Finance structured around overage and planning gain sharing arrangements

Planning gain sharing is simply the principle that the value created by planning permission is split between the parties who make it happen, usually the developer or promoter who takes the risk and secures consent, and the original landowner who sells the site. Overage, also called clawback or uplift payment, is the most common mechanism for doing that.

Under an overage, the buyer pays a base price on completion, and agrees to pay the seller a further sum if and when a defined event occurs, most often the grant of planning permission for a more valuable use. The extra payment is typically calculated as a percentage of the uplift in land value that the consent creates.

• Trigger: the event that switches the payment on, commonly the grant of consent or the sale of a consented site.
• Share: the percentage of the uplift the landowner receives.
• Period: the number of years the overage runs before it falls away.

It lets a developer buy at a price that reflects today's planning status, while giving the seller a genuine share of tomorrow's planning gain if consent is achieved. Both sides are aligned on getting permission.

An overage does not just sit in a private contract. It is usually protected on the title, commonly by a restriction at the Land Registry or a legal charge, so that the land cannot be sold or dealt with without the overage being addressed. That protection is exactly what makes it relevant to any funder taking security.

When a lender takes a first charge over the land, they need a clear picture of what else is registered against it and where their charge ranks. An overage obligation is a future liability attached to the site: at the trigger point, a sum becomes payable to the original landowner out of the value the consent created. If that is not understood and ranked correctly, it can cut across the lender's security.

The practical effect is that overage tightens the arithmetic. The funder is lending against the land, but part of the future uplift is already spoken for. That does not stop a deal working, but it does mean the exit has to cover the loan, the rolled-up interest and the overage payment, with headroom left over. Getting the ranking and the payment mechanics clear at the outset avoids nasty surprises later.

The aim is to make the deferred payment predictable and to make sure it is settled cleanly at the point value crystallises, usually on refinance or sale of the consented site. Handled well, overage sits comfortably alongside a funder's charge; handled badly, it becomes a dispute at the worst possible moment.

A few structuring points matter most:

• Ranking: agree in advance how the lender's charge and the overage sit relative to each other, so everyone knows who is paid in what order on exit.
• Calculation: tie the overage to a clear, valuable-event definition and a valuation method both sides accept, so the sum is not open to argument at trigger.
• Timing: line up the overage trigger with the funding exit, so the payment to the landowner is made from the same event, sale or refinance, that repays the facility.

On this kind of case, land bridging tends to sit around 0.75% to 1.1% per month, and stronger consented cases can move to senior debt from around 6% to 8% a year. Interest is usually rolled up. We work with the solicitors on both sides so the overage and the finance are designed to settle together, not to collide.

Funders are not put off by overage in principle. It is a normal feature of land deals. What they care about is clarity: they want to know the overage exists, what triggers it, how much it is, and where their charge ranks against it. An overage that is well drafted and properly disclosed is manageable. One that is vague, or discovered late in the process, is a red flag.

The main concerns a funder will raise are straightforward. Does the overage payment, when triggered, still leave enough value to repay the loan and rolled-up interest? Is the trigger event aligned with, or ahead of, the funding exit? Is the calculation method certain enough that the payment cannot balloon unexpectedly? And is the ranking documented so there is no argument on the day money moves?

Because leverage is set against value, the presence of overage effectively reduces the net value available to the funder at exit, so it tends to pull achievable loan to value towards the lower end of the usual bands. Full disclosure early, with the overage deed in front of the funder from the outset, is the single best thing you can do. We package the title, the overage terms and the exit together so a funder can price the case accurately rather than defensively.

As an illustration only, and not a promise of any particular value or outcome, imagine a developer buying a site with a base price of £1m, agreeing an overage that pays the original landowner 30% of any uplift in land value once residential consent is granted. Before consent the land is worth around £1m, so a land bridge might advance up to around 50% to 65% of current value to help fund the purchase and planning costs, with interest rolled up.

Suppose consent is later granted and the consented land value rises to a hypothetical £3m. The uplift is £2m, so the overage payment to the landowner would be 30% of that, £600k. On refinance or sale of the consented site, the proceeds first repay the funder's loan plus rolled-up interest, then settle the £600k overage to the landowner, leaving the developer's share of the remaining value.

The point of the example is the ordering: the deferred payment to the landowner is real money that comes out of the same uplift the developer is chasing, so the exit has to cover the loan, the interest and the overage with room to spare. These figures are purely indicative and illustrative, not a quote, forecast or guarantee.

If your deal involves an overage, clawback or any planning gain sharing arrangement, the most useful thing you can send us is the paperwork. We want to see the overage terms, or the heads of terms if they are still being negotiated, alongside the current land value, the planning status, and how you expect to exit, whether that is sale of the consented site or a refinance.

With that in front of us we can tell you honestly whether the deal is fundable, what the overage does to achievable loan to value, and how the finance and the deferred payment should be sequenced so they settle cleanly together. Where the overage is still being drafted, it is far better to involve us before it is finalised, so the wording works with the funding rather than against it.

Facilities in this space run from around £100k to £25m over terms of 1 to 36 months, with interest usually rolled up. Planning gain and land finance for companies, developers, promoters and investors is unregulated commercial lending outside the FCA's regulated-mortgage perimeter; where a deal would be a regulated mortgage contract it is referred to an appropriately authorised firm. Nothing here is financial, legal, planning or tax advice.