Lock Out Agreements – Help or Hinderance?

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires a valid contract for the sale and purchase of land to be in writing, incorporating all the terms which the parties have expressly agreed in one document or, where contracts are Exchanged, in each.

This means that a “handshake” agreement is not binding and has no effect if one party seeks to renege on a promise. It is tempting to view the use of a Lock Out Agreement as a suitable device for holding the parties to their word until such time as the mechanics of the conveyancing process catch up and deliver a formal Exchange.

As with any commercial transaction a balance of interests between the parties needs to be struck.

The Seller requires certainty and wishes to know that by X date in the future the Buyer will complete the purchase for the agreed price. The Buyer requires sufficient time to conclude due diligence to ensure that the property being sold by the Seller is the same Property that the Buyer believes is being acquired.

In a straightforward conveyancing transaction the Seller’s solicitor deduces title to the Buyer’s solicitor and the Buyer’s solicitor investigates title, undertakes property searches, raises pre-contract enquiries, checks planning history and then delivers a Report to the Buyer advising on all the terms, rights and conditions that affect the transaction.

The Buyer is likely to need time to arrange mortgage finance, have a survey and possibly conclude a related sale where part of the purchase price for the Property is being raised from the sale of an existing property. The Buyer understandably does not wish to go to the trouble and expense of dealing with all these issues only for the Seller to change their mind and withdraw at the last moment.

Is a Lock Out Agreement an appropriate solution for achieving the required balance of interests between Buyer and Seller?

Why not agree, for example, that for a Pre-Exchange Deposit of, say, £10,000.00 is paid by the Buyer to the Seller to secure the Property for 28 days (the “Lock Out Period”) and that the Seller will sell the Property to the Buyer once the Buyer is ready, allowing the Buyer to conclude pre exchange conveyancing steps sure in the knowledge that, provided Exchange takes place within the Lock Out Period, the Seller has to proceed as agreed?

What could possibly go wrong?

Consider the Buyer’s position. £10,000.00 is committed and may be lost if Exchange does not take place in the Lock Out Period. What, however, happens if the property that the Seller is offering is “different” from the Property that the Buyer thinks is being purchased? What happens if, in the course of carrying out standard conveyancing procedures on title investigation, some of the following issues arise:

• The Seller is not the registered owner
• The Seller has a mortgage on the Property more than the agreed purchase price and cannot afford to clear the mortgage on Completion
• The Property’s title is subject to restrictive covenants impeding its development, or preventing a use that the Buyer hoped to put it to
• The Property has a loft (which is part of the reason why the Buyer particularly wants to purchase it) but the loft has been built in breach of planning restrictions and without building regulation consent
• HS2 will barrel through the back garden
• An antisocial neighbour has been causing material disturbances in the area over an extended period, harassing the Seller and other neighbours, the police have been involved and the Seller is only selling as a result of this unreasonable behaviour
• The property is infested by Japanese knotweed and is unmortgageable.

Which of the above hypothetical issues would it be fair to treat as so “material” to the Buyer’s willingness to proceed, that they would warrant the Buyer being entitled to withdraw and receive back the Pre-Exchange Deposit?

• What if HS2 might be abandoned?
• What if the anti-social neighbour has just been sentenced to 6 years in jail? What about if only for 6 months?
• Suppose the knotweed was being treated, and would be cleared and cease to be a problem next week. Would that allow the Buyer to withdraw and recover the Pre-Exchange Deposit? What about if it would take 6 months to clear? 6 years?

Lock Out Agreements – Are they a Help or Hindrance?

It will be seen that unless the Lock Out Agreement is so comprehensive and anticipates and provides for all the issues that due conveyancing process will address, the interests of the parties are at risk.

Worse, say the Buyer identifies an issue that is important to them but the Seller considers the same issue to be trivial and should not allow the Buyer to withdraw and recover their Pre-Exchange Deposit, whose view takes precedence?

A solicitor advising either party about the Lock Out Agreement would be negligent if they did not advise their client about these issues. The solicitors for the Seller and the Buyer would move to protect their client’s interests by seeking to include relevant clauses in the Lock Out Agreement to provide clarity; until this negotiation process is concluded it is unlikely in practice that normal conveyancing steps would be commenced, such as searches being applied for.

The mere fact of seeking to utilise a Lock Out Agreement therefore might have the unintended consequence of delaying or even jeopardising the whole transaction altogether, contrary to the parties’ intentions.

Modern conveyancing practices and procedures have developed over time to provide both Buyer and Seller with clarity and reasonable protection and although the system is not perfect any attempt to circumvent the normal procedures by use of a Lock Out Agreement can, paradoxically, work against the parties’ interests and can give rise to expensive losses.

How we can help

Whether or not you consider entering in to a Lock Out Agreement, if you instruct Anthony Gold you will have the reassurance of knowing that a top-ranked London firm is dealing with your transaction and will work to protect your interests and to seek the best manner in which to achieve your objectives.

In addition to our specialist conveyancing services the Firm has substantial expertise in a wide range of complimentary property law areas which will assist if issues arise that fall outside a standard conveyance and which many other smaller firms may not have the resources to provide.