The ‘Boris bounce back’ in the residential property market has seen a bounce back in the unscrupulous practice of gazumping.
Back in the pre-election days whilst everyone was worrying about Brexit and Corbyn, gazundering was the name of the game. Gazundering is the practice of lowering an offer made to the seller of a property. The best time to do that is immediately before exchange of contracts when a desperate seller is forced to accept the lower offer just to get the sale through. And because of the very depressed state of the market many sellers were considered to be desperate.
During that period most buyers were biding their time waiting for the outcome of the election fearing that a Labour victory would see the market slump even further. So there was much relief on 13th December 2019 for sellers in particular.
Time then stood still over the Christmas period with the New Year then heralding the start of a more confident market. Buyers who had delayed exchanging on their purchases were then prepared to proceed.
Despite the more positive market, properties are still very cheap when compared with peak 2014 levels meaning that buyers are prepared to outbid each other to secure a property before prices move too far away from what was perceived to be the bottom of the market in Q4 2019. This is especially true of overseas buyers who continue to take advantage of weak sterling and who often engage the services of a property finder who will know which properties in an area are under offer and at what price having access to data source and network platforms as such LonRes, which are exclusively for property professionals.
Many sellers are not waiting to receive a higher offer for their property from another party. They are raising the price of their property forcing a buyer to exchange at a higher price than originally agreed in order to secure the property.
Buyers need to be aware of the fact that an estate agent is obliged to put to his seller client any offer for a property that comes in – even when the property is already under offer. The opportunity is always there for one potential buyer to gazump another who is already in the legal conveyancing process.
With gazumping on the increase many buyers now ask for an exclusivity or lock-out agreement. Under such agreements, the seller agrees not to negotiate with another prospective buyer for a period of time and the agreement often set out a deadline for the buyer to exchange contracts with obligations on the seller to assist the buyer in meeting that deadline. Often a deposit is paid by the buyer supposedly to cover the seller’s costs if the buyer does not proceed but the deposit is usually in excess of any likely abortive fees.
The disadvantage of exclusivity agreements is that time that could have been spent dealing with the legal due diligence to effect an early exchange of contracts is spent negotiating the exclusivity agreement. Which leaves more time for a seller to change his mind and negotiate with another party at a higher price.
And the agreement is not binding. A seller can decide to breach the exclusivity agreement by negotiating with another party at a higher price and simply return the deposit to the buyer. The offered price increase will exceed any abortive legal fees.
For such reasons, if a buyer does want to enter an exclusivity agreement then it should ensure that its costs will be covered if the seller decides to withdraw.
Better still, the buyer should endeavour to reach the stage at which he is prepared to exchange contracts as swiftly as possible and instruct his solicitor to commence legal due diligence whilst negotiating the exclusivity agreement. This is risky in terms of incurring potentially abortive fees but stands the best chance of binding parties to a transaction as soon as possible.
Neither gazumping nor gazundering are illegal despite leaving one party facing a loss – whether it be losing part of the purchase price or paying abortive fees. Such sharp practices are certainly not ‘gentlemanly’ and go against the moral protocol of proceeding with a transaction at the price on which you shook hands.
However markets are shaped by varying supply and demand and the English system where you are not bound to a transaction until exchange of contracts leaves the door open to the unethical behaviour of gazundering, gazumping and breaching an exclusivity agreement. The conveyancing mantra of “buyer beware” applies not just in relation to legal due diligence.
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