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An exclusivity agreement, also known as a lock-out agreement, is an agreement between parties which provides for certain restrictions on either or both for exclusivity in terms of supply of goods, services or other dealings, sometimes for a stipulated time period, to any other parties other than on the terms of the agreement.
Such agreements are also commonly used during periods of important or sensitive negotiation between parties who are considering entering into important business arrangements with each other. The agreement sets out covenants and restrictions for a party to not engage in a particular business activity with third parties for a specified period of time.
The obvious use of these Agreements is where there appears to be an opportunity to sell a product or service which is new or so attractive that preventing competition will secure a major advantage. From the other party’s perspective, they will want to ensure they have the right business partner and in all probability the most advantageous price, possibly at a premium, together with other advantages before allowing 1 person or entity to have exclusivity.
It can also be useful during business acquisitions by preventing the party from negotiating or entertaining bids from competitors. Such agreements, common in both commercial and property transactions, are also often referred to as lock out agreements.
It is also common for exclusivity agreements to contain terms such as confidentiality and termination. When entering into business relationships, a party may obtain and have access to highly confidential information and sensitive data which is valuable to competitors and consequently, a well drafted agreement should incorporate both the immediate and future needs of all the parties and to maximise business synergy.
Where parties enter into a long term exclusive arrangement it is worthwhile ensuring that the agreement makes provision for ongoing review and possible amendment so as to reflect business needs.
Consider all aspects before committing
A party can no longer consider other opportunities once they have signed an exclusivity agreement and, therefore, careful consideration should be given to the possible downside as well as upside of such agreements and, as stated above, to possibly ensure some appropriate caveats or break opportunities are included. There is always a risk that the business venture may not succeed but a party would be tied to the exclusivity arrangement in the absence of appropriate negotiation and consideration of all the implications before entering into the agreement.
The most common use of the term lock out agreement is for property transactions where a potential buyer of a property or land is aware that other potential buyers are interested or considers that there may be a risk of being gazumped. So, in order to try and avoid this there is an attempt to negotiate a lock out agreement. Such an agreement would need to be carefully considered, negotiated and drafted especially as a seller offered a much higher offer may decide to breach a standard lock out agreement on the basis that any damages payable for breach of that agreement would be less than the value of the increased sale price available by breaching the lock out agreement.
If you need a commercial solicitor in London with lots of experience in advising, drafting, negotiating exclusivity agreements or lock out agreements, please do get in contact. We also advise on disputes arising on these contracts.