Property Auctions in Liverpool, UK: How Overage Clauses Kills Profits on Land

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This excerpt is from a chapter in the book, THE TRUTH ABOUT PROPERTY, written by NRLA trainer, Henry Davis, 

Buying and selling homes in LiverpoolAlthough overage is technically another form of covenant, I feel overage clauses deserved a special mention. It can cause absolute devastation on land value in particular, yet it’s a challenge to work out the exact impact in percentage terms of original sale price. Overage clauses often give rise to legal disputes because of the legal complexity when it comes to their enforcement. This is a hidden clause in the title deeds, which can sometimes make or break a deal when it comes to land in particular. An overage clause is also known as claw-back or uplift. The concept is that if planning permission is obtained after purchase, the seller will be entitled to a share in any uplift in value. This sounds simple, but provisions of this nature give rise to a wide range of legal implications as to how the overage will be calculated. This can be complicated and requires close attention from your solicitor.

Overage clauses may have tax implications. If an overage payment is triggered, further Stamp Duty Land Tax (SDLT) may be due on completion of the purchase, and the buyer could end up paying this on the purchase price, plus the estimated enhanced value. In the case of a commercial property, if the original sale was subject to VAT, then VAT may also be due on any overage payment.

It is often used to protect against the risk of embarrassment should the new buyer achieve a significant profit from quickly re-selling.

This clause, often designed as a positive or restrictive covenant, may severely impact your profit opportunity, especially when buying land. I have seen many developers over the years buying land with these complicated clauses because they didn’t bother to instruct a solicitor to read the legal pack. Land with overage clauses is often sold at auction because in a Private Treaty sale, their complications give rise to extended negotiations. This inevitably results in additional legal fees and delays, hence why auction is an ideal sale platform for sellers. I also think sellers know a particularly onerous claw-back simply won’t receive the same level of due diligence, which would occur during a Private Treaty sale.

Worst case scenario
I’ve only had one property on which I was unable to raise a mortgage or even a bridge, and that was a commercial property with tenants in situ who had not signed a tenancy agreement. Given auction timescales, it’s not usually possible to raise a conventional mortgage on an auction property anyway, so most buy with cash or a bridging loan with a view to getting the property to a point where it’s mortgageable at a later stage.

Most property is bridgeable, but although I purchased this property, and because the current tenants were in situ with no formal written contract, I was unable to raise even bridging finance. I also had issues securing lending on a property where the flats were below the minimum room sizes and only had one lending option (Fleet Mortgages) available to me with low LTV (Loan-to-Value) and a valuation that was quite frankly a joke. This was to re-mortgage an old conversion of flats, completed before my purchase, where some of the rooms were below the current minimum room size. It was very challenging and although lenders always knock you down on valuations, Fleet Mortgages were particularly ruthless in terms of their valuations. This left me very unhappy with the LTV or the valuation, which was way below anything reasonable, despite me providing relevant comparable valuation evidence. Once I had provided this evidence, they kept changing the rules, but as they were the only lender available, I had no better option.

Generally speaking, most lenders do not lend on properties valued below £50,000. If a property is not habitable, with structural issues or with a non-compliant EPC, it will not qualify for a buy-to-let mortgage, but you will be able to use bridging finance.

It would be very unusual to be unable to raise at least bridging finance, but as far as making a property unmortgageable, here are a list of issues which will challenge lenders:

  • Tenants in situ with no written contract is both unmortgageable and unbridgeable.
  • Derelict or non-standard construction, including any flats with a lease under 75 years or blocks of flats. Any blocks over ten storeys can also be problematic.
  • Ex local authority, especially with entrances to flats along an exterior corridor, and don’t have their own separate access via an internal entrance hall or stairwell.
  • Grade I Listed Buildings are a challenge to mortgage and likely to fail the new Minimum Energy Efficiency Performance rules.
  • Granny flats and annexes, as lenders prefer single unit properties and this may take the property into the specialist lending area.
  • If a compulsory purchase order is in place.
  • Properties with mixed freehold/leasehold titles. This is where the landlord may own the freehold title of a multi-unit block of flats but some of the flats within the property are on long leasehold titles, which may be owned by others. Lenders prefer the landlords to be the sole freeholder of the block, again bringing the property into the specialist lending area.
  • Properties where there are boundary disputes or where planning applications have not been applied for correctly, although lenders may in some cases accept insurance for any future claims.
  • Japanese Knotweed or Himalayan Balsam will also stop a lender until the weed has been correctly eradicated and suitable warranties provided.
  • If flooding is a common occurrence and it’s uninsurable for flood risks, or near a landfill, mining works or an area of known subsidence, which appear in search results.
  • There’s been a recent trend for builders to sell homes on a leasehold basis with the ground rent doubling every ten years. However, the Government are taking action to resolve this.

These are all areas I believe you may have particular difficulty to mortgage, but the many other issues which may be of a lesser challenge are those such as flats over commercial premises, mixed-use properties, properties with mixed freehold/leasehold titles, properties with flying freeholds, kit houses, log cabins, colt bungalows, property with sitting tenants or regulated tenancies.

Henry is the CEO of We Buy Any House and Genii Developments Ltd and a developer for over 32 years. He is also an accredited Property trainer for the National Residential Landlords Association. 

Copyright, Henry Davis.

Henry Davis Quote Regarding Property