Overage: How this Works in Practice
This Guidance Note sets out when overage clauses will be sought, and how they work in practice. Links to model overage clauses can be found at the end of this document
Why is an overage clause required?
Strategy 34 of the adopted Local Plan requires that ‘an overage clause will be sought in respect of future profits and affordable housing provision, where levels of affordable housing fall below policy targets’. This means that where the Council is satisfied that evidence has been provided to demonstrate viability issues with a scheme, the Council would accept a lower amount of affordable housing (on site or in kind) subject to an overage clause.
What is an overage clause?
An overage clause is a clause in the Section 106 agreement relating to future profits. Viability appraisals offer informed assessments of how much affordable housing could be viably provided on a particular scheme, by calculating presumed costs and values. Obviously, the actual costs and values of a scheme can only be known after the scheme is built. Viability appraisals are therefore snapshots in time including various assumptions and contingencies, albeit assumptions usually informed by professional guidance and experience. The use of overage clauses offers a way to seek some redress where overly pessimistic assumptions about values and/ or an overestimation of costs, have been used to justify a lower level of affordable housing contributions, when the scheme could actually have provided more. Where a developer makes more profit than expected, then a proportion of this unexpected and additional profit is paid to the Council to help fund provision of affordable housing that should have otherwise been provided as part of the development.
When would an overage clause be required?
Where viability information has been used to demonstrate to the satisfaction of the Council that a less than policy compliant amount of affordable housing is acceptable an overage clause will be applied.
Overage clauses will be sought on all applications where a less than policy compliant amount of affordable housing is accepted unless there are clear and justifiable reasons not to. This includes single and multi-phase developments.
Do overage clauses apply immediately?
Before the adoption of the Local Plan, some overage clauses were drafted in a way to incentivise development to happen quickly and often included a specific time period before the overage clause kicked in. This meant that if a development was completed within that time period, there was no requirement for revised viability information to be submitted. Therefore no overage calculation was undertaken, and no overage would be payable. This reflected the market conditions at that time, and the lack of a five year housing land supply, as well as the Council’s desire for schemes to be built out quickly to ensure that the much needed homes were delivered. The adoption of the Local Plan and in particular Strategy 34 which includes a specific reference to overage, now means that the Council will seek to ensure that overage clauses will be applied without any periods of deferral or other restrictions unless there are clear and justifiable reasons not to.
When does overage become payable?
The overage clause in the Section 106 requires the submission of a Development Account at the completion of the scheme. If this shows additional profit over and above that initially anticipated in the viability appraisal then a proportion of that is paid usually within a few days of the Development Account being agreed.
How much overage is payable?
The East Devon approach to overage clauses is to seek to recover 50% of any additional profit made, up to a capped sum which represents the amount that would have been required for a policy compliant scheme. Any contributions already secured through a Section 106 count towards the total.
Does overage introduce uncertainty for a Developer?
The overage clause only require an overage payment on any additional profit (over and above that already anticipated by the developer) to offset the affordable housing provision that would have otherwise been required. The drafting of these clauses in East Devon enables the developers’ actual purchase price, actual developments costs, actual sales receipts and actual percentage profit to be accounted for. Overage clauses therefore actually provide certainty, including in relation to the developer’s return.
Does overage affect the competitive return to a willing landowner and willing developer?
Paragraph 173 of the National Planning Policy Framework requires viability to be considered when determining planning applications. Development is viewed as deliverable if taking into account the normal costs of development, mitigation and policy requirements. As the actual sale price of the site is used in the Development Account (subject to benchmarking against current values if needed) submitted under the overage clause this price has already been deemed to be an ‘acceptable return’ for the landowner. The Development Account also applies the same level of Developer’s profit as stipulated in the viability appraisal. The percentage profit has therefore also already been agreed ‘acceptable return’ for the developer.
What principles do you apply when considering overage?
At a meeting of Strategic Planning Committee on Feb 20th 2017 Members endorsed/re-endorsed the following principles:
1 Any overage clause will be drafted by the Legal Department in consultation with the planning officers to suit the specific circumstances of the site.
2 Consideration will be given to the requirement to provide development accounts throughout the construction phase of the development based on the size of the development and projected delivery time / phasing – this may result in a requirement for the submission of annual accounts, bi-annual accounts or one account at the end of the development and, if appropriate due to the size of the scheme, delayed submission of the first account following commencement of development.
3. If there are occasions where the viability appraisal shows a loss, any overage payment will only be required to be paid where that loss is recouped and the developer goes into net profit.
4. The default position will be to require 50% of any net profit element to be paid to the Council, unless a different percentage can be robustly justified by the Developer or the Council.
5. The overage payments will be capped to an amount equivalent to the full cost of the mitigating benefit (including affordable housing provision) that has been reduced or waived.
6. Any monies recovered pursuant to an overage clause will be spent proportionately of the elements that have been reduced or waived. In practice this means all Affordable Housing overage must be spent on Affordable Housing.
Overage for Phased Developments
On multi phased development Viability Appraisals can be submitted for each phase. Where it is accepted a lower amount of affordable housing has been justified for a phase and less Affordable Housing provided on site as a result, Strategy 34 requires an overage clause to be applied to that phase. The next phase would need to be assessed afresh to see if a higher percentage / policy compliant level of affordable housing was now viable. If so, on-site provision would be expected, except in exceptional circumstances. Each phase is considered separately and there is no carry over of losses, or profits between each of the phases. Whole scheme costs should be proportionately distributed across the full scheme, and clearly explained in any viability appraisal.
Overage for Enabling Developments
On occasions residential development may be permitted as enabling development. In these cases the new houses assist / enable the delivery of some other planning objectives, for example retention or renovation of a listed building. In such circumstances, it may be the case that the Council accepts a reduced level of affordable housing in order to help ensure the other planning objective is achieved. As with single phase schemes, in such circumstances it is appropriate to review final costs and income to ensure that the assumptions and estimations were reasonable and whether the scheme overall could have provided affordable housing. In these cases, overage clauses will be sought.
Model Overage Clauses
A model overage clauses for inclusion in a Section 106 agreement can be found here (to follow). The appropriate clause will depend on the nature of the development and the stage of the process.
- Overage for a single phased scheme
- Overage for multi-phased schemes
These are simply for use as a guide as each agreement will be negotiated dependent upon its particular circumstances.