In the fast-paced and competitive property market, buyers often face challenges like bidding wars, inflated prices, and the risk of losing out on their desired properties. To address these concerns and uncertainties, buyers and sellers can enter into exclusivity agreements, also known as lockout agreements. This article explores the concept of exclusivity agreements, their purpose, and how they benefit buyers in the conveyancing process.
What is an Exclusivity Agreement?
An exclusivity agreement, also referred to as a lockout agreement, is a formal contractual arrangement that restricts the seller from engaging in negotiations with third parties regarding the property’s sale during a predetermined exclusivity period. This agreement provides the buyer with a crucial sense of security, enabling the conveyancing process to proceed smoothly, free from the seller’s potential withdrawal due to higher offers.
For buyers, this assurance is particularly beneficial as their solicitor must conduct comprehensive due diligence, including a thorough title check and examination of various searches, before advancing to the contract exchange stage. Although the typical duration for completing due diligence is estimated at six to eight weeks, the exact timeframe varies for each transaction, depending on factors such as title issues, search outcomes, and any additional concerns that may arise. Throughout this period, buyers incur search fees and legal costs, making them more inclined to proceed with confidence, knowing that the seller is bound by the exclusivity agreement and cannot entertain offers from other parties.
It is important to understand that an exclusivity agreement does not create a binding commitment for either party to complete the transaction. If contracts are not exchanged before the exclusivity period concludes, both parties have the freedom to walk away. Once the exclusivity period expires, the seller regains the ability to deal with the property without any restrictions or obligations towards the buyer.
Advantages of Exclusivity Agreements for Buyers
● Enhanced Buyer Security: Exclusivity agreements offer buyers a heightened sense of security by preventing the seller from entertaining offers from other parties during the exclusivity period.
● Minimised Bidding Wars: Buyers can proceed with the conveyancing process without the pressure of competing against other potential buyers, reducing the likelihood of bidding wars and inflated prices.
● Ample Time for Due Diligence: Exclusivity agreements provide buyers with the necessary time to conduct thorough due diligence, including title checks and comprehensive searches, ensuring well-informed decisions before exchanging contracts.
● Reduced Risk of Seller Withdrawal: Buyers can proceed with confidence, knowing that the seller is bound by the exclusivity agreement and cannot threaten withdrawal from the transaction due to higher offers.
● Financial Protection: During the exclusivity period, buyers can incur search fees and legal costs without the risk of the seller engaging with third parties, safeguarding their financial investment.
Reduced Uncertainty and Pressure
Exclusivity agreements offer buyers a sense of security by preventing the seller from engaging with other potential buyers. During the exclusivity period, buyers can engage in due diligence activities, such as title checks and comprehensive searches, without the fear of losing the property to a competing offer. This eliminates the stress and pressure associated with sellers considering alternative offers.
Time for Due Diligence
Typically, the due diligence process takes approximately six to eight weeks, although this timeframe may vary. Buyers incur search fees and legal costs during this period, making them more willing to proceed when they know the seller cannot entertain other offers. The exclusivity agreement grants buyers the necessary time to conduct thorough due diligence, ensuring they make informed decisions before exchanging contracts.
Important Terms in Exclusivity Agreements Exclusivity Period
The length of the exclusivity period should be agreed upon by both parties. Buyers should aim to negotiate for as long a period as possible to accommodate unforeseen title issues, adverse search results, and potential delays caused by factors such as lockdown restrictions.
Exclusivity Agreement Consideration
To establish a legally binding contract, exclusivity agreements require valuable consideration. In most cases, buyers’ incurred search fees and legal costs, coupled with a nominal consideration of £1.00, suffice. However, some sellers may request a non-refundable deposit, which should not exceed the customary 10% deposit payable upon exchange. It is essential to include a clause stating that the deposit will form part of the purchase price to ensure its protection.
Seller’s Obligations
It is essential that some basic obligations are imposed on the seller in the exclusivity agreement.
These include, but are not limited to:
(a) Prohibiting the seller from actively marketing the property or dealing with any third party.
(b) Placing an obligation on the seller to instruct a solicitor to act in the transaction and to deal with the matter in accordance with good conveyancing practice.
(c) Ensuring the seller’s solicitor is obliged to send draft contract documentation along with evidence of the seller’s title within a specified number of days after the exclusivity agreement has been exchanged.
(d) Requiring the seller to respond promptly and fully to all reasonable enquiries made in respect of the property.
It is important that these obligations are contained within the exclusivity agreement as, failing this, the seller may be able to frustrate the process by not cooperating during the exclusivity period. This is especially important where a deposit has been paid. A buyer should also insist on the inclusion of a good faith clause.
Finance
Buyers should arrange their financing as early as possible, ideally before exchanging the exclusivity agreement. This proactive approach avoids potential difficulties arising from adverse financial outcomes during the transaction. Lenders often have strict requirements, making it necessary to resolve any financial issues to their satisfaction.
Exclusivity Agreement Termination
Buyers should retain the ability to withdraw from the exclusivity agreement if title documents, search results, or replies to inquiries reveal defects or significantly affect the property’s value in the reasonable opinion of the buyer. In such instances, any deposit paid should be refunded to the buyer. Additionally, the exclusivity agreement should include a provision stating that if the buyer gives notice to the seller that they are ready, willing, and able to exchange contracts during the exclusivity period, but the seller fails or refuses to do so, the seller is required to reimburse the buyer for the total costs and expenses incurred during the exclusivity period and refund any deposit paid.
While exclusivity agreements are not foolproof and require negotiation between the parties, buyers who have had an offer accepted on a property in high demand should consider negotiating an exclusivity period. This is especially important when the seller requests an upfront deposit to ensure its protection. The exclusivity period provides buyers with the necessary time to conduct due diligence in a stress-free manner, without the seller considering other offers or walking away from the deal.
