Overage agreement is a term used in the real estate industry that refers to an additional payment made by a buyer to a seller in cases where the property`s value increases, usually beyond an agreed-upon price. It is also known as a clawback agreement and is a legal contract between the buyer and seller that outlines specific terms for the payment of additional funds. Overage agreements are typically used in long-term land transactions, such as those involving commercial properties and large land parcels.
An overage agreement works by setting an agreed-upon price for the property at the time of sale. However, it also includes a provision allowing the seller to receive additional payments if the property`s value increases beyond the agreed-upon price. This increase is often determined by a specific percentage or dollar amount. For example, a seller may agree to a 5% overage agreement, meaning they would receive an additional 5% of the property`s value if it rises beyond the agreed-upon price.
Overage agreements are beneficial for both buyers and sellers. For sellers, an overage agreement provides a safety net in case the property they sold increases significantly in value. For buyers, it can be an opportunity to purchase a valuable property at a lower price, with the potential to make a profit if the property increases in value.
The key to a successful overage agreement is to include clear and specific terms in the contract. This includes outlining the percentage or dollar amount the seller is entitled to, how long the agreement will be valid, and what circumstances would trigger payment.
Overage agreements have become increasingly popular in recent years due to rising property prices and the desire to mitigate market risks. In some countries, such as the United Kingdom, overage agreements are commonplace, and almost standard practice in the sale of development land.
In conclusion, an overage agreement is a legal contract that allows a buyer to purchase a property at a lower price, while providing a safety net for the seller in case the property`s value increases. By including clear and specific terms in the contract, both parties can benefit from this type of agreement. If you`re in the market for a long-term land transaction, consider discussing an overage agreement with your lawyer or real estate agent.