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What is an exclusivity agreement?
Exclusivity agreements or lock-out agreements are most commonly used in commercial sale and purchase transactions.
They aim to ensure that the seller negotiates solely with the buyer regarding the prospective transaction for an agreed-upon period of time and does not actively market the property during that period.
Our Commercial Property Solicitors explain what the functions are of these agreements, and how you may benefit from them.
The functions of exclusivity agreements
An exclusivity agreement will be entered into before any detailed drafting and due diligence begins. It will give the buyer an exclusive opportunity to negotiate with the seller, carry out title investigations and property due diligence, and commit to the proposed transaction without competition from third parties.
The seller will be prevented from dealing with the property in a way that would prevent the buyer from entering into the proposed transaction and, typically, will also be prevented from sending out a contract for the sale of the property to another party.
It should be noted, however, that an exclusivity agreement is not a contract to enter into the proposed transaction during or after the exclusivity period, and either party is free to walk away at any time.
One of the main purposes of entering into an exclusivity agreement from the buyer’s perspective is to reduce the risk of wasted time and costs and to allow some breathing space to undertake due diligence and arrange funding.
Preparation
There is no established practice regarding which party drafts the exclusivity agreement, and either party may do so depending on the circumstances.
These agreements are usually prepared and signed quickly and do not contain complex provisions or controversial terms that require negotiation, as doing so is likely to be counterproductive.
What do exclusivity agreements consist of?
An exclusivity agreement will typically contain the following:
- Exclusivity period – the agreement should state when the exclusivity period will start and finish, being the period within which the buyer will have the exclusive opportunity to carry out due diligence and negotiate with the seller in relation to the proposed transaction
- Consideration – the seller may require a non-returnable payment from the buyer in return for the seller taking the property off the market. However, provisions dealing with such a payment are generally unsuitable for an exclusivity agreement because of the time and effort involved in their negotiation, as the parties may get caught up in arguing about, e.g. the circumstances in which the payment will or will not be refundable
- Obligations of the parties – the agreement should oblige the parties to do everything necessary to allow the buyer to enter into the proposed transaction with the seller within the exclusivity period, including imposing timetables and imposing an obligation on the seller not to negotiate with or market the property to other parties or do anything which may prevent, frustrate or hinder the buyer from entering into the transaction. The buyer will be obliged to ensure as far as possible that it has done everything necessary to be in a position to enter into the transaction within the exclusivity period
- Termination – the agreement usually permits the buyer to withdraw at any time during the exclusivity period, for example, in the event the buyer has a change of heart, if due diligence reveals something unacceptable about the property or if the seller breaches its obligations under the agreement. Any payment made by the buyer will be forfeited. The seller is usually only permitted to withdraw if the buyer is in breach of its obligations under the agreement
What to consider
Whenever parties are considering entering into an exclusivity agreement in relation to a proposed transaction, careful thought should be given as to whether an exclusivity agreement is really what is needed in the circumstances and, if so, care should be taken not to overcomplicate matters.
Exclusivity agreements are beneficial in a competitive market where there is huge demand for a desired property. However, a speedy and collaborative effort to try and get an exchange of contracts over the line often works for most and is faster than the time it often takes to finalise the exclusivity agreement terms.