What is a contract race in commercial real estate?

A contract race arises where there is more than one prospective buyer and the seller wishes to submit a draft contract to each of them. These types of sales typically occur when a seller has received multiple offers and wants to sell quickly. Usually, it will be the first buyer who is able to exchange contracts who secures the deal, however this may not necessarily be the case. Therefore, a contract race can carry legal, financial and strategic implications for all parties involved.

A contract race could arise when selling freehold or leasehold land, or granting a lease. It is important to note that as with ordinary conveyancing procedure, there is no binding agreement in place until contracts have been exchanged. However, once contracts have been exchanged, the terms cannot be amended.

Considerations for contract races from the buyer’s perspective

Despite the speed of a race, buyers must remember to complete the typical due-diligence when entering into a contract. These include undertaking relevant searches and visiting the property to consider the boundaries of the property along with its adequacy for the intended use.

There will be upfront costs that a buyer needs to consider, and it is important that there is certainty surrounding funding. Surveys will need to be completed quickly, as will a mortgage valuation, and solicitors fees will need paying. Due to this, cash buyers are seen to have an advantage as there won’t be any delays caused by a mortgage.

A large factor that buyers will need to consider is the uncertainty that comes with a contract race. It cannot be guaranteed who the seller will proceed with  up until the point of exchange, and therefore buyers will need to be prepared for the possible disappointment and wasted costs they may face.

Consideration for contract races from the seller’s perspective

A seller should consider their reputation before setting up a contract race. There are pressures that will be placed on both agents and buyers when dealing with this process, and if a seller wishes to sell further properties in the future then they should consider whether causing a contract race will foster the type of working relationship they are looking for.

The seller must also consider whether they are in a position where they are fully prepared legally to proceed. The contract pack must be completed so as not to cause delays once the race is underway. If this is not the case then a race may not be the correct route to go down.

Which buyer is the ‘winner’ should also be considered. The person who signs the fastest is not necessarily the best and most secure option, and sellers should be wary to make sure they don’t exchange based purely on speed. Therefore, we would recommend that sellers consider whether they wish to retain their right to review the candidates rather than automatically going with the first person.

Considerations from the acting solicitor’s perspective

Neither the Solicitors Regulation Authority (SRA) Principles, the SRA Codes 2019 nor the SRA conflicts guidance expressly address the issues for a solicitor acting in a contract race. Interestingly, earlier regimes offered guidance, yet these have not been implemented into subsequent editions which has led to many ethical challenges for legal professionals.

Acting for a seller in a contract race

A solicitor must not:

• Abuse their position by taking advantage of clients or others (SRA Codes 2019, paragraph 1.2)
• Mislead or attempt to mislead their clients, the court or others, either by their own acts or omissions or allowing or being complicit in the acts or omissions of others (including their client) (SRA Codes 2019, paragraph 1.4).

When a seller instructs a solicitor to send out a contract to another potential buyer,  the solicitor is required to inform all buyers (or their solicitors) of the seller’s intention to deal with more than one buyer. This is the case even if the seller has not instructed the solicitor to act for the seller in relation to the other buyers (SRA Codes 2019, paragraphs 1.2 and 1.4).

Consequently, this requires the consent of the seller to whom a duty of confidentiality is owed. If the seller will not give consent, the solicitor must consider if it must cease to act for the seller.

The Law Society’s view

The Law Society advises that, when acting for a seller, it would be sensible to continue the practices expressly required by earlier regimes of informing all buyers immediately when a seller intends to deal with more than one buyer.

However, a conflict may arise between the solicitor’s duty of confidentiality to the seller and the duties owed to potential buyers. A solicitor is required to keep the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents (SRA Codes 2019, paragraph 6.3).

Therefore, if the seller refuses to grant consent to the disclosure, the Law Society’s view is that the solicitor may likely need to cease acting to avoid breaching the SRA Principle that the solicitor act with integrity.

Acting for more than one buyer

The SRA Principles require a solicitor to “act in the best interest of each client”. If a solicitor accepts instructions from more than one buyer, the solicitor may find that it has compromised its ability to comply with this SRA Principle. This could be the case even if both buyers agreed to the solicitor acting for them both.

There is a high risk of a conflict of interest and breach of the duty of confidentiality if a solicitor acts for more than one potential buyer. The solicitor must decide if there is a conflict of interest, or a significant risk of a conflict of interest, in the circumstances. If there is, then the solicitor should not act for both clients.

If the buyers each agree, it is possible that the solicitor may act for more than one buyer, but the solicitors and the buyers must specifically agree and should treat the arrangement with great caution. A solicitor can act despite a conflict of interest, or a significant risk of a conflict of interest, if the clients are competing for the same objective and certain conditions are met. It is therefore important that those on all sides of the contract race weigh up their options before entering and only participate once they understand the possible implications of the process and accept the risks involved.

If you have any questions about the topics raised in this article, please get in touch.