The recent changes in the property market have surprisingly left us with a glut of potential buyers and not enough property available for purchase on the market. This has again led to an increased risk of gazumping, which means that potential buyers are being forced to bid against each other and results in their offering higher prices due to fear of losing the property to a another bidder. This can be avoided by entering into an exclusivity agreement, more commonly known as a ‘lock-out’ agreement. These agreements impose an obligation upon the seller not to negotiate with any other bidders for a set period of time allowing the buyer, for example, a four week period in which to exchange contracts without the fear of a higher third party bid forcing them to increase their offer.

To be enforceable, these agreements need to satisfy certain criteria. Amongst other things they must be ‘lock-out’ agreements as opposed to ‘lock-in’ agreements, which are merely agreements to negotiate with each other, rather than preventing negotiations with other bidders.   They must be for a specified time period, and generally invile the buyer paying a sum of money (also known as a non-refundable deposit) to the seller. Once the basic criteria have been met, these agreements can be enforceable in law.

Importantly and crucially, but what is often missed in a ‘lock out’ agreement, is a provision to ensure that the seller is not able to simply refund the deposit to the buyer and sell the property to another person for a higher price!

Although ‘lock out’ agreements avoid a buyer from having to raise their bid at the last minute, there are certain pitfalls. The payment of a deposit to secure the agreement for a certain period of time can cause problems if it is the buyer who wishes to withdraw from the sale. For example, if the buyer spots a problem in a search result or the title of a property, which gives them reason to pull out of the sale, the buyer would be unable to withdraw and obtain a refund unless the agreement allowed it. It is therefore usual to include in the agreement provisions allowing for a refund in certain circumstances, such as an adverse search result; adverse entry on the title or an adverse survey result.  This would seem to solve the problem on paper but what if the seller does not agree that the problem or adverse result merits the buyer’s withdrawal from the transaction and refuses to refund the deposit?

In addition it is common for the Solicitors acting for each of the parties to end up negotiating the terms of the agreement for many weeks, instead of undertaking the legal work necessary to progress the purchase to exchange of contracts. If this happens then a ‘lock out’ agreement could end up delaying a transaction unnecessarily!

Therefore, although a buyer may be tempted to rush into a ‘lock-out’ agreement to avoid gazumping, particularly in the current state of the property market, such agreements must be entered into with some trepidation as the buyer must remember they are being ‘locked’ into an agreement and face losing their non-refundable deposit if they cannot or do not wish to proceed with the purchase.