The proposed implementation of reservation agreements has been high on the Government’s agenda in an effort to reduce the risk of sales falling through across England and Wales. A reservation agreement would financially bind the buyer and seller at the point of a sale price being agreed. A similar system is used by some property developers, requiring buyers to pay a deposit when putting their name down to purchase a new home. The idea of reservation agreements has been supported by various consumer groups in recent years, with a payment of around £1,000 per party considered to be a fair commitment. If either party pulls out of the transaction for non-genuine reasons, such as the seller putting the property back on the market or the buyer withdrawing over something insignificant not being included in their purchase, they would lose their agreement payment to the other party.
According to Rightmove data, one in three property deals in the UK falls through between offer and exchange. Research published by Reallymoving.com, reveals 67% of buyers and sellers support reservation agreements being introduced. The research also highlighted the main reasons why sales fall through prior to exchange, these include people changing their minds (29%), survey problems (17%), difficulties getting a mortgage (15%) and issues up or down the chain (11%). Rob Houghton, CEO of Reallymoving.com said, “The system for buying and selling property in England and Wales is fundamentally unfair, requiring both buyers and sellers to commit considerable sums of money to a process in which they are entirely unprotected. People are also forced to make life-changing decisions about moving to a new area, perhaps changing jobs, children’s schools and so on, while at any moment the other side can pull out of the deal without consequence. To save the millions of pounds wasted through collapsed deals every year and to foster renewed trust between buyers and sellers, change is urgently required. Reservation Agreements, which would require both sides to part with a lump sum of cash at the point an offer is agreed, would undoubtedly prompt people to think hard about their commitment to the process, which can only be a good thing. The devil will be in the detail however and there will need to be clear guidelines outlining what exactly constitutes a genuine reason for withdrawing from a sale.”
The government has announced that it will trial reservation agreements this year, telling conveyancers that buyers should not be allowed to pull out of transactions without consequences ‘just because they decided they do not like the avocado bathroom suite’. Housing minister Heather Wheeler told the Council for Licensed Conveyancers at last years’ annual conference that standard reservation agreements are being developed. Heather Wheeler said ‘’Government research has shown that somewhere between a quarter and a third of all transactions fail. This costs consumers around £270 million a year. That’s hard-working families shelling out for surveys and searches on properties they won’t even get to buy. A survey carried out by the Royal Institution of Chartered Surveyors in October last year, showed it usually takes around 19 weeks from when you put your house on the market to when you actually complete on your new home. Technology also offers us a chance to think anew about the services on offer. I know that there are lots of ‘proptech’ companies who are developing innovative ways to shake up the home buying process and speed up conveyancing. And we want to help them, which is why we have been looking at whether we can streamline ID verification and make more use of electronic signatures in the homebuying process.’’
The Home Buying and Selling Group, has been tasked with creating standard wording for a reservation agreement. It recommended the agreement be dependent on the information available during the acceptance of an offer as well as the buyer and seller’s circumstances. Both parties will be expected to pay a commitment deposit which they may lose if they breach the agreement and the deposit will be protected by an arbitration process. The HSBG acknowledged there were still questions to be cleared, such as whether reservation agreements should be voluntary or made compulsory. And while consumers and the industry appear “split” on the potential success of reservation agreements, the HBSG siad that those already using them believe they improve the process and save consumers time and money. Joe Arnold, a member of the group, said: “Work is continuing to ensure the right approach is eventually implemented. One thing for sure is that, if Reservation Agreements are successful and aborted property sales are reduced and transactions times sped up, this would substantially improve the home buying and selling process for everyone involved.”
Speaking at The Council for Licensed Conveyancers’ (CLC) annual conference in January 2020 , Matt Prior from the Ministry of Housing, Communities and Local Government (MHCLG) said reservation agreements were “still a live idea” and ‘the department was waiting for consumer research to be produced by Qantar, which would then be taken to government’. He said: “I will go to ministers and say, ‘do you think it’s worth a trial?’ and if they agree, we’ll launch a trial sometime in the next few months.”
The idea of reservation agreements is not new and is already successfully in use for many new build properties and will hopefully put off buyers who are not fully committed. However, there are still problems to be addressed such as what constitutes reasonable cause for withdrawal and the issue that a reservation agreement is another step to add to an already complicated process. Redbrick Solutions Case Management can save time by automating much of the conveyancing process, from producing quotes, to completing ID checks, Land Registry submissions and ordering searches to producing completion statements. The online portal allows the law firm to upload documents for the client to complete and sign electronically, providing a better service for the client and a more efficient transaction for all concerned.