Tags: estate agent, gazumping, lock out agreement, no-flies, se15, se22, se5, solutions Gazumping Part 2 – Possible Solutions?
In the first Blog post on this subject we looked at what gazumping was, the kinds of markets in which it occurred and the reasons why it occurs in the English residential property market but not, for example, in the Scottish market. We finished the post looking at the government response to a parliamentary question on whether the government proposed to change the conveyancing system to prevent gazumping. The response indicated that no changes were proposed as there was a wide variety of contractual mechanisms available to provide buyers with greater certainty should they require it. This second post will look at the first of the mechanisms suggested in the answer to the parliamentary question.
Before looking at the various mechanisms it is important to remind ourselves of a few things:
- The Buyer is ideally looking for certainty that they can buy the particular house of flat. They may also want to ensure that they will not waste money on fees, etc but the principal aim is to achieve certainty that the particular property has been secured.
- You can only use one of these mechanisms if you can get the seller to agree – bear in mind that gazumping is only really a problem in a sellers’ market – so this may be no easy task.
- As a buyer you will want to use one of these mechanisms at the point in the conveyancing process (between offer and exchange of contracts) when you still have enquiries and investigations to make about the property – you are therefore unlikely to want to, or be able to, commit yourself absolutely to the price.
- If somebody breaches a contract (i.e. doesn’t do what they said they would do in the contract) a court can award the other party one of a number of remedies. The first, and most obvious, remedy is an award of damages. Another remedy that could be used is “specific performance” i.e. a court orders the party in breach of contract to perform the contract. A third possible remedy is an injunction i.e. the court makes an order preventing the party in breach of contract from doing something. There are detailed rules about what kind of remedy a court will award but it is difficult to get an award of specific performance or an injunction – an award of damages is much more likely.
Let us look now at the first of the mechanisms that was referred to in the parliamentary answer – the lock out agreement.
A lock-out agreement, which is also sometimes called an exclusivity agreement, gives a buyer the short term comfort of a period of time to carry out searches and other investigations and to negotiate the sale contract in the knowledge that no other potential buyers are being dealt with; so in theory they should get to exchange of contracts prior to any other interested party. It is usual for such agreements to set a period for which the exclusivity will last and to specify dates by which certain steps have to be achieved or information exchanged. For the buyer the most important provision is the one preventing the seller and its agent marketing the property or negotiating with any other person until the end of the exclusivity period. However, it is important to understand that such agreements just provide the buyer with a period of exclusivity and therefore with the “inside track“ to get themselves in a position to exchange contracts first – they do not prevent the seller selling the property to another buyer at the end of the exclusivity period.
Also, you need to bear in mind that, even if the seller breaches the lock-out agreement and sells to another potential buyer during the exclusivity period, the aggrieved prospective buyer will be able to recover just wasted costs, such as solicitors’ and surveyors’ fees and search expenses. Therefore, if a seller receives a substantially higher offer, the limited damages payable and the virtual impossibility of the original prospective buyer obtaining an injunction to stop the seller from selling to somebody else, might well tempt the seller to sell to another party and bear the damages to be paid to compensate the original buyer for wasted costs.
There are ways to give sellers a greater disincentive to breach the lock-out agreement and sell to somebody offering more money, for example by building agreed damages into the lock-out agreement which would be at a significantly higher level than just wasted costs, so that any improved offer would have to be substantially greater to tempt the seller to go with another buyer. Clearly whether a seller will agree to such a term will depend on the relative bargaining positions of the parties.
In summary then a lock out agreement may provide a buyer with protection against wasted costs but is only possible if the seller agrees to it. The agreement will also probably increase both the buyer’s and the seller’s legal fees and negotiating it may well distract from the transaction itself. You should not, therefore, place too much faith on the protection afforded by a lock-out agreement. It is unlikely to provide you with a cast iron guarantee that you will be able to buy the particular property.
At the current time there is a shortage of property coming on to the market in East Dulwich, Camberwell and Peckham – this is usually an indication that it is a sellers’ market. It may be difficult, therefore, to persuade sellers to entertain the idea of a lock out agreement – to seek to insist upon one is likely to make your offer less attractive in a market where sellers can generally expect to receive a number of good offers. You should therefore think carefully about whether you wish to raise this as a buyer.
In the next post on this subject we will look at the other mechanisms referred to in the parliamentary answer.