Look out for Lockouts


As the property market again witnesses ever-increasing property prices, ‘lock out agreements’ (or ‘exclusivity agreements’ as they are often called) are becoming more and more prevalent. But are they worth it?

In a buoyant market one danger to buyers is that once an offer has been accepted, the buyer must begin the time consuming and costly process of performing due diligence on the property. During this point however the seller is free to accept other offers and until contracts have been exchanged a seller may withdraw from the transaction at any time without consequence.

For this reason many buyers are now looking to lock out agreements to protect their offer and provide a period of exclusivity during which the seller may not deal with other potential purchasers. This can offer a buyer a certain comfort to perform the due diligence and obtain search fees and surveyor and legal fees without the concern of being simultaneously outbid.

Any Downsides?

Firstly, lock out agreements cannot be relied upon to oblige the seller to proceed with the sale. There is nothing to stop the seller waiting for the lock out period to end and proceeding with any better offer it may then receive.

The lock out agreement may not even prevent a seller receiving and considering offers during the lock out period. This is especially the case given that a court is unlikely to prevent a sale initiated in breach of the agreement. Given that the buyer may only be liable for the buyer’s wasted costs, the seller may decide to take this hit and proceed with a higher offer received during the lock out period.

Other options?

This perhaps leads to the crux of the matter. If a buyer has found a great deal, time spent focusing on discussing and drafting a lock agreement could be time spent instead on performing the required due diligence and getting the transaction to the point of exchange of contracts – the moment when the seller is legally obliged to complete the sale. A lock out agreement could, therefore, slow down the deal who a buyer who wants to buy quickly might want to look at other options.

One possibility may be to consider entering into an ‘option agreement’ with the property owner. Whilst a lock out agreement prevents a seller talking to other parties for a period, an option agreement obliges the seller to sell the property at an agreed price when asked to by the buyer. This alternative is not relevant in all circumstances and is perhaps not applicable to the quick sales in which lock-agreements are becoming prevalent.

Lock out agreements should therefore be treated with care. They may be of some use to buyers wanting comfort to proceed with the transaction having made a strong offer, but for real commitment from a seller, getting to exchange of contracts is key.

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