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Buying Reform: call for legally-binding Reservation Agreements

An influential consumer group has responded to the government’s commitment to reform the house buying process by advocating legally-binding reservation agreements to reduce the number of fall-throughs.

As part of its submission to the government's 'call for evidence' the HomeOwners’ Alliance says it wants to see a standardised and legally binding reservation agreement introduced at the point of agreeing the sale price, but before the buyer or the seller commits substantial expenditure.

If one side then pulls out, it pays the other side £1,000.

This is broadly similar to the reservation system used by some developers, where buyers post a £1,000 deposit when putting their name down for a property.

Under the HOA proposal, the reservation agreement would be exchanged between conveyancers, and would require buyers and sellers to be more ‘transaction ready’ before they enter the market than they are at the moment.

However, with the reservation agreement signed the two sides would then proceed to exchange of contracts and commit expenditure on searches and surveys, and then proceed to completion, as now.

The HOA says this proposal is need because, it estimates, some £500m a year is wasted by the public on failed attempts to buy and sell homes.

The association reaches the £500m total this way: it cites ONS figures showing 1.23m residential property transactions in 2016, with a fall-through rate of 28 per cent according to the Quick Move Now monitor, and with government data showing fall-through costs of £695 to £744 for buyers and £582 and £740 to sellers. 

The full details of the HOA proposal are:

- The reservation agreement needs to be short and standardised, so that its contents are not made more complex and subject to negotiation between solicitors.

- Both sides agree to pay the other side £1,000 if they pull out of the transaction for any reason. A variation could be that each side just compensates the other for direct costs actually incurred, but this is more bureaucratic and will require proof of expenditure and so on and will be less fair to those who have suffered stress and lost opportunity from a failed sale, but have not yet incurred any costs (for example, sellers at the end of a chain).

- Those caught in the middle of a chain that collapses will both pay and be paid £1,000, and so will not lose out – only those that cause the collapse of the chain will have to pay (and will pay £2,000 if they are both buying and selling and pull out of both transactions at the same time);

- This new system will make chains far more stable, as an increase in commitment in each link of a chain makes the probability of collapse much less. 

- There would need to be a backstop date for completion of the purchase, say three months after the reservation letter. If both sides want to continue with the transaction, they can agree to extend the deadline, but if one side has failed to meet their requirements (eg not arranged a mortgage), then they will be deemed to have pulled out, and have to pay the other side £1,000;

- Both sides pay their conveyancer/solicitor a repayable £1,000 bond to cover the payment if they do pull out. Interpretation should be covered by standard industry guidance, or failing agreement between the conveyancers, by the property ombudsman or then small claims court;

- If either side is worried about being able to afford the £1,000, they can take out homebuyers/sellers insurance;

- Before the reservation agreement, the homeowner will have to have proof of funds such as a mortgage in principle. This is good practice – and indeed estate agents are obliged to find out this information and pass it onto the seller as stated in their code of practice;

- Sellers will have to fill out property information document TA6 before the reservation agreement. Again, this is simply good practice, and there is no reason they cannot do this before putting their house on the market (and the estate agent can provide it to the buyer), and the estate agent can then provide those details to the seller before they make an offer;

- If any previously undeclared material issues emerge during the surveys and searches that potentially affect the value of the property by more than one per cent, then either side has the right to renegotiate the price to reflect the impact of the matter that has emerged. If they can’t agree a change of price, then the side that is detrimentally impacted by the new information (invariably the buyer) will have the right to pull out without losing their £1,000 bond. This will provide a powerful incentive for the seller to disclose all material issues during the sales negotiations;

- If either side pulls out over matters that are financially less than one per cent of the value of the property (for example, over whether a cooker is included) they will be liable to pay the other side £1,000;

- If either side breaches their commitment to being a ‘genuine’ seller or buyer – (eg by putting the property back on the market, accepting a higher offer from another buyer, or the buyer putting in a lower offer after the sale price has been agreed) – then they will be deemed to have pulled out of the transaction, and are liable to pay the other side the £1,000;

- Signing the reservation agreement should be minimal work for the conveyancer, and they should include the cost of it in their normal conveyancing fee paid at the end of the process;

- The fact that both sides will have to be ‘transaction ready’ before they agree a price - establishing proof of funds, arranging a mortgage in principle, appointing a conveyancer, completing a TA6, putting up £1,000 - then the transaction after the sale is agreed should be a lot quicker.

  • Simon shinerock

    We have used something like this in our Investments division for years, there is no need for a change in the law, just convention, unless the government choose to make these agreements compulsory. If this happens expect a 600 page agreement which costs thousands to prepare, cannot be enforced and takes six months to agree

  • icon

    This is already in place and accepted by solicitors. Generally called "lock/out agreements" or "collateral contracts" they are legally binding. To make these mandatory would be relatively simple and solve a lot of problems, but I would suggest a percentage of the agreed sale/purchase price rather than an exact figure because £1,000 might be a material figure at the bottom of the market but petty cash to someone buying or selling for £1 million plus.

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