In an ever more competitive property market, exclusivity or “lock-out” agreements are coming back to the fore.
This blog post highlights a few of the ‘key’ points (pun intended) to keep in mind when drafting or negotiating these agreements.
If you regularly act on the sale and purchase of real estate - be it residential or commercial - there’s a good chance that you’ve recently been asked (or soon will be) for advice on an exclusivity or “lock-out” agreement.
While such agreements don’t guarantee that a sale contract will be entered into, they can at least provide buyers with a fixed period of exclusivity. The aim is to allow buyers time to negotiate (and incur expenses such as searches and surveys) without fear that the seller is continuing to talk to other interested parties.
In most cases, an exclusivity agreement should be a relatively short and relatively uncontroversial document (subscribers and users on a free trial can view our precedent here). Nevertheless, it never hurts to have a checklist handy so here are six points to keep in mind when drafting or negotiating a lock-out agreement.
1. “Lock-ins” are for the pub – not sale and purchase transactions…
A lock-out agreement is fundamentally a negative agreement. The sellers agrees not to negotiate with third parties. The Court of Appeal has confirmed that such agreements are enforceable. By contrast, it is not possible to bind parties to a ‘lock-in’ agreement that compels them to agree terms. An agreement to negotiate, like an agreement to agree, is unenforceable because it lacks the necessary certainty and the courts cannot decide whether it has been observed.
The agreement can (and should) however still contain positive obligations on the parties to take objectively viable steps to facilitate the transaction (eg instructing solicitors, providing documentation, raising and replying to enquiries).
In the context of a purchase where the buyer proposes to ‘develop’ the property (and such ‘development’ includes a change of use requiring planning permission) such obligations should also include carrying out all relevant investigations into the likelihood of obtaining any contents such development would require. These might include consents from the local planning authority, the highway authority and statutory undertakers. In such circumstances, the Buyer would likely be seeking either a conditional contract or an option agreement to avoid becoming bound to buy the Property before a satisfactory planning permission is available.
2. Consider consideration
Lockout agreements must be supported by valuable consideration. Sellers frequently seek a cash sum in the form of a non-refundable deposit. Alternatively, the buyer’s agreement to spend money on solicitors and/or surveyors and search fees would probably suffice, but a nominal £1 should also be provided to put the matter beyond doubt.
Alternatively, consider executing the agreement as a deed.
3. Duration
The agreement must specify the start and end dates of the exclusivity period. If specific dates are not stated, there should be absolute certainty as to when these will be. Where there is no fixed period, a contract is void for uncertainty, as either party could break off the negotiation at any time.
4. Withdrawal
Since a seller cannot be bound to agree the terms of a sale it is reasonable to include a mechanism whereby the seller can end any positive obligations where negotiations have broken down or where the seller decides not to proceed.
Typically, this would involve the service of a written ‘withdrawal notice’ on the buyer upon receipt of which such obligations would immediately terminate. The Seller’s negative obligations (not to negotiate with other parties etc) would however remain live until the end of the agreed exclusivity period.
By contrast, in most cases a withdrawal notice from the buyer will logically operate to bring the exclusivity period to an end immediately upon receipt by the seller.
5. Recovery of the buyer’s costs
In our precedent Exclusivity Agreement the seller’s liability for costs is triggered by the buyer’s service of a written notice (during the lockout period) confirming that it is ready, willing and able to exchange contracts. If the seller then fails or refuses to exchange contracts, the Seller must pay to the Buyer a sum equal to the total costs, fees and expenses incurred by the buyer during the lockout period. This may or may not be subject to a cap.
It is worth noting that an injunction is unlikely to be available to prevent breach of the restrictions imposed on the seller. Exclusivity or ‘Lockout’ agreements are designed to protect the Buyer from having incurred substantial costs in getting ready to complete and at the last minute losing the property because the Seller elects to sell to somebody else. As such, damages are likely to be regarded as a suitable alternative.
6. No interest in land
Lockout agreements are not contracts for the sale of a property and do not create an interest in land. They are not registrable agreements and Law of Property (Miscellaneous Provisions) Act 1989, s 2 does not apply to them.
For further background on exclusivity agreements or to access our precedent and associated drafting notes please login or sign up for a free trial.
Source: LexisNexis Purpose Built
Lock-out agreements & exclusivity: 6 ‘key’ drafting points
