The disadvantages of the English conveyancing system are routinely raked over by the press. Among those that most infuriate buyers and sellers alike is the fact that, until contracts are exchanged, either party can and sometimes does walk away from an agreed deal: the seller often because it has a better offer; or the buyer because it has changed its mind. In either case, one party is left disappointed and often out of pocket with professional fees.
As we see it, unless and until there is legal reform to the system, there are four potential solutions to this problem.
The parties can agree to progress the due diligence with lightning fast speed (our record for exchange is just a few hours including a full survey and a full report on title). Often you will hear of attended exchanges – which these days are more likely to be virtual so this simply means fast due diligence and may involve a buyer taking a view on unknown issues, a seller insuring against defects, or a conditional exchange. This speedy approach may not be possible depending on the parties’ circumstances eg whether the seller is organised with a full legal pack, and whether the buyer is reliant on mortgage finance. But it is often the most sensible way forward, if the parties are able.
2. Reservation form
Alternatively, buying or selling agents will propose a very simple one-page reservation form. These are often used by developers to take a token deposit or reservation fee as a sign of commitment from the buyer to purchase a new build or off plan property. Its simplicity is key. It documents the terms agreed between the parties and states an intention to proceed with the sale and purchase transaction within a given timeframe and an intention that the seller will not entertain other offers for that period of time. The reservation fee is usually refundable so there is little need for haggling over terms and the underlying due diligence can commence immediately that it is signed.
The downside is that it affords a buyer little protection from a seller changing their mind and selling to a different buyer at the end of the exclusivity period, but it is used more as a tool for the seller to receive comfort that the buyer is committed enough to the deal to put forward a monetary sum.
3. Exclusivity agreement
Typically, when the market is somewhat febrile, a more detailed exclusivity agreement (alternatively known as a lock-out agreement) is suggested. This prevents (on the face of it) any dealings with a third party for the exclusivity period, thus giving the buyer a chance to carry out due diligence. The buyer can proceed on the basis that it can expend funds on surveys, searches, bank valuation etc, safe in the knowledge (in theory) that the seller will sell to them.
Because English law will not recognise an “agreement to agree”, any exclusivity agreement has its limitations as it does not afford the buyer certainty that the seller will enter into the underlying transaction, even if the buyer is ready, willing and able to do so by the end of the exclusivity period. Further, the exclusivity agreement cannot stop the seller letting time run out and then doing a deal with another buyer.
Occasionally we agree drafting that protects the buyer against liability for wasted cash on professional fees, searches etc, but that sum does not deter a seller who will be more than adequately compensated for these costs by a better sale price from the second buyer.
Equally, buyers can be unreliable, which is why sellers’ agents will sometimes ask for a payment in return for the seller granting exclusivity. Whether or not the payment is refundable will depend upon the amounts involved and what the parties are trying to achieve. It might be seen as a touch punchy to ask for that sum to be non-refundable, when the buyer will not necessarily have carried out the due diligence on the property and cannot know if the property has good and marketable title or is subject to constraints that make it unsatisfactory for this purpose. Consequently, negotiating and agreeing the terms of any exclusivity agreement containing a payment can be a slightly messy and often fraught affair. The parties might wish to agree limited circumstances in which the deposit would be refunded, such as: a down valuation; a material survey defect or an aggregate of survey defects which amount to a certain financial value; or any issues which would mean that we, as lawyers, could not certify that the property has good and marketable title (and which cannot be resolved at the seller’s cost with insurance or otherwise before completion). This might therefore be better described by agents when putting together the terms as an exclusivity deposit or fee, rather than a non-refundable deposit or payment as it is clearly not in fact non-refundable, save where the buyer simply changes their mind about the purchase for no good reason!
Despite all this, an exclusivity agreement can only be protective as to costs and cannot actually deliver a sale of the property – the fundamental objective – so has limited value. Ultimately, its negotiation could waste time which might be more valuably spent on progressing the due diligence.
4. Is there another way?
Let’s assume that the buyer is prepared to pay a deposit and wants at least three weeks to carry out due diligence and to know for certain that, at the end of the three weeks, he can proceed to purchase the property. Let’s also assume that the seller is willing to commit to selling on the agreed terms at the end of that period.
What the parties can then enter into at the outset is an option agreement that permits the buyer to serve notice on the seller requiring the seller to sell at the pre-agreed price. The option has an option fee (in effect the exclusivity fee) which will be passed to the seller or held by their lawyers when the option is exchanged. From the buyer’s side, the advantage is that the buyer knows it can buy the property after the due diligence has been carried out. It is open to the parties to agree that the option fee should be refundable in certain circumstances, as with the exclusivity agreement caveats above, but this will depend on the sums and duration involved and the negotiation position of the parties.
Exclusivity or option agreements and exclusivity deposit payments are not for every transaction, but there will always be a part of the market and a type of client for which they have a place. It seems to us that:
- agents should be very clear in their terminology, using “exclusivity deposit” rather than “non-refundable deposit” where appropriate;
- the terms on which any deposit might be refunded should be considered and agreed early on;
- those selling agents suggesting a formal exclusivity period in a competitive bidding situation might advise their client on the merits of an option; and
- those buying agents advising clients who are being asked to pay exclusivity deposits might think about the suitability of option agreements.
Is such a document difficult to draft? Not necessarily, if you know what you are doing.
If you require further information about anything covered in this briefing, please contact Edmund Fetherston-Dilke, Laura Conduit, Laurie Horwood, Annabel Dean, 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, July 2020