, before the new consent is granted. The two residuals become 3,416,000 for 40 homes and 4,440,800 for 52.
| Measured against | Uplift | Overage at 50% |
|---|---|---|
| Value with the old consent, same date | 1,024,800 | 452,400 |
| The original land price | 2,144,800 | 1,012,400 |
Measured against the original price, the overage captures 560,000 of pure market growth that would have accrued to the buyer on the 40 homes it bought with no new consent at all. A clause meant to share planning gain becomes a share of the housing market.
| Overage share | Payment | Developer keeps | PV of expected payment |
|---|---|---|---|
| 30% | 170,640 | 398,160 | 76,923 |
| 50% | 284,400 | 284,400 | 128,204 |
| 75% | 426,600 | 142,200 | 192,307 |
The present value assumes a 60.0 per cent chance the improved consent is granted, in year 3, discounted at 10.0 per cent. At 50 per cent the obligation is worth 128,204 today, 5.6 per cent of the land price: that is what a buyer offering overage instead of a higher price is really giving.
Negotiations settle on the percentage and leave the definition of "increase in value" to the lawyers. Yet the base moved the payment from 284,400 to 1,012,400 in this case, at the same 50 per cent. Before signing, write the overage as a formula: the valuation date for both consents, whether developer's profit and finance are deducted, which costs come off (planning fees, affordable housing, infrastructure contributions), and what happens on a part sale. Then run it in the appraisal. For buying land before consent, see how much to pay for land subject to planning.
A higher affordable housing requirement on the new consent reduces the uplift too. Measure both residuals with the obligations each consent actually carries.
The book covers land acquisition, appraisal and consent, and the free workbook for this case carries a residual appraisal you can run under both consents.
A promise by the buyer to pay the seller a share of any extra value created after the sale, usually by a better planning consent, within a fixed period. In the illustrative case the land sells for 2,296,000 with consent for 40 homes, and the seller is promised 50 per cent of the uplift if the buyer later obtains more. With 52 homes the payment is 284,400.
The share is a matter of negotiation, and the base it is applied to matters more than the rate. On the illustrative case a 30 per cent share of the land value uplift pays 170,640 and a 75 per cent share 426,600; a badly drafted base at 50 per cent pays 780,000, more than either.
Multiply the expected payment by the probability of the trigger and discount it to today. A 284,400 payment with a 60 per cent chance of being triggered in year 3, discounted at 10.0 per cent, is worth 128,204 today, 5.6 per cent of the 2,296,000 land price.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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