Reservations over home buying reservation agreements

Sharron Tennant - Partner / Solicitor at Spire Solicitors LLP

Sharron Tennant

If there’s one thing that infuriates house sellers (other than being gazumped) it’s a buyer pulling out at the last moment without a good reason. However, the government have stepped in and announced that 2019 will see a trial for reservation agreements – which basically tells conveyancers that buyers who pull out of a transaction because they ‘didn’t like the colour of the bathroom’ will face consequences. And those consequences could be costly.

Housing Minister Heather Wheeler informed the Council for Licenced Conveyancers annual conference that reservation agreements could be developed that would actively reduce the number of property deals that fall through for trifling reasons. She stated: “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

Part of the process will be to commission ‘behavioural insight’ research to identify the parameters of the agreement so that they are 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, as the suggestion is they’ll have to ‘buy their way out’. But how much that will be, and how practical it will be to enforce the agreement, is still being ironed out.

Reservation fees are controversial as they’re seen to be yet another financial roadblock on the way to purchasing a house. In 2016 the Consumer Code for Homebuilders tentatively looked at the whole question of reservation fees for clients buying newbuild and off-plan properties, but it wasn’t something that was rolled out into the property market in general. Now, the new legislation aims to close a loophole that allows purchasers to dip out of a sale at the last minute, potentially leaving the seller out of pocket for conveyancing fees and legal costs.

So rather than introducing a reservation fee on top of the usual deposit, the new legislation 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’?

What does concern some industry watchers, though, is how that ‘reasonable cause’ is to be defined. 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?

As 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. 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 buying reservation agreement that hasn’t been properly defined.

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.

Getting the legal experts on your side

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. However, most legal experts agree that in principle, the idea of a reservation clause 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.