Clients know that a property deal is not binding until there is a completed, signed contract. However, they are still frustrated and disappointed if the opposite party withdraws from negotiations, wasting all the time and money both spent on getting towards exchange. To solve this, agents may suggest a “lock out” or “exclusivity” agreement, but beware; this is no panacea.
Exclusivity agreements do not, indeed cannot, lock the parties in to the deal. An agreement “to agree” is invalid. When the exclusivity period expires, both parties are free to walk away if they have not chosen to exchange contracts, but the exclusivity agreement may improve their incentives to exchange.
A simple exclusivity agreement prevents the seller (or landlord, if it is a lease deal) from dealing with other potential buyers (tenants) for a fixed time. It can be written or verbal. Its aim is to give the buyer a guaranteed window to do due diligence, tie up funding and hopefully achieve exchange with less risk of being gazumped by a competitor and consequent waste of the costs invested in that preparation. These can be quite substantial, eg on a development, the anchor tenant may be doing detailed, expensive planning assessment and environmental searches. The buyer knows the seller does not have to exchange contracts, but hopes that it will take the deal on the table rather than start again. If that hope proves wrong, the buyer gets no compensation.
Such an agreement is less attractive to the seller. It offers no guarantee of exchange, no compensation for wasted costs if the exclusivity period expires without exchange, and may prohibit the seller from doing anything during the exclusivity period to prepare a back up plan. It could find itself back at square one in what may be a falling market.
More complex exclusivity agreements try to address these failings. They are best done in writing. However, negotiating them takes time and incurs legal costs, with the early stages of the main transaction going on hold meanwhile. Such delay suits neither client, so they and their agents need to think hard before embarking on a sophisticated exclusivity agreement as its negotiation may, at worst, torpedo the whole deal.
Some of the potential “extra features” and their drawbacks are:
Clients need to balance carefully the reduced risk of losing the main deal against the extra time, cost and potential loss of goodwill in negotiating an exclusivity agreement.