Lockout agreements in the property industry – extent of their protection

Lockout agreements have become increasingly common in the property industry over the past few years. However, from a buyer's point of view, the crucial issue is to what extent these agreements provide real protection in practice.

The rationale behind such agreements is that they enable a seller and buyer a short period to agree the specific heads of terms on a transaction whilst at the same time guaranteeing the buyer exclusivity during that period (i.e. the seller will not talk to any other potential buyers in the meantime) and allowing the buyer to start its normal due diligence.

However, from a buyer's point of view the crucial issue is to what extent these agreements provide real protection in practice.

Historically, the answer has been not a great deal. However, the recent case of Dandara v Co-Operative Retail Services may assist buyers in future who find that sellers have breached a lockout or exclusivity agreement.

So what are the issues?

Are such agreements enforceable?

There used to be some doubt as to whether a lockout agreement would, in any event, be enforceable because in many ways such an agreement is no more than simply an agreement to agree. However, in 1992 in the case of Walford v Miles the House of Lords held that it was possible for lockout agreements to be enforceable – although the agreement in that particular case was not because it was open ended and not for a specific period.

How can you create a legally enforceable lockout agreement?

Even better from a buyer's point of view a lockout agreement does not actually have to be in writing signed by the parties. The legal formalities under section 2 of the Law of Property (Miscellaneous Provisions) Act 1992 that the industry is used to in relation to contracts for the sale of land do not apply. A lockout agreement is not an agreement to sell land. It is an agreement not to negotiate with third parties for a limited period. Accordingly a lockout agreement can be created in the same way as any other contract. In fact lockout agreements can actually be created verbally – although this obviously adds to the difficulty in terms of improving the exact terms that have been agreed!

What sort of issues should the lockout agreement cover?

It needs to be drafted sufficiently widely to prevent the seller not only negotiating with third parties during the exclusivity period but also prohibiting such actions as showing third parties around the property, providing title or other documentation in relation to the property to a third party and instructing solicitors to deal with any third party.

The agreement should also cover issues such as:

An obligation on both parties to try and agree the details of the transaction (although this will not in itself amount to an obligation on either party to actually proceed).

Obligations on the seller to ensure that a draft contract and supporting title information are supplied promptly.

Possibly obligations on the part of the buyer to carry out due diligence and soil and other intrusive investigations – perhaps even providing for copies of any reports obtained in respect of ground investigations to be provided to the seller.

A confidentiality provision.

What happens if a lockout agreement is breached by a seller?

Historically this has always been regarded as a problem from the buyer's point of view. After all the agreement does not guarantee that the seller will actually sell the land to the buyer. All it does is give a short period for negotiations.

The courts have previously accepted (see Tye v House) that a seller could simply wait until the end of the relevant exclusivity period and then sell to a third party. Therefore in that particular case the court was not prepared to award an injunction to prevent a seller from selling to someone during the lockout period. Even worse from the buyer's point of view the damages were modest in that in effect all the buyer could recover was the costs lost as a result of the seller dealing with another during the exclusivity period.

However, the recent case of Dandara Holdings v Co-Operative Retail Services may provide some assistance to a buyer who finds that a lockout agreement has been breached by a seller.

In this particular case Dandara had offered to buy a property for £15.25m. A lockout agreement was entered into between Dandara and the Co-Operative as seller. During the lockout period Co-operative's agents provided a copy of the marketing brochure to another potential purchaser (in breach of the lockout agreement) that third party then approached Co-Operative direct with a higher offer. Negotiations between the Co-operative and the third party actually started during the lockout period (again in breach of the lockout agreement) although the contract for sale with the third party was not exchanged until some time afterwards.

Clearly there had been breaches of the lockout agreement but what was the impact? If the lockout agreement had been complied with would the property actually have been sold to Dandara?

On the facts the court was not convinced that the breaches actually led to the property not being sold to Dandara. Even before the third party made its offer Co-Operative was reconsidering the sale price because they felt they could achieve a much higher price and had decided that there was a good chance of finding a buyer willing to pay more than Dandara had agreed to. In effect the sale to Dandara would not have happened whether or not there had been a breach. Accordingly for Dandara there was no right to damages for the breach.

Although on the facts Dandara lost this is the first time that the courts have been prepared to accept that the damages for breach of a lockout agreement could actually be based on the loss of the opportunity to actually purchase the property.

So perhaps there is still hope for a buyer after all!