Being gazumped on a property purchase – is there a way to avoid it?

Gazump (verb) – to make a higher offer for a house than someone whose offer has already been accepted by the seller and thus succeed in acquiring the property.

The term “gazumped” means that after having an offer to buy a property accepted, another party makes a higher offer that the seller accepts and proceeds with. The first buyer is gazumped by the second.

In addition to the frustration caused by not securing the property, gazumping also means that any costs incurred up until the point that the higher bid is accepted – including agent’s fees, surveyor’s fees, and legal fees – have to be paid without anything to show for it.

Background

In England and Wales, the acceptance of an offer for the sale of a property is not legally binding on a seller, so the seller is entitled to negotiate with any party until contracts are exchanged. As a result, a buyer runs the risk of being replaced by a higher bidder up until the point that they exchange contracts for the purchase of the property.

The practice of gazumping became commonplace in the 1980s-1990s when property prices were rising and competition was fierce. Prospective buyers commonly found themselves being replaced by another party who was prepared to pay more, and many felt what some believe to be the original definition of the word “gazumped” – cheated, or swindled.

Gazumping activity increases significantly when the property market is buoyant. In addition to a Covid-generated search for space creating more action in the country house market and leafier areas of London, we are seeing a surge in demand from buyers seeking to capitalise on the favourable UK residential property market conditions, including:

• the Stamp Duty Land Tax (SDLT) holiday which ends on 31 March 2021;
  
  
• transacting ahead of the additional 2 per cent SDLT rate for non-resident buyers, commencing on 1 April 2021; and
  
  
• the current low rates of interest on mortgage finance.

Many of our clients are (i) encountering competitive bidding; (ii) concerned about being gazumped and (iii) keen to understand the options available to avoid this.

Options

There are four main options available to try and avoid being gazumped prior to exchange:

1. Exchanging at speed

The most straightforward route to securing a property is to progress the due diligence and exchange contracts at speed. This approach will depend upon the parties’ circumstances and readiness to proceed but if they are able, it is often the most sensible and cost-effective way forward. The due diligence process can be completed incredibly efficiently, sometimes in a matter of days (or even hours).

2. Reservation form

Reservation forms are often used by developers to take a deposit from the buyer in return for informal assurance that the seller will not entertain other offers. The downside is that it affords little protection from a seller changing their mind and selling to another buyer at the end of the reservation period.

3. Exclusivity agreement

The purpose of an exclusivity agreement, which is sometimes referred to as a lock-out agreement, is to prevent the seller from dealing with a third party during the exclusivity period, giving the buyer a chance to carry out due diligence and incur costs safe in the knowledge (in theory) that the seller will sell to them.

The buyer usually pays an exclusivity fee, which may be refundable in certain circumstances – such as the discovery of a title defect or material survey issue. 

However, exclusivity agreements do not afford the buyer certainty that the seller will sell to them, and cannot stop the seller letting time run out and doing a deal with another buyer at the end of an exclusivity period.

4. Option agreement

Option agreements share many similarities with exclusivity agreements. The key difference with an option agreement is that the buyer has a legal right to buy the property if they serve an option notice during the option period (once their due diligence has been carried out and they are ready to proceed).

Further information on these options can be found here.

Conclusions

Many transactions proceed smoothly to exchange without the buyer being gazumped and without the need for protective steps being taken.

However, there will always be certain market conditions and a particular profile of client for which these measures should be considered. Buyers looking to secure a period in which they are guaranteed the right to buy a property without being gazumped would be well advised to seek advice on their options.

If you require further information about anything covered in this briefing, please contact Laura Conduit, Joe Hobson, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2020