The email arrives late on a Thursday. The other side's lawyer has sent a two-page document headed "Lock-Out Agreement" and wants it signed before the weekend so their client can start due diligence on Monday. The document is short, but it will tie your business's hands: for the next sixty days you will not be able to talk to any other buyer about the deal. Before you sign, it is worth knowing exactly what each clause does.
A lock-out agreement, also called an exclusivity agreement or a "no shop" agreement, is a standalone contract in which one party promises not to negotiate with anyone else about a proposed transaction for a defined period. In return, the other party gets an exclusive window to complete due diligence and settle the terms of the main deal. The document does not oblige anyone to complete that deal: the seller is not promising to sell, and the buyer is not promising to buy. It supplements the process that leads to a term sheet, heads of agreement or the final contract, and it works alongside any non-disclosure agreement already in place.
The clauses that make a lock-out work
Australian courts do enforce exclusivity promises, but only where the document has the ordinary ingredients of a binding contract: an offer, acceptance, consideration, an intention to create legal relations, and terms certain enough to be given a practical meaning. Everything below is where those ingredients actually live, so each clause deserves real attention at the drafting stage.
The exclusivity promise
The heart of the document is a negative promise. The seller agrees that it will not solicit, discuss or negotiate any competing transaction with any third party during the exclusivity period. Drafted as a clear prohibition, this is the obligation a court can enforce directly.
- What it does: stops the seller from shopping the deal around, so the buyer can spend money on diligence without being used as a stalking horse.
- Who it catches: the seller, its directors, shareholders, employees, agents and advisers. If the document only binds the company itself, the seller can route competing negotiations through an adviser and the promise is close to worthless.
- The variant the other side will push for: a "no shop" obligation only, which stops the seller actively soliciting other buyers but lets it respond to unsolicited approaches. The stronger position for the buyer is "no shop, no talk", which also prohibits entertaining approaches that arrive unprompted.
The exclusivity period
The period is the second most important clause in the document, after the promise itself. It needs a fixed start date, a fixed end date, and a mechanism for extension if both parties agree. The length is a commercial choice, commonly a few weeks to a couple of months depending on how much diligence is needed.
An open-ended lock-out is a drafting failure that can sink the whole document. In Walford v Miles [1992] 2 AC 128, the House of Lords refused to enforce a lock-out agreement because the parties had not fixed its duration: an agreement to negotiate that could run forever was too uncertain to bind anyone. Australian courts insist on the same certainty, so a lock-out without a defined period should be treated as unenforceable.
- The trap: a period that expires on a date but says nothing about what happens if diligence overruns. Negotiate an extension right in the document rather than relying on goodwill.
- The drafting minimum: state the start and end dates in the document itself, not in a covering email.
The scope of the deal
Define what the exclusivity covers. If the deal is the sale of a business, identify the shares or assets, any associated debt, and whether the promise extends to related entities or a restructured version of the transaction. A buyer who signs a lock-out over "the business" and then finds the seller has negotiated a deal for the same assets through a different corporate entity has a much harder argument to run.
What the buyer gives in return
Consideration is what makes a promise enforceable in Australia, and a lock-out needs it just like any other contract. Usually the buyer's consideration is a combination of promises: to proceed diligently with due diligence, to meet agreed timeframes, to keep information confidential, or to pay a small exclusivity fee. The fee also gives the buyer a concrete remedy if the seller breaches.
If the parties are not comfortable with the buyer promising anything, the document can be executed as a deed, which is enforceable without consideration. Deeds have their own formalities, including correct execution, so they are worth using deliberately rather than as a default.
Process commitments
A lock-out works best when it is paired with a timetable. Common process clauses include obligations to provide a complete due diligence data room by a set date, to give reasonable access to premises, key staff and accountants, and for senior decision-makers to meet regularly to resolve issues. These clauses convert the exclusivity period from a waiting game into a project plan.
Confidentiality
The lock-out is often signed before any documents change hands, so confidentiality needs to be dealt with somewhere. Either include a confidentiality clause in the lock-out itself or confirm that the existing non-disclosure agreement covers everything shared during the exclusivity period. The risk of silence is that the buyer's questions, financial models and internal assessments of the business are not protected.
Costs and break fees
Decide who pays for what, in the document. The common approaches are that each party bears its own costs, or that the buyer pays an exclusivity fee which is refundable if the seller breaches the exclusivity promise. Some lock-outs include an agreed reimbursement of the buyer's wasted costs if the seller walks away in breach. Whatever the choice, spell it out in the document, because if it is silent the parties are left arguing about the money later.
Good faith and the path to the main contract
Many lock-outs include an agreement to negotiate the main contract in good faith, or to use best or all reasonable endeavours to reach agreed terms. This is the clause where Australian law parts company with England. In United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLR 618, the New South Wales Court of Appeal held that an obligation to undertake genuine and good faith negotiations was sufficiently certain to be enforceable, following the earlier recognition in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 that an agreement to negotiate can have real content.
That does not mean a bare "negotiate in good faith" clause guarantees anything. The more the clause ties good faith to a defined process, such as a timetable to reach a term sheet or heads of agreement by a set date, the more certain it is and the easier it is to enforce. A free-floating promise to negotiate in good faith with no process attached is much harder to police, because a court has little to measure it against.
Carve-outs
Sellers should insist on carve-outs from the exclusivity promise. The usual ones allow the seller to respond to unsolicited approaches, to comply with a court order or a regulator's request, and to fulfil its statutory duties to shareholders. If a carve-out is used, the clause should also require the seller to notify the buyer promptly and to share only what is legally required.
Remedies for breach
The remedies clause is where the lock-out shows its teeth, and Australian courts will enforce these promises. In Urban Fortune Global Ltd v Deicorp Projects (Partridge Ave) Pty Ltd [2022] NSWSC 1352, the Supreme Court of New South Wales treated a vendor's obligation not to deal with other parties during a due diligence period as enforceable, and separately examined whether a promise to use all reasonable endeavours to agree the terms of a contract of sale was enforceable and had been breached.
Typical remedies to include are the right to keep the exclusivity fee, an agreed reimbursement of wasted costs, and the right to seek an injunction to stop competing negotiations while the period is still running. An injunction is a discretionary remedy, but it is available in an appropriate case to restrain a breach of a clear negative promise.
Execution: agreement or deed
How the document is signed matters as much as what it says. If it is executed as an agreement, the parties should make sure consideration is present. If it is executed as a deed, it must be expressed to be a deed and executed correctly. For companies, the usual route is s 127 of the Corporations Act 2001 (Cth), which allows a document to be executed by the signatures of two directors, or a director and a company secretary, or the sole director of a proprietary company where that director is also the sole secretary or there is no secretary.
Electronic signing is generally available. Under s 10 of the Electronic Transactions Act 1999 (Cth), a signature requirement is satisfied where a method identifies the person and indicates their intention and is as reliable as appropriate in the circumstances, and the states and territories have equivalent laws. Section 127 signing can also be done electronically under the technology-neutral signing provisions of the Corporations Act, so a remote execution should be valid if the process is set up properly.
Optional clauses worth considering
A few optional provisions are worth adding where the deal calls for them:
- Extension mechanism: worth including whenever diligence could overrun. A clause allowing the period to be extended by agreement, or automatically if specified milestones are met, avoids a scramble at the deadline.
- Buyer's termination right: a right for the buyer to end the lock-out if due diligence produces a deal-breaker, so the parties are not left in limbo.
- Announcements: a clause agreeing that neither party will publicise the proposed deal during the exclusivity period without the other's consent. Useful where a failed deal could affect customers or staff.
- Governing law and dispute resolution: a governing law clause and a sensible dispute resolution process, because a lock-out dispute is exactly the kind of matter that should be resolved before it escalates to litigation.
- Survival: a clause confirming which obligations, usually confidentiality, survive the expiry of the exclusivity period.
Where a lawyer earns their keep on a lock-out
A lock-out looks simple because it is short, but the value is in the detail. An Artificer Legal practitioner reviewing a lock-out would start by checking the three clauses that decide enforceability: the defined period, the scope of the exclusivity promise, and the presence of consideration or a valid deed. We would then push back on open-ended wording, such as a best endeavours obligation with no process attached, and insist on carve-outs for the seller and a refundable fee structure or wasted costs protection for the buyer. The order matters too: agree the period and scope first, then the process commitments and remedies, and leave execution method until the end, because the substance should drive the form.
Why the exclusivity period is the clause courts look at first
If there is one drafting choice that separates a lock-out that works from one that does not, it is how precisely the exclusivity promise and its period are defined. An indefinite lock-out is unenforceable, a vague one gives the other side every argument, and a precise one is enforceable, as Urban Fortune demonstrates. Define the promise, fix the dates, and decide what happens on breach, and the document will do its job. Leave any of those vague, and the money you spent on diligence is at risk the moment the seller takes another call.
In short: a lock-out agreement gives a buyer an exclusive window to negotiate without competing bidders, binds only while the defined period runs, and never forces the deal to complete. The exclusivity promise, the period, the consideration, the process commitments, confidentiality, costs and remedies are the clauses that carry the weight, and execution as an agreement or deed under the Corporations Act, with electronic signing where appropriate, completes the picture. It is a short document, but one where precise drafting decides everything.