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How Lock-Out Agreements Can Stop Third Party Competition

28 January 2009

When times are hard, parties in a commercial property transaction often take a more prudent look at their outgoings.

The last thing on a buyer’s mind is incurring ‘due diligence’ set-up costs such as search fees and legal costs - only for the transaction to fall through before contracts are exchanged, says specialist commercial property lawyer Liz Brady.

One way to control the risk of third party competition is a lock-out agreement – the late ‘80s answer to ‘gazumping’ - which stops the seller from using a buyer’s offer to seek higher offers elsewhere, explains Liz, an associate solicitor at leading regional law firm Furley Page.

“In their simplest form, lock-out agreements give the buyer a fixed time to negotiate the terms of the transaction, carry  out ‘due diligence’ investigations and make funding arrangements without any third-party competition. But parties must be clear about the limitations. They’re not conditional contracts or options and the seller isn’t obliged to enter into a future sale contract.” 

Lock-out agreements need to follow certain legal requirements:
 

  • They should define the nature of the transaction as clearly as possible
  • They can’t be lock-in agreements – in other words party ‘a’ must negotiate with party ‘b’
  • They  should be for a fixed term – meaning a reasonable time for the buyer to carry out pre-contact matters and negotiations
  • They should be in the form of a deed or failing that, nominal payment should be considered

Agreements can also include the following:
 

  • The buyer has to make reference to certain target dates
  • The seller has to send out papers/respond to enquiries within certain specified time limits
  • The agreement can by ended by the buyer if he wants to withdraw
  • The agreement can be ended by the seller if the buyer is in breach of his obligations

For further information on commercial property issues contact Liz Brady .

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