Exclusivity agreements in property development
Exclusivity or lock agreements are often used in property development. They can be used to help with tricky negotiations.
How do exclusivity agreements work?
Exclusivity agreements are contracts. They set out contractual rights and obligations for the parties. Typically, a buyer or developer is given the right for an exclusive opportunity to negotiate with a land owner or seller. This means without the involvement of other interested parties. Sensitive or confidential information is often also shared. This is so the prospective buyer can price the deal and carry out due diligence, before a formal exchange of contracts.
Recent case in point
There have been some interesting property cases about real life examples of exclusivity agreements. A recent one is Bugsby Property LLC v LGIM Commercial Lending Ltd & Anor  EWHC 2001 (Comm) (27 July 2022) (bailii.org). This case featured an exclusivity and confidentially agreement on a large-scale development. It is an interesting specific case in point. The Commercial Court held that the defendant's breach of the exclusivity agreement had caused the claimant to lose the 'chance' of winning a bid, to make the property acquisition. That loss of a chance was evaluated on a % basis and damages were quantified accordingly.
Key points to consider
With the benefit of the case law, the key points with drafting exclusivity agreements are often:
- The time period: What is the duration of the exclusivity period and what triggers the next steps?
- Money: Is there any consideration being given for the lock out period or any deposit being lodged for it?
- Obligations in the seller: What is the seller to do – such as providing information (for instance deducing title to the land)? What is the seller not to do - for example not marketing the property to others?
- Obligations on the buyer: What is the buyer to do – for instance carrying out surveys? What is the buyer not do – such as not using or disclosing confidential or sensitive information that it obtains?
- Termination: When is the agreement at an end and when is each party released from their obligations? This can be controversial. How any dispute would be resolved should be considered.
- Remedies: What happens if there is a breach? An innocent party has to consider what would compensate them or even if there should be a financial penalty.
Application in each deal
With all the above general issues there are practical considerations. These will change for the specific circumstances of each deal. This can be seen in the case mentioned above. In that case, there had been consideration of what was meant by 'non-circumvention'. It was interesting to note this was not just circumvention by buyers or agents, but included a wider sphere of funds and brokers.
The case also flagged what was defined in the agreement as 'confidential information'. The definition was wide, mentioning both the 'direct and indirect' context of the information. This was a factor in the arguments as to the 'loss of chance' suffered. In other words, it was linked to the plans of one party extending beyond the immediate property transaction and into a wider development. This seems a useful reminder when considering an exclusivity agreement that there can be a benefit for making clear the scope you have in mind and if there is any 'bigger picture' to consider when the legal wording is being drafted.
This recent case reinforces that property development carries inherent risks. Good legal support mitigates these risks. It will always pay dividends for you to have robust legal support in negotiating the terms of any contract wording, such as exclusivity agreements. We are experts at drafting wording to provide solutions to implement deals to make sure that the agreed terms have been incorporated. Please contact the transactional real estate team if you would like to discuss specific matters we can assist with.