Lock-out Agreements: An effective way to avoid gazumping?
JUNE 2010
Following acceptance by a seller of a buyer’s offer, it is not uncommon for it to take several weeks (or months) for contracts to be exchanged. This is because it can take time for the necessary investigations to be carried out by the buyer, and for the relevant information to be supplied by the seller. A buyer is likely to incur significant costs in carrying out his investigations. Bearing in mind that either party may withdraw from the transaction before exchange of contracts, without being penalised, it is understandable that a buyer might wish to gain exclusivity in his dealings with the property at this important stage.
Similarly, a seller will often want exchange of contracts to take place quickly, and will look for some form of commitment from the buyer.
For these reasons, lock-out agreements are becoming increasingly popular. Under a typical agreement, the seller will be prohibited from dealing with any other buyer during the exclusivity period. This will include negotiating, giving access, providing a draft contract and agreeing any terms with another potential buyer. The seller may also be required to take the property off the market.
The buyer may be required to pay a holding deposit to the seller, in consideration of the seller entering into the lock-out agreement. The lock-out agreement will put pressure on the buyer to exchange contracts before the end of the exclusivity period. However, if the buyer is not happy with his investigations into the property at the end of the exclusivity period, he can walk away and (provided the agreement is properly drafted) have his holding deposit back.
Although it is tempting for parties to enter into a lock-out agreement very quickly, care should be taken to ensure that it is enforceable and covers the necessary eventualities during the exclusivity period. It should be drafted clearly and the parties must agree matters such as when the exclusivity period begins. Should it begin on exchange of the exclusivity agreement? Or on receipt of the contract papers by the buyer’s solicitors? How long will the exclusivity period be for?
In addition, a buyer would want to ensure that:
- the seller’s solicitors issue the draft contract and supporting documentation as quickly as possible, enabling the buyer’s solicitors to progress their investigations;
- the seller’s solicitors deal with any enquiries promptly;
- the seller gives reasonable access to the property for the purpose of surveys/valuations;
- the holding deposit will be returned to the buyer if any of the following circumstances occurs: the seller refuses to exchange contracts; the mortgage valuation is less than the agreed purchase price; a lender requires a retention to be agreed or additional surveys to be carried out; searches or enquiries reveal matters which adversely affect the value or normal use of the property; the title to the property does not comply with Council of Mortgage Lenders requirements or is otherwise defective;
- if the buyer does go ahead and exchange contracts, the holding deposit will form part of the deposit paid on exchange.
A seller would want to ensure that:
- the buyer’s solicitors make all necessary searches and enquiries as quickly as possible;
- deal with the negotiation of the draft contract promptly;
- if the buyer decides not to go ahead, he gives notice to the seller and the exclusivity period comes to an end immediately;
- if the buyer decides not to proceed, and is unable to show good reason (as mentioned above), he will have forfeited the holding deposit.
Lock-out agreements will not guarantee that the transaction will take place, as they cannot bind the parties to exchange contracts. However, they are a useful tool in trying to ensure that matters proceed quickly and with a certain level of goodwill. They can provide a level of comfort for both buyer and seller but it is crucial to ensure that they are properly drafted.
If you would like any further information about the issues raised in this article or any other aspect of property law please contact Rosie Davies or any other member of Goodman Derrick LLP’s property department on 0207 404 0606.
This guide is for general information and interest only and should nit be relied upon as providing specific legal advice. |
