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TODAY'S OTHER NEWS

Reservation Agreements: two key problems that must be overcome

A law firm has spoken out about two possible problems in the government’s much-publicised idea of considering Reservation Agreements as a weak of reducing fall-throughs in the house buying process.

Trials are set to start in the first quarter of 2020 in two areas using different versions of reservation agreements - one option is for the buyer and seller both to put down a non-returnable deposit of £1,000 which is forfeited without reasonable cause. 

However, Sharron Tennant - a partner at Spire Solicitors In East Anglia - says that while most legal experts agree that in principle, the idea of a reservation agreement is good and will give purchasers some protection, there are still difficulties.

“What does concern some industry watchers is how ‘reasonable cause’ is to be defined” says Tennant, referring to how one party may seek to pull out of such a deal. 

“Obviously, if it’s for something as trivial as the colour of the bathroom suite then most buyers and sellers would agree that a penalty fee is fair. However, if a buyer pulls out because of the discovery of subsidence that wasn’t previously known about, for example, then should they still be made to pay an exit fee from the agreement?” She asks in a blog on the company website.

“Furthermore, what is reasonable to one buyer may well be very different from what another deems to be reasonable; with any new system, it’s going to take some time to iron out all the bugs, and there will need to be very clear guidelines on the definition of reasonable cause” she adds.

Tennant warns that another problematic area Involves defining precisely when a sale has been agreed - and therefore the point at which the reservation agreement takes effect. 

“Is it when a seller has accepted a buyer’s offer, or only at the point just before contracts are exchanged? This single issue could have a big bearing on how effective reservation fees are” explains Tennant.

“Buying and selling a house is the single largest financial transaction most of us will ever make. It is already tangled up with yards of red tape, and those who oppose the plan say that this adds yet another layer to an already-overcomplicated process” she adds.

The Theresa May-led government moved relatively quickly to consider ways of speeding up and making more transparent the house buying process, and was particularly critical of a system that allowed - according to figures from the Ministry of Housing, Communities and Local Government - some 20 per cent of all transactions to collapse at some point.

The MHCLG has also recently been made aware that research by the London-focussed online agency Nested claims a part of central London - in the SWV1 postcode, which encompasses Victoria, Westminster and Chelsea - saw 48 per cent of sales fall through over the 12 month period up to August this year.

MHCLG Secretary of State Robert Jenrick and Housing Minister Esther McVey - confirmed in their roles in yesterday’s mini-reshuffle - are expected to be leading on the reservation agreement trial in the coming months.

Poll: Reservation Agreements: good or bad?

PLACE YOUR VOTE BELOW

  • Velgram Quaid

    I would suggest a non-refundable reservation of 0.5% of the property sale price.

  • Simon Bradbury

    I simply can't see how the issue of "reasonable cause." will be overcome.
    Unfortunately, I can't see this being effective at all. Surely no sensible buyer is going to make a legally binding offer ( with financial penalties ) until and if all the legal work, surveys and finance arrangements are fully in place.
    What would happen if, through no fault of a particular buyer, the chain below collapses? Is that "reasonable cause" to withdraw?
    I genuinely wish everyone luck in this project, but am sceptical as to the chances of success.

    Matthew Payne

    Completely agree Simon. There are way too many unknowns and too much to establish to commit any party to a financial penalty at the point of offer, and we have a system that doesnt promote disclosure by sellers. We also typically have old housing stock in this country that inevitably brings up potential issues for a buyer and their lender, not to mention the legals, chains etc. The only solution if we are to go down this road is full disclosure much earlier in the process, similar but more advanced to the idea on HIPs, building survey, complete legal pack incl searches etc so a buyer (and their lender) can then make an informed decision about whether to commit, at which point a NRD could be introduced. That is currently called exchange of contracts. The 19 weeks of work (if it needs to take that long) needs to start before someone puts their property on the market. You have to provide more information to buyers to sell a secondhand car, or a fridge on ebay, why does property seem to be the exception?

     
  • Simon Shinerock

    It would suit Solicitors to perpetuate our mad system, no one else. We have run our version of these agreements for investment purchases for years and they are pretty simple but they involve a commitment by the buyer. Our agreements set out the basis on which the buyer can withdraw, these are principally good title, valuation and mortgagability. There is a time scale the buyer and seller must work to with attendant penalties for non compliance. Of course we haven’t extended the approach to branch sales as yet and there is the complication of chains to consider, a solveable puzzle I feel

  • Bryan Mansell

    Having had some personal involvement with the discussions around how to make RAs work and having experience as an agent using them, there must be provision of more detailed information earlier for the buyer to view prior to making a decision to offer. Once that decision has been reached then the RA is essentially a turbo charged Memo of Sale that clearly sets out the terms agreed. This must be subject to mortgage, survey and good title. There also needs to be a clear arbitration route for both parties in a similar way that the TPO operates now. One final point, the RA should be optional, with mutual consent between both parties trumping all elements of an agreement.

  • Andrew Stanton CEO Proptech-PR    Proptech Real Estate Influencer

    It is not buyer's remorse that often ends a sale, which a deposit might fend off, what ends many sales is the gestation period.

    Hopefully, in the next 3-years the digital revolution will catch up with the land registry (yes I know they are on it) conveyancing (yes I know some are on it) and the antiquated and slow process that is sale by private treaty, a preferred system of doing a deal.

    RoPA and front loading transactions with advanced HIP like legal packs in a digital form, encrypted contracts, etc will be the future. The only variable is - what is the timescale for all this change and what vested interests will hold it back and what forces (millennial's and Gen-Z) will push it forward?

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