What are Reservation Agreements?
A reservation agreement is used when a buyer wants to prevent a seller from negotiating the sale of a property with another party for a fixed period of time.
The objective is to offer the buyer time to proceed with the transaction without running the risk of losing the property to a rival buyer (aka gazumping).
It does not guarantee that the sale contract will be entered into after the relevant period. At the end of the exclusivity period, a seller will be free to sell the property to another party, although, initial deposits may be lost subject to the terms agreed.
Where are they commonly used?
Reservation agreements are common within new building conveyancing. Residential developers use them to give buyers a fixed exclusive period in which to exchange contracts. In return, the buyer pays a non-refundable deposit that can be forfeited if the deadline is not met.
In commercial transactions, buyers may ask for a reservation agreement when there is a lot of interest in a property or they need time to obtain planning or to arrange finance.
Why are the government trialing their use?
The government are considering whether the use of reservation agreements may reduce the risk of fall throughs across England and Wales. According to property portal, Rightmove, about a third of all property transactions fail between acceptance of offer and exchange of contracts. The government have already completed a 10-month research period and a trial into reservation agreements. A second stage trial was due to take place this year but has been postponed.
The Ministry for Housing Communities and Local government (MHCLG) is currently working with the Conveyancing Association in order to develop a standard form of reservation agreement. This is likely to mean that the agreement will be conditional upon the provision of upfront information at the point of acceptance of offer. This is likely to be in the form of an upfront online information questionnaire for sellers.
Both parties will be required to pay a commitment deposit (likely to be £1,000 each) which they may lose if they breach the terms of the agreement. The deposit monies will be protected by an arbitration process.
Government research shows that half of all buyers and 70% of sellers were willing to enter into such an agreement. The main reason being was that 46% of sellers and 33% of buyers were concerned that the other party will change their mind at some stage in the conveyancing process. Some 70% of buyers and 66% of sellers believed there would be a problem during the conveyancing process which would cause their transaction to fail.
Research by home moving platform, reallymoving.com revealed that 67% of buyers and sellers supported the idea of reservation agreements being introduced. However, the research highlighted that the main reason why sales fell through before an exchange of contracts were varied and included: 29% people changing their mind, 17% survey defects, 15% mortgage difficulties and 11% issues with the chain of transactions.
Overall, the research reveals that the government are keen to add greater certainty to residential transactions. It is a concern that so many buyers and sellers have high expectations that their transaction may fail. The government realise that they must introduce measures to increase confidence in all parties that transactions once accepted will proceed to completion. However, much of the private research suggest that reservation agreements will not fix the problem of abortive transactions or gazumping as this is not the main reason why sales fall through. The main reasons are varied and often unique to individual circumstances.
Clearly the benefit of such agreements will depend upon the final form of agreement, the level of deposit, whether they are likely to be mandatory or voluntary, the terms applicable to deposits, enforcement and dispute resolution provisions.
Also, the trials, once completed, will need to be analysed carefully as to whether they were successful, the comparison between urban and rural areas, impact on the chain of transactions and whether, ultimately, losing a deposit may be worth it to a seller in order to accept a substantially higher offer.
Will Reservation Agreements be Successful?
The property industry appears to be split on whether reservation agreements will be successful.
They have long been established in the new build industry and the commercial world.
The provision of upfront legal information can only be a good thing by adding further certainty to an often fraught process.
However, aside from whether they will be mandatory or voluntary, the primary question is whether they are really necessary? The main cause of people not proceeding with residential transactions is due to circumstances often outside of their own control. Will consumers wish to be penalised for a change of circumstances?
Accordingly, subject to the final form of reservation agreement and process being agreed, it appears that reservation agreements will have their place in a significant number of conveyancing transactions. Greater upfront information and enhanced certainty will clearly assist all willing parties. However, it is unlikely that they will be suitable in every transaction especially where there are complex circumstances or where individuals steadfastly wish to retain their freedom to contract to the point of exchange.
Should you require any further information regarding reservation agreements or residential property, please do not hesitate to contact Mr Bill Dhariwal, Managing Director and Solicitor, Lawcomm Solicitors, DDI: 01489 864 117, E: bill.dhariwal@lawcomm.co.uk.
Please note: The contents of this article are for information only and do not constitute legal advice.
