Lock-out agreements are used to ensure that a prospective seller negotiates exclusively with a named party for a specified period. Such an agreement buys the prospective buyer time to investigate a property, while guarding against the risk that the seller may enter into negotiations to sell the land to someone else.
The House of Lords has described a lock-out agreement as a “negative” agreement. In other words, lock-out agreements do not lock sellers into negotiations with another party: Walford v Miles [1992] AC 128. In reaching the conclusion that a lock-out agreement can constitute a binding contract, unless it is void for uncertainty, the lords also ruled that the parties to the negotiations were entitled to pursue their own interests, so long as they avoided making misrepresentations. Thus, in the absence of an agreement as to when the lock-out period was to terminate, there could be no implied obligation on the seller to continue to negotiate in good faith until there was a proper reason to withdraw. A duty to negotiate was unworkable and unenforceable.
So what then are the courts to make of a lock-out agreement that expressly provides that “each party owes the other a duty of good faith”? In Chilli Developments Ltd v Commission for the New Towns [2008] EWHC 1310 (QB); [2008] PLSCS 174 the prospective buyer sought to rely upon just such a provision. The buyer relied upon the observations of the Court of Appeal in Petromac Inc v Petroleo Brasileiro SA [2006] 1 Lloyd’s Rep 121, to support its case, even though the observations made in that case were not essential to the disposition of the appeal.
In Petromac the court took the view that Walford did not bind the court to hold that an express obligation to negotiate in good faith (imposed by an agreement negotiated under the aegis of a large and reputable firm of
In Chilli, the judge ruled that he must determine the facts before considering the duty of good faith imposed by the lock-out agreement. It was only if the facts gave rise to an issue of law that he would need to consider the question further. The judge went on to weigh the facts and concluded that the sellers had not breached the terms of their lock-out agreement with the buyer.
Practitioners will be disappointed that the question still remains to be resolved, but the issue is likely to crop up again. Duties of good faith are included in an increasing number of contracts, and the law has developed since the decision in Walford. However, parties should expect any such obligations that are upheld to be restrictively construed, in accordance with their exact wording.
Allyson Colby is a property law consultant
