A trial of reservation agreements is pending. Mark Sellers explores the reasons behind the initiative and asks whether they could be successful.
The government has been keen, since its consultation in mid-2017, to speed up residential conveyancing and reduce the wasted costs and disappointment that result from withdrawn offers, gazumping or gazundering. This article looks at the second of these laudable objectives. The government’s preferred solution (reservation agreements – see below) has taken a lot of flak but a three-month trial will soon start with selected estate agents in two (as yet unannounced) areas of the country.
Housing minister Heather Wheeler originally described reservation agreements as giving the parties “skin in the game”, encouraging their commitment to the deal. The agreement does not amount to exchange of contracts. Either party can still pull out, but if they do so without good reason, they lose their reservation deposit. The other party at least then has something to compensate them for their wasted costs (eg survey, search fees). MHCLG commissioned consumer research into the idea and has developed draft reservation agreements (not yet released) with help from the House Buying and Selling Group (HBSG), an industry-led group of relevant stakeholders, including solicitors, licensed conveyancers, and the RICS.
Reservation agreements are not new. New-build developers have long used them (often with bad press regarding non-refund of deposits) and some estate agents trumpet their regular use for securing successful high-value sales. Initial government research suggested that a significant majority were in favour of reservation agreements, despite the financial implications. However, customer focus groups and estate agents gave a more mixed response.
What is a reservation agreement?
A typical reservation agreement obliges, for a stated period:
- the seller to take the property off the market and not deal with other buyers;
- the buyer to stick to the offer price;
- both parties to progress the transaction in good faith;
- both to pay a deposit (suggestions are £500 to £1,000) up front (to be held by a neutral party – possibly a conveyancer, possibly a special scheme).
Are reservation agreements needed?
Wheeler cited government research which found that 25-33% of conveyancing transactions fail. This does not mean they did so for “bad” reasons, such as gazumping (where the seller accepts an alternative, higher, offer), gazundering (where the buyer reduces their offer price at the last moment, hoping the seller will agree rather than abort), or frivolous change of mind. There are many legitimate grounds to withdraw an offer:
- title defects;
- costly physical defects disclosed by survey;
- problems disclosed by searches (eg flood risk, planning breaches);
- unacceptable higher maintenance costs than revealed in the sales brochure;
- unacceptable lease terms;
- inability to get a mortgage;
- changes in family or job circumstances that mean a move is no longer possible; or
- failure of other deals in the chain on which the sale depends.
It will be crucial for the reservation agreement to define carefully the grounds that justify forfeiture of the reservation deposit or escape without penalty. Standard reservation agreements cannot cater for all situations, and bespoke drafting may add cost and time up front, contrary to the government objectives behind their use. If tailoring the reservation agreement is not possible, parties are potentially wasting their deposit.
Reservation agreements work best with full pre-offer disclosure
Sensibly advised parties will link their “get out” excuses to what they know about the property when they sign the reservation agreement. Sellers who are prepared to pay the cost of someone pulling together a comprehensive sales pack about the property (eg full title details, planning documents, copy lease, leasehold management and service charge information, replies to enquiries) without knowing there are potential buyers, can reduce the escape grounds.
HBSG is keen to promote voluntary adoption of a pre-pack of truthful information about a property, made available to agents, buyers, lenders and surveyors. Press comment in October calls this a BASPI (Buying and Selling Property Information). It is similar to the abandoned concept of a compulsory Home Information Pack.
True, this will reduce delays caused by a seller’s lawyers drip-feeding information post offer. Many solicitors already encourage clients to be “sales ready” but sadly:
- sellers are not always convinced it is worth paying the upfront cost when they have neither a buyer nor an alternative home in mind;
- some sellers like to play down aspects of their property in the hope that they will be overlooked;
- some buyers don’t believe a sales pack is unbiased so repeat it; and
- some lenders will only rely on the data sourced by their adviser.
Pre-information would be needed about the buyer too. Where a reservation agreement compels the seller to take the property off the market and negotiate only with this buyer for the stated period, the seller needs to know their finance is in place. Yet not all buyers get a “mortgage in principle” letter, nor do all agents rigorously check the financial status of a buyer or their dependent sale (at least not until they have made a successful offer).
Will reservation agreements be successful?
Legally, yes; they can be legally binding, clear enough for the parties to know their risk and provide some compensation for the disappointed party. The practical answer is less clear, particularly in a chain transaction where a deal that is “sales ready” and parties who have the funds may still have to withdraw due to default higher/lower up that chain. Experienced, better-funded buyers can find the upfront reservation fee and wear its loss more easily than first-time buyers, for whom every cost is a struggle. Without upfront information about the property, a buyer should insist on wide-ranging excuses for “free” escape, but then the seller is agreeing to take the property off the market with little confidence that the buyer really has skin in the game.
So the government trial of reservation agreements is imperative. If clients are not enthusiastic, whatever their reasons, then there are other potential ways, using technology, to speed up the transfer of conveyancing information between parties, lenders, valuers and agents.
Mark Sellers is a partner in the social housing team at Penningtons Manches Cooper
