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Lockout agreements

In ordinary contract law, there can be ‘no agreement to agree’ binding on the parties.  In order to address this, pre-contract agreements known as Lockout Agreements are sometimes used in commercial property transactions. These aim to secure a pre-contract ‘exclusivity’ period for a potential buyer to enable the buyer to carry out searches, surveys and investigations before committing to the purchase, while avoiding the risk of a landowner accepting another offer in the meantime.  They do not bind either party to proceed with the transaction.

Lockout are not lengthy agreements, but both the buyer and the seller need to carefully consider whether they wish to enter into such an arrangement, taking into account the specific circumstances of the proposed sale. It goes without saying that if a landowner is intent on being free to deal elsewhere then he should not enter into a lockout agreement

The key considerations are:

The Lockout Period

In most lockout agreements the period of exclusivity is to be of short duration. It is unlikely that the landowner agree to an unnecessarily long period of exclusivity, unless there is some valuable consideration paid to incentivise him.

Although the case of Walford v Miles 1992 confirms an open-ended period is not enforceable, that case did not lay down any guidelines as to the length of exclusivity periods. Lockout periods, in practice, tend to range from several weeks to up to six months, depending on the circumstances.

The lengthier periods encountered in practice are most often associated with the need for the prospective buyer to investigate whether its special requirements for development of the land are likely to receive favourable treatment by the local planning authority.

The land owner will however need to ensure that its interests are protected against the risk of the prospective buyer delaying unnecessarily, or not making due progress with the investigations or enquiries, particularly where the lockout period is fairly long. The owner also needs to be mindful of the duration of the lockout period in terms of the risk of loss of opportunity, particularly if there is a risk of a falling market.

Restrictions on what the landowner may do during the lockout period

The Buyer’s objective will be to secure a binding commitment in relation to the agreed period where the owner is unable to escape without being liable to the prospective buyer for any losses. However there may be circumstances where some activities on the part of the landowner may be required during the lockout period which may not be inconsistent with the negotiations which the agreement is there to protect. These exceptions need to be mentioned in the agreement.

The proposed scope of investigations

The lockout agreement should define the scope of the buyer’s preliminary investigations which the prospective buyer intends to make during the agreed lockout period.  Full investigations that are likely to take some time and at considerable expense (to cover specific issues, for example, environmental audit, soil survey, obtaining a satisfactory planning permission, etc) would be better protected by the inclusion of conditions precedent in a conditional contract for the sale of the land.

Consequences of breach of lockout obligation by the landowner

A landowner needs to carefully consider whether any incentive offered to them is sufficient to compensate them for the wait.  If a landowner breaches the obligations for example by accepting a much more attractive offer received from a third party during the lockout period, then the prospective buyer will be entitled to make a  damages claim.

A lockout agreement should clearly set out the consequences of breach so that the prospective buyer can recover the loss suffered under the protection of the lockout agreement, and the landowner is aware of the magnitude of risk. The usual rules concerning liquidated damages apply, meaning any sum specified in the lock agreement must be one which is a genuine pre-estimate of the loss that will be suffered, if the contract is breached. The fact that an estimate may not be completely accurate will not normally prevent recovery in the case of breach.  However a penalty sum (meaning a sum that is not a genuine attempt at assessment of loss flowing from breach) will not be an enforceable term.

As in all property matters, the parties should take legal advice early on, to ensure that that the lockout terms are property recorded.

This article is for guidance only and does not constitute specific legal advice.  For advice on using lockout agreements or conditional contracts for the sale of land, and any specific circumstances, please contact commprop@prettys.co.uk.

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