What is a Lock Out Agreements?
A lock out agreement is an agreement between a property seller and a buyer giving the buyer exclusive rights to proceed with the purchase for a certain period of time. It stops the seller from negotiating with any other potential buyer during a lock out period. However, it does not guarantee an eventual sale to the buyer.
What it does do is protect both parties and gives reassurance in a climate where potential buyers can make offers, then withdraw; or where sellers accept an offer and then withdraw because they have been offered a higher amount from another buyer (gazumping).
What is Gazumping?
Gazumping refers to the process where a seller accepts a higher offer from a subsequent buyer after it has accepted an offer from someone else. It’s a particularly unsavoury practice because gazumping usually occurs when the conveyancing is already under way. Should the gazumping be successful, the first buyer will have no property – but will have a conveyancing bill for the work already done before the gazumping took place.
When are Lock Out Agreements typically used?
The conveyancing process can take a long time. 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. It prevents the seller from entertaining other offers during the period covered in the lock out agreement.
Whether you should ask for a lock out agreement depends on the buyer and seller relationship, and the prevailing 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.
What would a Lock Out Agreement include?
The lock out period must be clearly defined. It will also set out obligations on both parties. The seller may be subject to conditions such as not to talk to third parties in relation to a sale; to cooperate with the buyer and allow the buyer to carry out their searches and enquiries, and site inspections; and to ask the solicitors to send a draft contract to the buyer promptly.
The buyer may be obliged to proceed promptly with pre-contract searches, enquiries and inspections, and to keep the seller informed as to progress; and to act in good faith. Both parties may be bound by a covenant to notify the other if they decide not to proceed.
Are Lock Out Agreements practical?
There are many pros and cons to using them. Whilst it gives buyers protection from losing the property to another buyer, the seller may have a selling 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 buyer. The seller could, for instance, try to raise the sale price. In addition, while the seller is, of course, bound not to entertain higher offers during the lock-out period, there is no agreement to sell to the buyer at the end of the lock out agreement. The seller could just allow the period to lapse, refuse to sign the contract, and then proceed to sell at a higher price to a subsequent buyer.
Ask your estate agent or solicitor whether a lock out agreement is right for you.