Overage and clawback in a planning obligation
Section 106 overage shares scheme upside with the authority, usually as affordable housing. This covers early, mid and late stage triggers, defining the uplift, why a cap matters to funders, and the drafting traps that surface years later.
An overage clause in a section 106 agreement is a promise to share value that does not exist yet. The authority accepts less affordable housing now, on the basis that if the scheme performs better than the appraisal assumed, some of the upside comes back as affordable housing or as a payment. In the trade these appear as viability review mechanisms, and whether they are tolerable depends entirely on how four things are drafted: the trigger, the definition of uplift, the cap and the security.
Get those wrong and a scheme that stacked up at appraisal carries an open-ended liability that a funder will price.
What overage secures in planning terms
Planning obligations are entered into under section 106 of the Town and Country Planning Act 1990 and must meet the statutory tests reflected in the Community Infrastructure Levy Regulations 2010: necessary to make the development acceptable in planning terms, directly related to the development, and fairly and reasonably related in scale and kind.
An overage provision satisfies those tests only where it is tied to a planning purpose. In practice that purpose is almost always affordable housing. The authority agrees a below-policy level of affordable housing on viability grounds, and the review mechanism exists so that the shortfall can be revisited rather than written off.
Which means the first question to ask about any proposed review is what it buys. A review that produces a cash payment with no identified use is weaker against the statutory tests than one that converts surplus into additional affordable units or an in lieu payment for a stated purpose.
How it differs from overage in a land contract
These two things get confused constantly and they are not the same.
| Feature | Section 106 overage | Private overage in a land contract |
|---|---|---|
| Parties | Developer and local planning authority | Seller and buyer of the land |
| Purpose | Planning purpose, usually affordable housing | Additional consideration for the land |
| Binds successors | Yes, as a local land charge running with the land | Only if secured by a restriction or covenant |
| Trigger typically | Sales progress, implementation date or completion | Grant of permission, or uplift in value on sale |
| Treated as a cost in a viability review | Generally not | Often claimed, usually resisted |
The last row is where real money moves. A developer who agreed a private overage payment to the landowner will want to treat it as a development cost when the section 106 review is run. Authorities resist that, on the basis that land value in the review is assessed on a benchmark rather than on what the developer actually agreed to pay. The approach to valuing land in a review is the same discipline as residual valuation against comparable land transactions, and the mismatch between the two is a common source of dispute.
Settle the treatment of private overage in the drafting. Silence favours the authority.
Triggers and how they are drafted
Review mechanisms come in three familiar shapes.
An early stage review, triggered where the development has not been substantially implemented within a defined period after permission. Its purpose is to stop a consent being banked on an outdated appraisal.
A mid-term review, triggered partway through a phased scheme, usually by reference to phase completion.
A late stage review, triggered when a specified proportion of the private units has been sold or let, or a set period after first occupation.
Drafting points that matter on all three. Define substantial implementation precisely, by reference to identified works rather than to the general law on commencement. Define the sales trigger by reference to legal completions rather than exchanges, and say what happens if units are retained for rent rather than sold. And state the period within which the review has to be submitted, with a default if it is not.
Defining the uplift
The uplift is the difference between what the appraisal assumed and what happened. Every word of that sentence needs definition.
- Revenue. Actual gross development value from legal completions, net of agents' and legal fees, with a stated basis for valuing unsold or retained units.
- Costs. Actual build costs, verified by whom, and whether overspend is allowed in full, capped, or only where it was not within the developer's control.
- Profit. The return the developer keeps before any sharing starts, expressed on cost or on value, and stated as a percentage.
- Indexation. Which index applies to which input, named specifically, since a construction cost index and a consumer index produce different answers.
- Finance. Whether actual finance costs or a notional rate is used.
Audit rights belong here too. The authority will want the right to appoint a reviewer at the developer's cost, and a cap on that cost is a reasonable thing to negotiate.
An honest word about profit. The level of return allowed before sharing is the single most argued figure in these mechanisms, and there is no settled answer. It varies with the scheme, the risk and the date, which is why it should be fixed in the agreement rather than left to the reviewer.
Caps and sharing percentages
Two numbers decide how painful a review is.
The sharing percentage splits the surplus between the authority and the developer. The cap limits the authority's total take, usually by reference to the affordable housing level that policy would have required in the first place.
Both are set locally, and in London by the Mayor's affordable housing and viability guidance. Check the current adopted guidance for the figures rather than assuming the percentages from a scheme you did last year, because they move.
Insist on a cap. An uncapped review converts a fixed obligation into an unknown one, and a funder assessing the facility will treat an uncapped liability as the worst plausible case rather than the likely one. The cap is also the provision most likely to be conceded, because the authority's policy aim is reaching the policy-compliant level rather than exceeding it.
Security and enforcement against successors
A section 106 obligation is registered as a local land charge and binds successors in title, which gives the authority a baseline position without any further security. On a review payable years after the land has changed hands, baseline is not usually enough.
The mechanisms authorities ask for:
- A restriction on occupation, preventing occupation beyond a stated number of units until the review is submitted and any payment made. This is the most effective and the most resisted.
- A legal charge over the land, which funders usually refuse to permit to rank ahead of the facility.
- A bond or bank guarantee for a defined sum.
- A restriction on the title at the Land Registry requiring the authority's consent to a disposal.
Negotiate the interaction with the funding at the same time as the obligation. An agreement signed without the funder's sight of the security provisions is an agreement that may need a deed of variation before drawdown.
Traps in standard drafting
Six provisions cause most of the arguments after completion.
No definition of practical completion, leaving the trigger ambiguous on a phased scheme.
Indexation applied to the obligation but not to the inputs, or to one input and not another, which produces a result nobody intended.
Affordable units included in the gross development value without the corresponding transfer price, inflating the apparent surplus.
Dispute resolution by an expert whose decision is final, with no provision for who pays, and no mechanism for appointing the expert if the parties disagree.
A review that bites in a falling market, with no provision for a nil return and no recognition that the surplus may be negative.
And the interaction with a later section 73 permission, where a varied permission can leave the original agreement in place but mismatched. That problem is worth understanding before it arises, and it is covered in making the original section 106 bind a section 73 permission.
Where the review is run, the evidence is a full appraisal to the RICS approach, and a Viability Assessment is the document that carries it. Councils normally expect a suitably qualified author, and professional review is strongly advised. The affordable housing position itself is set out in an Affordable Housing Statement at application stage.
Enter your postcode on PlanScope to see which reports a scheme with an affordable housing obligation is likely to need.
This is general guidance, not legal advice. Take legal advice on any obligation before completing it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.
Frequently asked questions
How does section 106 overage differ from private overage?
Section 106 overage runs between the developer and the local planning authority for a planning purpose, usually affordable housing, and binds successors as a local land charge. Private overage is additional consideration between seller and buyer of the land. Whether a private overage payment counts as a cost in a review is a frequent dispute.
What triggers a late stage review?
Typically the sale or letting of a specified proportion of the private units, or a set period after first occupation. Define the trigger by reference to legal completions rather than exchanges, and say what happens where units are retained for rent rather than sold, otherwise the trigger may never be met.
Why is a cap on the review important?
Because an uncapped review converts a fixed obligation into an unknown one, and a funder will price an uncapped liability as the worst plausible case. A cap by reference to the policy-compliant affordable housing level is also the provision most likely to be conceded, since that level is the authority's policy aim.
What security will an authority want?
Commonly a restriction on occupation beyond a stated number of units until the review is submitted and paid, a legal charge, a bond or bank guarantee, or a Land Registry restriction requiring consent to a disposal. Negotiate the security alongside the funding, or a deed of variation may be needed before drawdown.
Which figures in a review are argued most?
The developer's return allowed before sharing begins, the treatment of build cost overrun, and the indexation applied to each input. None has a settled answer, which is why each should be fixed in the agreement itself rather than left to whoever reviews the appraisal years later.
Sources and further reading
This article is general guidance about the planning system in England and, where stated, the rest of the UK. It is not legal or professional advice. Check your local planning authority’s validation requirements and take professional advice for your specific site.