Buying property can be an expensive and complicated business. In certain commercial property purchases, the preliminary steps involved, such as obtaining planning permission, even before the final decision to buy is made, can be time consuming and costly, so that a prospective purchaser may look for a period during which the property is off-limits to other potential buyers.
But what does such an arrangement involve? And how binding on the parties are agreements of this type?
The recent case of Beaghmor Property Limited v Station Properties Limited concerned the breach of a lock out or exclusivity agreement. The case is of interest to those considering the implications of entering into a lock out agreement and importantly the potential consequences of breaching it.
What is a lock-out agreement?
A lock-out agreement is characteristically a contractual undertaking by the Seller that for a specific period of time he will not enter discussions or otherwise deal with any other party in relation to the property. It typically obliges him to take the property off the market. It does not guarantee that a contract for the sale of the property will definitely follow. The Purchaser will want to ensure that any expenses incurred by him in carrying out any preliminary investigations and concluding negotiations are not wasted.
The circumstances for each lock-out agreement being entered into will be different. In some cases, the lock-out period provides time for the Pursuer to carry out due diligence as part of a fact-finding mission and make him more comfortable about putting in a formal bid to purchase the property. In other cases, the parties may be in a closer bargaining position and use a lock-out period in which to conclude the contract for the sale of the property. Interestingly Beaghmor insisted on a lock-out agreement after twice having reached agreement to purchase with Station who then on each occasion walked away.
Essentials of a lock-out agreement
The Seller should consider carefully how prescriptive he wants to be about what the parties are required to do during the lock-out period. By entering into the agreement, the Seller is essentially giving up the right to sell to a third party during the lock-out period, effectively sterilising the property. That said, the essential points to be covered in the agreement are:
- The lock-out period has to be a defined period, such as two months. Clearly the Seller will want the period to be as short as possible, to limit the time during which he is prevented from dealing with the property, but conversely the Purchaser may be looking for a longer period to carry out due diligence with the property securely off the market.
- The accurate identification of the extent of the property, preferably by reference to a plan.
- Whether any payment is to be sought in exchange for entering into the agreement. This is relatively uncommon, unlike in an Option Agreement.
- A statement that each party owes the other a duty of good faith.
- Confidentiality provisions. These are particularly important for the Seller. If there is no sale of his property following on the lock-out agreement, the Seller does not want the market to get the wrong impression as to the value of his property. Both parties agreeing to be bound by confidentiality is an extension of the good faith obligation.
- Clarity as to what is to happen in the case of a breach by either party of its obligations under the agreement. There is, of course, the option of claiming damages for breach of contract, although the agreement may seek to cap this by, for example, specifying that the full extent of liability in this respect is the reimbursement of the other party's costs. Even if the lock-out agreement had not been breached, there is no guarantee that the transaction would have proceeded and the Purchaser in such a situation would have had irrecoverable costs.
Consequences of a lock-out agreement and its breach
In the case of a breach, leaving aside the damages issue, the Purchaser may be able to obtain an interdict preventing the Seller from negotiating with a third party but, given the relatively short lock-out period, this would only be granted for a limited time.
If the Seller was to disregard the lock-out agreement and conclude or seek to conclude a deal with a third party during the lock-out period, then the Purchaser under the lock-out agreement may be entitled to claim damages but may also be able to enforce further restrictive measures against the Seller. While there is nothing in practice to stop the Seller waiting until the period under the lock-out agreement has expired without making any serious attempt to negotiate a sale with the purchaser party, this might be demonstrated to be contrary to the obligation to act in good faith.
The Case of Beaghmor Property Limited v Station Properties Limited
Beaghmor Property Ltd (the purchaser) and Station Properties Limited (the seller) entered into a lock-out agreement. Notwithstanding this, Station then entered into binding missives with a third party in breach of the terms of the lock-out agreement. Beaghmor raised an action against Station and lodged an inhibition against them.
It was accepted by Station there was, on the face of it, a breach of the agreement. The case turned on whether deliberate failure by Station to instruct their solicitors to enter into missives to reflect what had been agreed between the parties had caused Beaghmor to lose the benefit of the purchase. While this would have to be agreed at proof, given the general terms and circumstances of the lock-out agreement, the judge decided that Beaghmor potentially had a higher claim for damages than simply wasted transaction costs, and that it was reasonable that the inhibition remained in force. Station had submitted that liability in damages for the loss of Beaghmor's hoped-for-contract was not the sort of risk Station had envisaged when they entered into the lock-out agreement.
Parties entering into a lock-out agreement must consider carefully the obligations to which they are prepared to commit in order to ensure that in the event of breach the outcome is not more onerous than they anticipated. While not equating to a contract to sell, it should not be disregarded lightly by either party, particularly as the Beaghmor case demonstrates, the Seller.
To read the decison in the case of Beaghmor Property Limited v Station Properties Limited click here.