Exclusivity or lock out agreements are back. I have seen an increasing number of these agreements in the last six months and it is interesting to examine just why these agreements are increasingly being used by sellers and buyers and what advantages and disadvantages they bring.
What is an exclusivity agreement?
An exclusivity agreement is a formal agreement or deed in which the seller gives to the buyer a period of time within which only that particular buyer will be allowed access to the information relating to an agreed transaction. It is usually an agreed timeframe in which to enter into a formal contract for the purchase of a property at an agreed price.
The seller's perspective
From a seller's point of view it sets out an agreed timetable for the exchange of an agreement to purchase and a timetable to completion.
It also offers a real advantage if the seller has a limited amount of time in which to sell, particularly if they are able as part of the process to extract form the buyer some "hurt money" as well as a contribution to costs. "Hurt money" here meaning an additional premium payable to the seller if the transaction does not go ahead.
It also provides the seller an initial view of the buyer, helping them assess just how the buyer will perform on the transaction and also whether the buyer is a serious contender for the transaction.
The seller also gets an opportunity to negotiate with the buyer to recover some or all of its abortive costs if the transaction does not go ahead. This is particularly valuable, as the seller is formally tying up its property for an agreed period with no guarantee that the buyer will ultimately purchase the property, and will also be incurring legal and other costs to get the sale up and running.
The buyer's perspective
Exclusivity agreements give a buyer the security of knowing that for a given period it has fought off the competition for the property, and if it is satisfied with the results of its due diligence it can proceed to purchase the property at the agreed price within the agreed timeframe. Nothing will change during that period so, for example, the buyer will not be hit with a price increase or a substantial change in terms. There is some certainty within which the buyer can proceed and plan the viability of the project.
The disadvantages are, however, centred around the costs of the transition. Entering into an exclusivity or lock out agreement is not as straight forward a process as most people would anticipate as, very early on, a decision has to be made about the scope and extent of the transaction.
If the buyer is being prudent, they will insist that all the transactional documents are attached to the exclusivity agreement, so that if and when they are ready to proceed they know the exact terms that will be required and there can be no further debate. However, this does mean that most of the transaction will have to be thrashed out before the exclusivity is entered into and as a consequence most of the buyer's costs will be incurred before the exclusivity is entered into.
The seller may resist this approach as they will also be front loading costs, but if the seller is confident about the quality of its product this should not be a real concern. The seller is, however, likely to require some protection on costs if the buyer decides not go ahead - the seller will want to protect against a change of mind rather than a real defect uncovered by the buyer.
So, why have exclusivity agreements returned to favour in the present market?
In certain locations and uber prime areas there is now a real shortage of good product, so when a property comes to market there is a great deal of competition for those properties. Buyers are also increasingly reluctant to spend their due diligence cash unless they are able to ensure that they have a clear run to buy the property within an agreed timeframe.
The outlook for the UK property market continues to remain good as evidenced by the Deloitte Property IQ Report. The key dynamic would appear to be foreign investors who are not at all deterred by the election uncertainty, which could affect some of our domestic investors. Growth has also been found in some regional areas, such as the West Midlands, Scotland and Manchester, so there is still much competition for properties coming to the market.
The expiry of the residential permitted development rights from office to residential has also fuelled an already very hot residential development market. I therefore think that until there is some cooling in the market, exclusivity and lock out agreements are definitely here to stay. The key for investors and developers is to make sure that you obtain proper advice and guidance before these are entered into to ensure that your interests are properly protected at this very early stage.