For landowners considering a sale, overage has long been a useful way to share in future value – allowing sellers to receive additional payments if planning permission is secured or development proceeds at a later date.
As natural capital markets continue to evolve, the same approach is increasingly being considered for the sale of land with environmental potential – the challenge, however, is that natural capital opportunities do not always fit neatly into a framework designed for development.
Harvey Davies, head of natural capital at Thrings, takes a look at how landowners can make the most of a land sale without it becoming too complicated.
The challenges of natural capital overage
With development land, the trigger for an overage payment is often clear, with value typically crystallised when a planning permission is implemented or land is sold on with the planning consent. In natural capital projects, value is generated very differently.
It is frequently the purchaser who must invest in establishing the scheme and commit to long-term land management obligations.
For the seller, a restriction on the land title does not automatically guarantee compliance with the overage as the purchaser implements the scheme itself and receives the income through the sale of credits or units without selling the land.
This creates a fundamental tension: if an overage arrangement captures too much future value, it reduces the purchaser's incentive, potentially sterilising the very activity intended to create that value– leaving both parties worse off.
Further practical difficulties compound this. Natural capital markets are evolving all the time, making it harder to identify simple overage triggers and monitor compliance (especially where the ownership of the land does not change), with greater challenges around the drafting and negotiation of the overage.
The overage trigger for biodiversity net gain (BNG) may be the registration of the land on the biodiversity gain site register but this does not work for nutrient neutrality schemes which are not recorded on a public register.
The commencement or completion of the establishment works could provide the trigger, but maintaining transparency and monitoring this is less easy than it is in relation to a development overage.
Questions also arise around everyday land management. While it may be the intention of the parties to include, say, BNG and nutrient neutrality schemes within the scope of the overage, it is unlikely that the intention is the same for income from participating in land management schemes under the Agriculture Act 2020 (such as the Sustainable Farming Incentive or Countryside Stewardship schemes).
Drafting the overage broadly (to try and capture future unknown environmental schemes) risks creating considerable difficulties for the purchaser of the land; while limiting its scope risks omitting potentially lucrative future natural capital projects.
Unclear drafting risks future disputes and uncertainty. What appears at first glance to be a straightforward way of protecting future value can quickly become a complicated exercise, leaving each party with significantly increased transaction costs and with obligations that are difficult to interpret years down the line.
Consideration also needs to be given to the stacking of natural capital projects and whether the overage can be triggered just once or the seller has multiple ‘bites of the cherry’.
So, what's the solution?
While there will be times when a natural capital overage will be appropriate (eg the sale of land with obvious significant potential for a natural capital project), landowners may achieve a better outcome by focusing on how land is presented to the market in the first place.
Natural capital is now attracting interest from a growing range of investors, operators and environmental businesses. By ensuring land is marketed not only to traditional farming purchasers or developers, but also to buyers active in the natural capital sector. Sellers are more likely to attract competitive interest from those who recognise and are willing to pay for that potential upfront.
In many cases, a well-run process can reduce the need for overage arrangements altogether. Instead of attempting to predict and share future value through intricate contractual mechanisms, the market itself may reflect that value at the point of sale.
As natural capital markets continue to develop, overage will undoubtedly remain part of the conversation. However, the most effective approach may not always be the familiar one. Sometimes, the key to unlocking future value is simply ensuring the right buyers are at the table from the outset.
Getting legal advice early in the process will enable you to make informed decisions that deliver positive environmental outcomes while achieving strong commercial results.
Natural capital is an evolving and increasingly important area, presenting new opportunities for landowners, developers and businesses to unlock environmental and commercial value. Our sector-leading multidisciplinary team advises on the full range of natural capital matters, including biodiversity net gain, nutrient neutrality and voluntary nature markets. Get in contact today to find out more.