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Exclusivity agreements – helpful or just a hindrance?

Posted on 19 August 2022

sign agreement

In a competitive market where buyers are fighting for their desired property, it can be difficult for a seller to confirm that the buyer is in a strong position to proceed. Conversely, a buyer can sometimes take the view that they risk being gazumped if they start due diligence on a property without the reassurance that the seller will stop marketing it. Exclusivity Agreements can be a solution for both parties and sometimes a pre-condition to a buyer starting its due diligence.

The purpose of an Exclusivity Agreement is not to bind each party to the transaction, but to enable the buyer to obtain their searches, property survey and any mortgage offer (if required) and "lock out" other interested buyers. Naturally, these agreements have advantages and disadvantages for both parties.

The seller agrees not to deal or negotiate with any other interested party during the agreed exclusivity period. This includes showing the property to prospective buyers. So, what is in it for them?

The seller almost always insists upon a non-returnable deposit being paid as consideration for the agreement. Should the buyer's searches or survey reveal any matter which affects their ability or decision to proceed, or if they can't obtain their mortgage offer within the agreed lockout period, the buyer is free to withdraw but they will lose the deposit. This ensures the seller is compensated for giving up potential opportunities with other prospective buyers. Equally, it does provide some incentive for the buyer to proceed with the purchase. Depending on the agreed terms, the seller is likely to be free to withdraw from the agreement but must give written notice to the buyer and should return the buyer's deposit.

Drafting these agreements can lead to disputes over the circumstances in which the deposit should be returned if the buyer decides not to proceed. It is difficult to draft for every eventuality. This may mean additional legal costs in dealing with any issues if they arise. The lockout period should be clearly defined and each parties' obligations clearly set out. There is no standard form exclusivity agreement and consequently solicitors can spend days negotiating terms before any transactional work is carried out, resulting in wasted time and legal costs for both sides.

The downsides for the buyer stack higher than those of the seller. Provided the lockout period is relatively short and the agreement clearly sets out the obligations for each party, a seller is not usually disadvantaged or concerned, especially if they secure a considerable non-refundable deposit.

Conveyancers generally agree that an exclusivity agreement does have its benefits. However, for the greater good of the deal, it is more beneficial to start the conveyancing process without having to first negotiate and reach agreement on exclusivity terms before beginning with due diligence. Arguably, a proactive seller would have a comprehensive sales pack prepared, including a full set of property searches (we are seeing this more frequently), ready for an eager buyer to proceed. Subject to financing arrangements or title issues, a buyer could be ready to exchange in the time that it often takes to finalise exclusivity terms.

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