Exclusivity Agreements When Buying a Business

An exclusivity agreement, also called a lock-out agreement, is a binding contract under which a seller promises not to negotiate with or sell to anyone else for a defined period. Under English law that negative promise is enforceable provided it is supported by consideration and runs for a stated period, but a promise to negotiate in good faith is not, which is precisely what the House of Lords decided in Walford v Miles [1992] 2 AC 128, a case about the sale of a business.

The phrase causes confusion because it covers three different arrangements. In a business purchase it means a short, time-limited lock-out while the buyer carries out due diligence and negotiates the sale documents. In conveyancing it means much the same idea applied to a single property, usually to guard against gazumping. In a supply or distribution contract it means something else entirely: a long-running promise that one party will deal only with the other in a territory or product line, which engages competition law in a way a deal lock-out does not. This article deals with the first of those, and we cover the distinction below because the wrong precedent gets used more often than it should.

We act for buyers and sellers of owner-managed businesses, so the points below are drawn from both sides of the table. A buyer wants a long exclusivity period and a seller wants a short one, and both are right.

What an exclusivity agreement actually does

Exclusivity is a negative covenant. The seller agrees not to do certain things for a defined window. It does not oblige the seller to sell, and it does not oblige either party to reach agreement. The Court of Appeal put the point in Pitt v PHH Asset Management Ltd [1994] 1 WLR 327 at 332 to 333, adopting Walford v Miles at 139, and it was restated recently in Landmaster Investment Ltd v HMRC [2023] UKFTT 736 (TC): a lock-out agreement “does not require the vendor to sell the property to the potential purchaser, but locks the vendor out of negotiations with anyone else during a specified period, leaving that one potential purchaser with the sole opportunity during that period to attempt to reach an agreement with the vendor”.

That is a narrower thing than most buyers assume when they sign one. Exclusivity does not stop the seller walking away from the deal. It stops the seller walking away to someone else. It does not fix the price, although the heads of terms sitting alongside it usually record a price subject to contract. It does not commit the seller to sign the share purchase agreement you send them, and it gives you no claim if the seller simply decides mid-process that they would rather keep the business.

What it does give the buyer is a clear, defined runway. For that period the seller cannot run a parallel process, cannot use a rival bidder to lever the price up, and cannot sign with a competitor while your accountants are halfway through the management accounts. That is worth paying for, and it is the reason exclusivity is almost always the first genuinely binding obligation in a private company deal.

Deal exclusivity is not supplier or distribution exclusivity

The two are regularly confused, and the precedents are not interchangeable. A deal lock-out is pre-contractual, negative and short: weeks, occasionally a few months. Its only job is to protect a negotiation. Supplier, distribution or agency exclusivity is a term of a concluded commercial contract, usually runs for years, carries positive obligations such as minimum purchase volumes and territory restrictions, and is the thing competition lawyers mean when they talk about vertical restraints.

That difference matters legally. Section 2 of the Competition Act 1998, the Chapter I prohibition, catches agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in the United Kingdom, and section 2(4) makes a prohibited agreement void. Long-term exclusive supply and distribution arrangements have to be assessed against that prohibition and the available exemptions. A six-week promise by one business owner not to talk to other buyers while a sale is negotiated does not restrict competition in any relevant market and is not the kind of agreement the Chapter I prohibition is aimed at.

So if you are searching for an exclusivity agreement template and you find one full of minimum order quantities and territories, you have the wrong document. If you are putting exclusivity into a long-term supply arrangement instead, that is a question for our commercial contracts team rather than a deal lock-out.

Why a buyer wants exclusivity before spending on due diligence

Because the buyer pays for the investigation and owns nothing at the end of it. Legal due diligence on a business purchase means solicitors reading every material contract, lease, employment file and policy, accountants working through the numbers, and often a tax adviser, an environmental consultant or a sector regulator specialist as well. On a modest SME acquisition that is a five-figure spend before anyone has signed anything binding. On a deal involving regulated premises it is more.

The courts have been clear that money spent in the hope of a deal is money at risk. In Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396, Generator incurred around £80,000 of legal and design costs on a joint acquisition. There was a lock-out agreement, but it covered the land purchase, not the joint venture agreement the parties never concluded. When the relationship broke down, the Court of Appeal declined to impose a constructive trust or a Pallant v Morgan equity over the site. Generator was left with its costs. The lesson is not that lock-outs do not work. It is that a lock-out protects only what it is drafted to cover.

Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2023] EWCA Civ 482 makes the same point from the other direction. Pretoria spent in the order of £74,000 obtaining planning permission during negotiations, and the Court of Appeal observed that it is “entirely plausible that a party to a putative contract undertakes expense in the reasonable expectation that agreement will be reached in due course”. Spending money is not evidence of a contract, and it does not create one.

Exclusivity also has two practical uses buyers tend to overlook. It gives a lender or investor the confidence to commit credit committee time and pay for a valuation, because the opportunity is not going to disappear mid-process. And it gives the buyer’s own advisers a hard deadline, which is usually the single most effective way of keeping a diligence exercise moving.

Why a seller resists a long exclusivity period

Competitive tension is the seller’s main lever on price, and granting exclusivity switches it off. Every week of exclusivity is a week in which the seller has one buyer, no alternative and diminishing leverage. Sellers who have been through a process before are usually far more resistant than first-time sellers, for good reason.

The specific risks a seller should weigh are these. A buyer who knows the seller has no alternative may use diligence findings to chip the price, and the longer the window the more scope there is to do it. A long exclusivity period exposes the business to deal fatigue, with the management team distracted and key staff sensing something is happening. If the deal collapses in month four, the seller returns to the market with a business that looks shop-soiled and a set of buyers who will ask why the last one walked. And exclusivity granted before a buyer has demonstrated funding can waste the entire window on a buyer who was never able to complete.

The sensible seller responses are all about shortening the window rather than refusing it. Keep the initial period short and allow extension only by written agreement. Tie extension to milestones, so the buyer earns more time by producing a draft share purchase agreement or a signed funding letter. Require evidence of funding before exclusivity starts at all. Carve out unsolicited third-party approaches, so the seller can at least note an approach without breaching. Most effectively, do the preparation first: a seller who has completed vendor due diligence before going to market can hand over a populated data room on day one and credibly insist on a four-week window instead of a twelve-week one.

The enforceability point, stated properly

A great deal of published commentary on this topic says that exclusivity agreements are unenforceable, citing Walford v Miles. That is not what the case decided, and the distinction is the single most important thing to get right when drafting one.

Walford v Miles concerned the sale of a business. All the negotiations were expressly subject to contract. The seller agreed not to negotiate with any third party and to negotiate only with the prospective buyer. Summarising what the House of Lords actually held, Longmore LJ said in Petromec Inc v Petroleo Brasileiro SA Petrobras [2005] EWCA Civ 891 at paragraph 120 that “the House of Lords held that the ‘lock-out agreement’ was unenforceable because there was no provision saying how long it was to last”.

The buyers tried to cure that defect by arguing for an implied term that, for so long as the seller wished to sell, he would negotiate in good faith with them. The House of Lords refused to imply it. Lord Ackner’s words at page 138, quoted in Chilli Developments Ltd v Commission for the New Towns [2008] EWHC 1310 (QB) at paragraph 7, were these: “while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Accordingly a bare agreement to negotiate has no legal content.”

Two consequences follow, and they are both practical rather than academic.

First, a lock-out must state how long it lasts. An exclusivity clause with no end date is not a drafting imperfection, it is void for uncertainty, and the buyer who relies on it has no protection at all. A stated end date or a defined number of days running from a stated trigger will do. A period running “until completion” or “while negotiations continue” will not.

Second, a promise to negotiate in good faith adds nothing and will not rescue a defective lock-out. If the negative obligations and the duration are drafted properly, you do not need it. If they are not, it will not help you.

What remains perfectly enforceable is the negative promise itself, for a specified period, supported by consideration. That is what the Court of Appeal upheld in Pitt v PHH, and it is how the two successive lock-out agreements in Chilli Developments were treated throughout: each ran between stated dates, and the argument at trial was about breach, not about whether the agreements were valid.

Consideration: the point most templates get wrong

A lock-out is a contract, so the buyer must give something for it or the document must be executed as a deed, which requires no consideration. Landmaster turned on exactly this: if the reservation agreement imposed no obligation on the vendor, the buyer received nothing for its fee and there was no binding agreement. A nominal payment, a commitment to bear the buyer’s own professional costs, an undertaking to pursue the transaction diligently or a reciprocal obligation on the buyer will each do the job. A one-sided letter in which the seller promises not to talk to anyone else and the buyer promises nothing at all is the most common defect we see.

Express good faith obligations: a narrower rule than people assume

There is a refinement worth knowing, because it is routinely flattened into “good faith clauses are never enforceable”. In Petromec at paragraphs 115 to 121, Longmore LJ considered an express obligation to negotiate in good faith contained within an agreement that was itself already binding, and narrow in scope. He distinguished Walford v Miles on the basis that there everything was subject to contract, there was no concluded agreement and there was no express good faith clause at all. His conclusion was that he did not consider Walford v Miles required him to hold the express clause “completely without legal substance”, adding that to decide it had no legal content “would be for the law deliberately to defeat the reasonable expectations of honest men”.

Those remarks were not necessary to the outcome, so they are persuasive rather than binding. The practical position is that an express, narrowly drawn good faith obligation inside a binding exclusivity deed stands on materially better ground than the implied term rejected in Walford v Miles, but it is not what we would ever ask a buyer to rely on. Rely on the negative obligations and the stated period. Treat good faith wording as a makeweight.

What a workable exclusivity clause contains

The following is the checklist we work through when drafting or reviewing exclusivity on a private company deal. The scope of the seller’s negative obligations is where most of the value lies, and where most short-form templates fall down.

Break fees and cost cover

A break fee is a sum payable if the deal does not proceed. There are two ways to draft one and they are not legally equivalent, which is something a lot of exclusivity letters get wrong by accident.

The first route is a sum payable if the seller breaches exclusivity. That is a secondary obligation triggered by breach, so it is exposed to the penalty rule. The test the Supreme Court set in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 at paragraph 32 is “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”. A cap set by reference to the buyer’s verified external professional costs will usually be defensible on that test. A large round number bearing no relationship to the buyer’s likely spend is vulnerable, and if it is struck down the buyer is back to proving its loss in the ordinary way.

The second route is a sum payable on a defined event that is not a breach: for example the seller deciding not to proceed, or the buyer withdrawing after a stated date. Drafted as a primary obligation triggered by an event the parties have agreed is permissible, it sits outside the penalty rule altogether, because the rule only engages secondary obligations arising on breach. This is usually the better route, and it has the useful side effect of being easier to explain across the table, because it is not framed as a sanction.

In practice, on owner-managed business deals a reciprocal cost-cover provision capped at each side’s verified third-party fees is far more likely to be signed, and far more likely to survive challenge, than a substantial one-way break fee. Sellers should also note the mirror image: a buyer may reasonably ask for cost cover if the seller pulls out, and a seller may reasonably ask for it if the buyer walks away after the seller has turned other interest down.

Remedies when exclusivity is breached

Exclusivity is a negative covenant, which makes a prohibitory injunction the natural remedy. A court can restrain a seller from continuing discussions with a third party or from completing a sale to them, without having to supervise performance of any positive obligation. That is the strongest remedy available and it is worth seeking quickly where the breach is discovered in time.

The practical difficulty is timing. Breaches of exclusivity are usually discovered late, often when the rival deal is signed or announced, and an injunction cannot undo a completed sale to a third party who took without notice. More fundamentally, no court will order a seller to sell a business it never promised to sell. Winning an injunction returns the buyer to the position of being the only permitted negotiator, which is all it ever bargained for.

Damages for wasted costs are the realistic claim in most cases, and they are recoverable. It is worth noting what the claimants in Walford v Miles itself ended up with: the trial judge awarded them £700 for wasted expenditure as damages for misrepresentation, which the Court of Appeal upheld and which was not challenged in the House of Lords. They recovered their abortive costs and nothing for the business they did not get. Chilli Developments was likewise a claim for damages for breach of two lock-out agreements, coupled with a claim against the third party for inducing those breaches.

Loss of bargain is the hard part, and buyers should understand why before they rely on it. Because the lock-out never obliged the seller to sell, the buyer must prove that but for the breach it would probably have reached agreement, and on what terms. Longmore LJ identified exactly this problem in Petromec at paragraph 116 as one of the traditional objections in this area: it can never be known whether negotiations would have produced an agreement at all, or what the terms would have been. A buyer in that position is asking a court to value a deal that was never struck.

A claim against the rival bidder for inducing breach of contract is possible but needs knowledge of the exclusivity and an intention to procure its breach, which is why buyers sometimes ask for the existence of the exclusivity to be disclosable to third parties who approach. All of which explains why the commercial answer is to agree cost cover up front rather than to litigate causation afterwards.

Heads of terms, or a standalone deed?

Both work, and the choice has consequences. Most commonly, exclusivity is one of a handful of expressly binding clauses in otherwise non-binding heads of terms for a business sale, alongside confidentiality, costs, governing law and sometimes an announcement restriction.

Pretoria Energy confirms that this works. It was common ground in that case that an exclusivity clause in signed heads of terms created a legally binding lock-out agreement, even though other clauses in the very same document created no binding obligations at all. As Lewison LJ noted, it was “an unusual case in which it is common ground that some parts of the same document created binding contractual obligations; but other parts did not”. Landmaster makes the same point: there is nothing to prevent a lock-out agreement and a subject to contract sale agreement sitting in one document.

But Pretoria Energy carries two warnings that are not widely understood, and both bite on how the rest of the heads of terms are drafted.

The first is that you cannot simply head the whole document “subject to contract”. The Court of Appeal noted that because it was common ground the parties intended to be bound by the lock-out, “the omission of the phrase ‘subject to contract’ is of less importance than it might have been”. If part of your heads of terms is meant to bind, a blanket subject to contract heading is unavailable to you, and every other clause has to be marked non-binding on its own terms.

The second is sharper, and it cuts against the buyer. The Court of Appeal treated the presence of a time-limited lock-out as positive evidence that the commercial terms in the heads were not binding: if there was already a binding agreement for lease, the court asked, what was the point of a lock-out that expired? The clear purport of the lock-out was that once it expired either party would be free to negotiate with others. A buyer who believes the price and structure in the heads of terms are locked in may find the exclusivity clause is the very reason a court holds they are not. If you want anything beyond exclusivity and confidentiality to bind, say so in terms.

A standalone exclusivity deed is the better choice in several situations: where there is no consideration to point to, since a deed needs none; where exclusivity is being granted before the commercial terms are agreed; where the seller will not sign heads of terms yet but will grant a short window; and where the exclusivity needs to bind shareholders who are not parties to the heads of terms.

One further point if the deal includes property, as it does on most trading business acquisitions. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires a contract for the sale or other disposition of an interest in land to be made in writing, incorporating all the expressly agreed terms in one signed document. A lock-out is not itself a disposition of an interest in land and so is not caught by section 2, but heads of terms dealing with premises need to be drafted so they cannot be read as a land contract. Our commercial property team works alongside the corporate team on these deals for that reason.

Where exclusivity sits in the deal timetable

The timetable below reflects a straightforward owner-managed business acquisition with funding in place. Regulated sectors, deals needing landlord consent or third party change of control approvals, and anything involving a competitive process will run longer. The point of the diagram is the sequencing rather than the week numbers: exclusivity should start when diligence spending starts, not before, and it should expire with enough margin that the seller is not signing the sale agreement under time pressure.

What this means for you

If you are buying, do not start paying advisers until exclusivity is in place, make sure the document states a period and that you have given something for it, and define the restricted transaction widely enough that the seller cannot comply with the clause while doing a different deal. Then agree cost cover, because wasted costs are the remedy you are realistically going to be claiming.

If you are selling, grant exclusivity only once the buyer has shown you funding, keep the window short and extendable only in writing, tie any extension to the buyer producing something, and be careful about what else your heads of terms say now that part of the document binds you. Preparing properly before you go to market is what lets you grant a short window without losing the buyer.

On either side, exclusivity is a small document that decides who holds the leverage for the most expensive stage of the deal. It is worth half an hour of a solicitor’s time before it is signed rather than a dispute afterwards. For the wider process, our guides to buying a business in the UK and selling a business set out the full sequence, and the choice between a share sale and an asset sale affects how widely the exclusivity needs to be drafted.

We act for buyers and sellers of owner-managed businesses across all sectors, including dental practices and other regulated premises where competitive processes and long consent timetables make the exclusivity period particularly important. If you have been sent an exclusivity agreement to sign, or you are about to grant one, we are happy to look at it. Speak to our buying a business team, or if you are on the other side of the deal, our selling a business team. You can call us on +44 207 566 1188 or email info@gurvelegal.com, and we will tell you plainly whether the document does what you think it does.