Claire Murphy, Head of Commercial Property, outlines the key differences between exclusivity and lock-out agreement.

First, what are exclusivity or lock-out agreements – and is there a difference between the two?

There's no difference between the two. They're just different names for an agreement under which a seller promises a potential buyer not to sell the property to anyone else for a defined period.

Importantly, the seller is not obligated to sell the property to the buyer within that period—or at all—and the buyer makes no promise to buy it.

So, what's the point of such agreements?

That's a good question! From a purely legal perspective, they're of limited value. There's nothing to stop the seller from waiting until the period has ended and selling the property to someone else.

From a commercial or negotiating perspective, they can be quite useful. There would be little point in a seller entering into such an agreement if he intended to sell to someone else anyway, so normally, the seller and the buyer enter into them in good faith. One of the key issues is the length of the period – the longer it is, the bigger the commitment.

In practice, once the parties have gone through the exclusivity period, they will often exchange contracts, assuming they have continued to show good faith to each other.

Do these agreements usually have any other terms?

It's purely a matter of negotiation. An Exclusivity Agreement can contain whatever terms the parties wish to include.

It could provide for a fee to be paid by the buyer in exchange for the property being taken off the market for a period—but the buyer has to recognise that the fee will usually be non-refundable and that the seller will have no obligation to sell the property at the end of the period.

It may allow the parties to do certain things during the period—perhaps for the buyer to conduct site investigations or for both parties to progress the transaction towards exchanging contracts. Both parties have to understand, though, that those obligations will be of limited value as they can't force the other party to go through with the transaction.

A conditional contract or an option agreement may be required when buying or selling property, but determining which is more appropriate can sometimes be challenging. Claire Murphy, Head of Commercial Property, outlines the key differences and similarities between the two.

Understanding conditional contracts and option agreements

A conditional contract is an agreement to buy and sell property that depends on specific conditions being met. A typical example is a contract subject to the granting of satisfactory planning permission. Once the specified condition is fulfilled, both buyer and seller are legally bound to proceed with the transaction.

An option agreement, in contrast, grants the buyer the right—but not the obligation—to purchase the property. The seller, however, is committed to selling should the buyer exercise this right. Unlike a conditional contract, an option agreement operates unilaterally in favour of the buyer.

Is an option agreement always more advantageous for buyers?

While an option agreement may appear more beneficial to a buyer and less favourable to a seller, the reality is more nuanced.

Consider a conditional contract contingent on securing "satisfactory planning permission." The definition of "satisfactory" can sometimes be vague, leaving room for the buyer to determine whether the condition has been met at their discretion. A conditional contract may function similarly to an option agreement in such cases.

However, precise language can make the definition of "satisfactory planning permission" more objective. Striking the right balance can be difficult, as parties may spend significant time negotiating contractual terms instead of progressing with the planning process.

Key factors to consider when choosing between a conditional contract and an option agreement

Several factors should be evaluated when determining the most appropriate agreement:

• Duration of the agreement: The contract period (the conditional period in a contract or the option period in an option agreement) should be carefully considered. The seller should assess how long the buyer can secure the property while fulfilling conditions or deciding whether to proceed. Their duration and circumstances should be clearly outlined if extensions are permitted for appeals or judicial reviews.
• Financial considerations: Sellers should determine whether the buyer is paying a non-refundable deposit or option fee and cover legal and surveyor fees. Without such safeguards, sellers may risk lengthy property tie-ups without compensation should the buyer walk away.
• Buyer's obligations: The agreement should clearly impose obligations on the buyer to actively pursue planning permission within a reasonable timeframe. While immediate application submission may not always be feasible, a structured timeline should be included.
• Potential benefits for the seller: If planning permission is granted but the buyer chooses not to proceed, the seller may benefit from an enhanced property value, having obtained planning consent at the buyer's expense.

When is an option agreement the preferred choice?

There are instances where an option agreement is more suitable. For example, securing individual option agreements may be more practical when a developer assembles a site comprising multiple landowners. Similarly, a longer-term option (e.g., five to ten years) may be the best approach when promoting land through a development plan process to establish planning viability.

seeking professional guidance

A surveyor with expertise in this area, working alongside an experienced property lawyer, can provide invaluable guidance. Switalskis Solicitors can assist in connecting clients with appropriate professionals to ensure informed decision-making and a smooth transaction process.