Drafting overage and clawback in a section 106 agreement

Most section 106 overage clawback provisions never produce a payment, and the reason is almost always the definitions rather than the scheme's performance. A developer agrees a profit share in principle, the drafting defines costs generously and revenues narrowly, and when the review is triggered the appraisal shows no surplus. Councils have noticed. The negotiation has moved from whether there is an overage clause to what sits inside the cost and revenue definitions, and that is where a developer's time is now best spent.

This is a drafting piece for people who have already accepted that a review mechanism is going into the agreement.

Why overage appears in an obligation

Where a viability assessment justifies less than the policy level of affordable housing or a reduced contribution, national guidance contemplates a review mechanism so that the shortfall can be revisited if the scheme performs better than the appraisal assumed. The council gives ground on day one and keeps an interest in the upside.

In London the pattern is formalised. A scheme that meets the threshold level of affordable housing on the fast track avoids a review altogether, while one that does not carries early and late stage reviews under the published viability approach. Outside London the position varies by authority and by the terms of the adopted plan, so the first question is always what the local policy requires rather than what the applicant offers.

A second use of overage is on land disposals, where a council selling its own land keeps a share of any uplift on a later grant of permission. That is a land transaction rather than a planning obligation, and it should not be confused with the planning version even though the arithmetic looks similar.

Common formulations and triggers

Three structures cover most agreements.

An early stage review, triggered if the development has not been substantially implemented within a defined period from the grant of permission, usually two years. The point is to stop an applicant from banking a consent on a pessimistic appraisal and building it years later in a stronger market.

A late stage review, triggered when a defined proportion of the private units have been sold, commonly around three quarters. This one measures what actually happened rather than what was forecast.

A mid-term review on phased schemes, taken at the start of each phase, with the appraisal rolled forward.

Each needs a cap. The council's share is normally capped at the cost of bringing the scheme up to the policy-compliant position, because the obligation has to be necessary to make the development acceptable and cannot simply be a levy on profit. Draft the cap explicitly and state what it is measured against.

Defining costs and revenues

This is the section that decides whether anything is ever paid.

On the revenue side, the definition should capture actual achieved sales values on completed transactions, plus an assessed value for unsold units at the review date on stated assumptions. Ground rents and commercial elements need naming. If the developer intends to retain units for rent rather than sell them, say how they are valued, because a build to rent switch after permission is the most common way a late stage review is defused.

On the cost side, the phrase to negotiate is "properly and reasonably incurred". Councils will want actual costs evidenced by certified valuations, with a cap by reference to an indexed build cost figure. Developers will want the actual spend whatever it turns out to be. The workable middle is actual costs, evidenced, with any overspend beyond a stated tolerance requiring justification.

Four cost items generate most of the argument.

Developer's profit, and whether it is expressed as a percentage of gross development value or of cost, and whether the benchmark differs between private and affordable elements. Finance costs, and whether notional interest is allowed where the scheme was equity funded. Professional fees, and whether internal management charges count. Payments to connected parties, which should be limited to arm's length market rates or excluded.

Land value is the fifth and largest. Fix the input at the review as the figure used in the original appraisal, indexed or not as agreed, rather than leaving it open. A review in which land value is re-argued from first principles is a review that will be litigated.

Audit rights and evidence

An overage clause without audit rights is a wish. The agreement should require the developer to submit an updated appraisal in a defined format by a defined date, with supporting evidence, and give the council the right to appoint an independent reviewer.

Who pays for the reviewer is a live point. The usual answer is the developer, capped at a stated sum, which is acceptable if the cap is realistic. A scheme with an uncapped obligation to fund whatever the council's consultant charges is a scheme with an open-ended liability.

Include a dispute mechanism that names the appointing body and a short timetable. Referral to an independent expert, appointed by the president of the relevant professional body in default of agreement, with a decision binding on both parties, is the standard and it works.

Access to records matters as much as the appraisal. Certified cost reports, sales completion statements and the development finance agreement should be listed as the evidence to be provided, so that the argument is about numbers rather than about disclosure.

Security and enforcement

A planning obligation binds the land and is enforceable against successors in title, which is the starting point for security. That alone is not always enough.

Councils typically add a restriction on title at the Land Registry preventing disposal of the last units until the review payment has been made, or a requirement for a bond or parent company guarantee. Lenders will require a mortgagee exclusion clause so that the obligation does not bite on a receiver enforcing security, and that clause needs to be read carefully because a wide exclusion can strip the security entirely.

Tie the trigger to something the council can observe. Occupation, disposal or the issue of a building control completion certificate are all checkable. A trigger defined by an internal accounting event is not.

The mechanics of those provisions overlap heavily with the review drafting described in overage clauses and review mechanisms in a section 106.

Where disputes actually arise

In order of frequency: the meaning of sold, where exchange and legal completion give different dates and the parties have not said which applies. The treatment of unsold units at a late stage review. Indexation, where build costs are indexed and values are not, or the reverse. Profit benchmarks applied to a different base at review than at grant. And phasing, where a scheme is reconfigured after permission so the phase definitions in the agreement no longer match what is being built.

Each is avoidable with a defined terms schedule that runs to three pages rather than one.

One further point worth stating plainly. The community infrastructure levy is a fixed charge calculated under the levy regulations and cannot be made subject to a review or a profit share. Obligations and the levy are separate, and an agreement that muddles them will be challenged.

The underlying appraisal, and the assumptions it fixes for any later review, belongs in a Viability Assessment prepared to the recognised professional standard, and the affordable housing position it supports belongs in an Affordable Housing Statement. Councils normally expect viability work from a suitably qualified author and professional review is strongly advised.

Where the scheme sits below the national small sites threshold, the obligations question changes shape, as set out in affordable housing and the small sites national threshold.

Browse the 66 PlanScope report types to see the documents a major residential application normally carries alongside the agreement.

This is general guidance, not legal advice; check the position with your local planning authority or a qualified professional before relying on it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.