Case spotlights lock-out agreements

Jul 23 2008 by Richard Freeman-Wallace, The Journal

A RECENT case involving development agencies and a local company highlights lock-out agreements, in which a vendor agrees to keep a property off the market for an agreed number of weeks.

In this High Court case between Chilli Developments v English Partnerships and Tees Valley Regeneration (June 2008), Chilli alleged that the two agencies had broken “good faith” by negotiating, providing prohibited information or entertaining a tender from a third-party consortium for land during the time that a lock-out agreement was in place.

English Partnerships and Tees Valley Regeneration denied doing so, and the judge agreed with the agencies.

The background is that Chilli Developments and English Partnerships entered into two “lock-out” or exclusivity agreements about land at Middlehaven. English Partnerships terminated negotiations with Chilli a couple of months after the second “lock-out” agreement had expired.

Chilli believed that the two agencies had never seriously considered entering into a development agreement with Chilli. It called the lock-out agreements a “sham” and said that the two agencies “went through the motions of negotiating”, resulting in considerable expense to the development company.

Mr Justice Jack, however, said the allegations were neither supported by the documentary evidence, nor apparently even “really believed” by Chilli’s own managing director.

He concluded that the two regional agencies acted in good faith throughout the negotiations. The court found no breaches of the lock-out agreements, and that English Partnerships was entitled to terminate the negotiations in the way it did. Chilli Developments had been seeking £10m damages. It was ordered to pay the entire legal bill of around £440,000 racked up by Tees Valley Regeneration and English Partnerships.

The case highlights the grey areas surrounding lock-out agreements. They cover only allocated time periods, and negotiations between landowner and developer can be terminated, quite legally, meaning that time and money could be spent unnecessarily.

In the same way, non-refundable deposits, given without search or survey to secure property from competitors, lack sufficient precautionary measures to be wise moves.

Other purchasers may still propose a higher offer, and the non-refundable deposit could be lost as a result.

Lock-out agreements are more likely to be used for residential property, and are more frequently used when the property market is more buoyant than it is at present.

Unlike options, lock-out agree- ments do not incorporate any terms and conditions for the proposed sale of the property. They simply allow the buyer time to undertake its investigations without fear of “gazumping”.

If at the end of the exclusivity period the buyer is not satisfied with the results of its investigations, he is free to walk away with no obligation to acquire the property.

As we have seen with the Chilli case, once the exclusivity period lapses, the seller is also free from any obligations, and could, if he wished, deal with any other offer from a third party buyer.

In reality lock-out agreements are simply an expression of goodwill by the parties to a transaction, and provide no real guarantees for either party.

Richard Freeman-Wallace is head of property at Watson Burton LLP.