Monday, 6 April 2015

Knowle relocation project: deciding to sell >>>>>>>>>> >>> 'overage' and the dangers of selling Knowle short

The District Council has published the minutes of the meeting where it voted to sell Knowle:
Futures Forum: Knowle relocation project: deciding to sell >>> Full Council: Wednesday 25th March >>> District Council reports

There have been several questions over the months about the transparency of the Knowle relocation project: for instance:
Futures Forum: Knowle relocation project: the Transparency Code and being opaque about Exmouth Town Hall refurbishment

Indeed, there have been questions for some time now about the transparency of process at the District Council: to take but one example:
Futures Forum: The lack of scrutiny at East Devon .... Council's Scrutiny Cttee meets Thursday 16th October

Several Freedom of Information requests have been made asking for documentation on the various contractual arrangements with consultants: for example:
Access to contracts for Alder King and Kensington Taylor - a Freedom of Information request to East Devon District Council - WhatDoTheyKnow

And other FOI requests have asked to look at the precise figures:
Disclosure of Progress Reports for the Knowle - a Freedom of Information request to East Devon District Council - WhatDoTheyKnow
Relocation from the Knowle - a Freedom of Information request to East Devon District Council - WhatDoTheyKnow

At the meeting last month when the Council voted to sell Knowle, the issue of 'overage' was raised:

How councillors have damaged chance of best price for Knowle sale.

April 5, 2015 by sidmouthsid Leave a comment

In another of the questions put to Full Council (25 March 2015), SOS member Jacqueline Green, explained:

‘Mr Chairman,
My question concerns ‘Best Value’, and why I believe Councillors have compromised the relocation team’s bargaining position on the Knowle sale.

An important disclosure made by EDDC last week, is that that it has not agreed Heads of Terms with Pegasus Life Ltd, the preferred buyer for the Knowle site. Councillors were informed about this, only as a result of a question from the public, at the special ‘combined committee meeting’ (Overview & Scrutiny, and Audit & Governance), dedicated to the relocation details.

The disclosure confirms that , although a price for the sale has been agreed, other vital factors have not. For instance, Richard Cohen revealed that ‘overage’ terms have been mentioned, but not fixed. Overage refers to the sums that will be paid by the developer in the event of the site being sold on at a profit, or selling the residential units very successfully. The overage payments and the purchase price are inextricably linked: if you pay more overage, then the purchase price is correspondingly reduced. And vice versa.

So by agreeing to accept the current price, without knowing the overage terms, the members of EDDC have effectively destroyed Richard Cohen’s negotiating position.

Why would Pegasus Life offer any overage, now that members have said they will accept the deal anyway?

Councillors having already approved the sale for “somewhere between £7m and £8m” have created a risky situation, given that they have been told that refurbishment of Exmouth Town Hall will be “in the region of £1m, and the newbuild offices at Honiton “in the region of £7m. Once again, the figures simply do not stack up.’

How councillors have damaged chance of best price for Knowle sale. | Save Our Sidmouth

What is 'overage' and why is it so important a point when negotiating a contract to sell a property?

Overage: ‘happy marriage’ or ‘excess baggage’?

7 March 2013

‘The purchaser will pay the vendor further monies if planning permission is received on the property’.

Quite often, I have seen phrases like this added to the end of Heads of Terms for the sale of property. I groan when I see such phrases, as this ‘overage’ arrangement leads to a lot of time, concern and money being spent on the issue.

So what is it all about?

‘Overage’ allows a seller of land to share in the potential future increase in value of the land that such seller has sold. Typically, a seller is disposing of land that it thinks at some stage in the future will increase in value. This normally will be triggered by the grant of a planning permission or by the buyer developing the land and doing better from the onward sales than it envisaged when it bought that land.

The overage ‘carrot’ is often used to reach final agreement on a deal. The seller wants more money for the property than the buyer wants to pay, because the seller thinks there is more scope for a future increase in the value of the property than the buyer is prepared to give him at this stage. The buyer says something to that effect, to which the seller responds, “Well, how about you paying me more if you get a better planning permission or you do better on your onward sales?” Overage is often used, therefore, to ‘swing the deal’ and get the matter into solicitors hands.

The trouble is that overage (or ‘clawback’, as it is sometimes known) is a complicated arrangement and sellers, buyers and their respective agents can easily overlook some key issues when negotiating the point, possibly because it’s the last thing outstanding.

For instance, they often do not consider how long the arrangement is to last, how it will be secured, what event(s) will trigger the payment, the amount of the payment and, crucially, whether actually it would be better to have a conditional contract or an option to purchase, rather than a straight sale with the possibility of a deferred payment in the future.

Greenwoods Solicitors LLP

See also:
Futures Forum: Knowle relocation project: Pegasus as preferred bidder... However, its proposals for ‘one of the finest coastal properties’ in South Devon have been rejected by Dawlish Town Council 'on the grounds of overdevelopment'.

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