Dow Schofield Watts llp

LOCK-OUT AGREEMENTS

Lock-in agreements, where parties expressly agree to negotiate with each other, are unenforceable because they are "agreements to agree", and therefore lack certainty.

Lock-out agreements , where vendors agree to grant exclusive rights to negotiate can on the other hand constitute valid, binding contracts.

The status and enforceability of an agreement to negotiate with one prospective purchaser and not to consider offers from anyone else was determined in Walford v Miles (1991) the vendor of a successful photographic processing business was prepared to meet the asking price of £2 million but a question was raised about the ability of the plaintiff to find the necessary finance.  Over the telephone the plaintiff agreed to procure a "comfort letter" and not to withdraw from the transaction.  In return, the vendor agreed to deal exclusively with the plaintiff and to conclude the deal as soon as possible. 

Ultimately, the vendor decided to sell his business to a competitor buyer whereupon the plaintiff sued him for breach of the lock-out agreement. 

The House of Lords distinguished an agreement to lock-out, which simply prevents the vendor from negotiating elsewhere, from an agreement obliging to negotiate a "lock-in" agreement.  As a general rule it appears that a lock-out agreement will be enforceable provided it is for a defined period of reasonable length and provided consideration is given.  Consideration would be costs incurred by the prospective purchaser.

"There is clearly no reason in the English contract law why A, for good consideration, should not achieve an enforceable agreement whereby B, agrees for a specified period of time, not to negotiate with anyone except A in relation to the sale of his property...But I stress that this is a negative agreement - B, by agreeing not to negotiate for this fixed period with a third party, locks himself out of such a negotiation. He has in no legal sense locked himself into negotiations with A." (Lord Ackner.)

Last updated March 2005