What Are Lock Out Agreements?
Lock out agreements are agreements between a property seller and buyer granting the buyer exclusive rights to the sale of the property for a certain period of time. Essentially, a lock out agreement is a contract stating that you will have a contract at a later time which is the contract for the actual sale. It is generally used for buyer protection though in some cases, the seller may stand to benefit from such agreements as well.
What Is Conveyancing?
Conveyancing refers to the actual transfer of title from the property owner to the buyer. Until this is completed, either party could back out as there is no actual exchange of contracts yet. Conveyancing can be done by the buyers and sellers themselves or it can be done through conveyancing companies.
On the whole, this process normally takes 10 to 12 weeks to complete. The long process of conveyancing gave birth to the unsavoury practice of gazumping.
What Is Gazumping?
Gazumping refers to the process of getting a property while it is in the process of conveyancing. It is a deceitful process where a second buyer attempts to outbid and gain favour with the seller while the conveyancing is in process.
It’s a particularly unsavoury practice because this is usually done when the property is already in the process of conveyancing. Should the gazumping be successful, the end result would be the first buyer holding an empty bag, with a conveyancing bill for a property that was sold to someone else.
What is a Priority Search?
Refers to a request made by a qualified party, for the Land Registry to effect a search to establish the status of a property for sale. This is done to establish the owners on record in preparation for conveyancing. A priority search essentially freezes the property for a period of 30 to 36 business days while the process is ongoing. Thus, it offers a mechanism that has been abused by buyers and sellers in order to delay a sale for their own gains.
Where are Lock Out Agreements Usually used?
To buyers, the existence of a lock out agreement gives them a sense of security that no one will be able to buy the property they are in the process of buying. After all, it does prevent the seller from entertaining any more enquiries.
This is particularly desirable because the process of conveyancing takes quite a long time. Thus, the transfer and processing period of up to 3 months creates a market that is ripe for the unsavoury practice of gazumping.
So imagine if within this 3 month period, the seller receives a much higher offer from a second buyer while conveyancing is ongoing and decides to sell to the second instead. It can quite possibly even go on to a third buyer or more.
All the while, the poor buyer is left with the expenses of conveyancing and no property to show for his efforts and money.
Hence the lock out agreement attempts to provide some degree of surety to the buyer by preventing the seller from entertaining other offers during the period covered in the lock out agreement.
Is it Practical to make use of Lock Out Agreements?
There are many pros and cons to using them.
For buyers, it gives them some degree of protection from losing the property to another buyer. This is because lock out agreements prevent the seller from entertaining other buyers.
However, the seller may have an agent who is duty bound to relay to him other offers for the property.
Such a scenario can lead to a difficult situation for the seller and the first buyer alike.
While the seller is indeed bound not to entertain the offers, there is no agreement either way to sell to the buyer at the end of the lock out agreement.
An unscrupulous buyer could just allow the period to lapse, refuse to sign the contract for various fabricated reasons, and then proceed to sell to the second buyer.
So as far as protection is concerned, it provides protection from casual offers but it may not protect the buyer from very serious determined buyers dealing with a buyer with some word of honour deficiency.
From the point of view of the seller, most sellers find these agreements a slight to their person. In other words, they feel that the buyer does not trust them. After all, if they did then there would be no need to draft such an agreement. This tends to turn what could have been a good deal, to one that is distasteful to both parties.
Are any there Repercussions to using Lock Out Agreements?
There are cases where some unscrupulous buyers try to frustrate a buyer once the lock out agreement lapses without any clear contract.
They employ the process called a priority search which actually ties up the property for about 6 weeks while the Land Registry is performing this process.
It’s really just a black guard method employed by a buyer of bad faith who only wants to give the seller a hard time, or it could be something used by an honest seller who has been gazumped by a seller of bad faith.
Why Should You Use The Lock Out Agreement?
It depends on the buyer and seller relationship. In a way, it also depends on the current property market.
In a buyer’s market, it may be to the advantage of the buyer not to enter into such an agreement unless the property has specific qualities that the buyer needs which is absent in other properties.
In a seller’s market, the buyer may wish to use one in order to protect themselves from losing out on conveyancing fees should someone gazump the property.
If you have a conveyancing agent, it may be best to consult with them to determine how to protect yourself.
This is a good move, regardless of whether you are the seller or the buyer.