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Reservations over home buying reservation agreements

View profile for Michael Rabbett
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If there’s one sure to infuriate house sellers, it’s a buyer pulling out at the last moment without good reason. However, the government has announced that it will trial “reservation agreements” later this year. These agreements would introduce financial consequences for buyers who pull out of a transaction for a trivial reason, such as not liking the colour of the bathroom.

Addressing the Council for Licenced Conveyancers annual conference, Housing Minister Heather Wheeler said: “We want to increase people's commitment by ensuring they get some skin in the game... there is no reason why this cannot become standard practice. I believe the appetite is there.” The government will “…run a field trial later this year”.

Behavioural insight

‘Behavioural insight’ research will be commissioned to identify the parameters of such agreements so that they are fair to both sellers and buyers, and to ensure that buyers don’t get forced into buying a property they don’t want - if there are justifiable reasons to withdraw from a purchase. However, if a buyer does want to pull out for a trivial reason, then that option brings with it a financial penalty – effectively a withdrawal fee. How such a penalty will be calculated, and how practical it will be to enforce the agreement, is still to be worked out.

Reservation fees are controversial as they’re seen to be another financial roadblock on the way to purchasing a house. In 2016, the Consumer Code for Homebuilders tentatively looked at the question of reservation fees for people buying newbuild and off-plan properties, but it wasn’t rolled out into the property market in general. This new proposal aims to address the position that allows purchasers to dip out of a sale at the last minute, potentially leaving the seller out of pocket for lost marketing time and legal costs.

So rather than introducing a reservation fee on top of the usual deposit, the new proposal looks at introducing an ‘after the fact’ charge levied to the buyer if they don’t have a reasonable cause for pulling out.

What is ‘reasonable cause’?

Some industry watchers are concerned about how ‘reasonable cause’ is to be defined. For instance, if a buyer pulls out because subsidence is discovered that wasn’t previously known about, then should they still be made to pay an exit fee from the agreement?

As with any new system, it’s going to take some time to iron out all the wrinkles, and there will need to be very clear guidelines on the definition of reasonable cause. Property legal experts predict that, until the situation is clearer, it’s going to be difficult to enforce any penalty fees on the strength of a reservation agreement of this sort.

Another problematic area is defining exactly at what point a sale has been agreed. Is it when a seller has accepted a buyer’s offer, or at the point when contracts are exchanged? This single point could have a significant bearing on how effective reservation fees are. The closer to the final exchange of contracts that point is put, the more financial impact a sudden buyer withdrawal could have. This, in turn, could have a marked effect on the calculation of the penalty fees.

The plus side of such an agreement is that it would stop buyers who are not fully committed to a sale from pulling out without a very good reason, as the financial costs could be considerable.

Getting the legal experts on your side

Those who oppose the plan say that it will add another layer to an already over-complicated process. However, in principle, most legal experts agree that the idea of a reservation agreement is a good one and will give sellers a greater degree of protection.

If you’re planning to buy or sell a property and want to make sure you’re not going to end up paying more than you should, talk to a property conveyancing expert for advice on the most recent developments in property legislation.