One of the worst fears of a buyer or seller in a property transaction is the other side getting cold feet and pulling out at the last moment. One way to mitigate this is for the parties to enter into a form of agreement commonly referred to as an ‘exclusivity agreement’ or ‘reservation agreement’.
What is a reservation agreement, or exclusivity agreement?
An ‘exclusivity agreement’ or ‘reservation agreement’ is where the seller is locked into selling only to the stated buyer for a defined period of time. In consideration of the seller tying his or her hands in that way, the buyer agrees to pay a non-refundable sum of money upon signing the agreement, which the seller is entitled to keep if the buyer fails to exchange contracts within the stated period.
Are reservation agreements common?
In over ten years of working in residential property, I have completed less than a handful of such agreements in a residential context, so they are rare. The primary reason for this is that a buyer will want certain caveats in the agreement preventing the reservation fee from being released to the seller if the buyer does not exchange for good reason, such as a title defect being uncovered once the property papers are reviewed. Even defining the term ‘title defect’ in a way that will satisfy both parties is difficult and so my view when speaking with clients is to try and have them focus efforts and resources on getting to exchange of the main contract itself; rather than wasting effort and expense arguing over a form of initial agreement.
Ambitiously, the Government is preparing a form of reservation agreement, which it hopes will catch on in the property industry, with Housing Minister, Heather Wheeler, saying “We want to increase people’s commitment by ensuring they get some skin in the game…there is no reason why this cannot become a standard practice. I believe the appetite is there. The government will ‘run a field trial later this year’.”
No-one can dispute the sentiment but finding a form of agreement that will satisfy both sellers and buyers and fit transactions of all values is a tough ask.
How will this be fair for both buyers and sellers?
Part of the process will be to commission ‘behavioural insight’ research to identify the parameters of the agreement so the agreement is fair to both sellers and buyers, and that buyers don’t get trapped 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 ‘get out of jail free’ by citing something trivial as a reason to pull out, then that option will be taken away, with the suggestion being that a buyer will have to ‘buy their way out’ if they pull out without reasonable cause. However, how much that will be and how one would in practice enforce the agreement, is still being ironed out.
What is ‘reasonable cause’?
Unless the reservation agreement includes clear definitions, it could be difficult to enforce the penalty fees within it. In particular, what will be reasonable in a particular set of circumstances? If it is something trivial such as the seller changing the colour of the bathroom since first viewing, a penalty fee would surely be fair. However, if a buyer pulls out because of the discovery of subsidence that wasn’t previously known about, should they still be made to pay an exit fee from the agreement? One would think not, but there will be grey areas in-between such as the discovery of inadequate rights of way and whether it would be reasonable for a buyer to accept indemnity insurance or not.
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 big 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 penalty fees incurred.
The plus side of such an additional 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.
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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. 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, contact us to talk to a property conveyancing expert for advice on the most recent developments in property legislation.