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Could Reservation Agreements stop transactions from falling through?

  1. 01 February 2019
  2. By Andi Michael

Could bringing in a contract earlier in the housebuying process cut down on transactions falling through?

Buying or selling a home can sometimes be a tricky and elongated process. This could be down to being part of a complex chain, a change in circumstances or just good old-fashioned indecision.
After recognising that the current home moving process needs some improvement, the government pledged last year (and originally in the Conservative's 2017 election manifesto) to make buying or selling a home quicker, cheaper and less stressful for consumers.

The review - which kicked off with a Call for Evidence in 2017 - includes proposals for a number of measures to improve the current system, including introducing a mandatory qualification for estate agents, publishing 'How to Buy' and 'How to Sell' consumer guides and ensuring local authority searches are completed within a 10-day timeframe.

Another concept being considered is the introduction of standardised Reservation Agreements with the aim of reducing fall throughs and providing more certainty for buyers and sellers.

According to government figures, around 25-33% of all transactions fall through each year, costing consumers up to £270 million in lost fees annually.

With this in mind, it's time to take a closer look at how Reservation Agreements could work and whether they could contribute towards reducing fall through numbers and lowering costs for home movers.

What is a Reservation Agreement and how would it work?

A Reservation Agreement would financially bind the buyer and seller at the point of a sale price being agreed.
This means that property buyers and sellers would have confirmed their intentions with an upfront payment before pursuing further expenditure such as surveys and legal fees - money which could be wasted in the event of a fall through.

A similar system is used by some property developers, requiring buyers to pay a £1,000 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 financial payment of around £1,000 per party considered to be a fair and worthwhile 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 reneging over something insignificant not being included in their purchase, they would lose their agreement payment to the other party.

The potential pros and cons of Reservation Agreements

The principal advantages of Reservation Agreements are that they can provide movers with more confidence and certainty, helping to keep chains going and push transactions through.
There is also a hope that they will reduce the frequency of gazumping - the controversial practice of a seller accepting a higher offer from another buyer after initially agreeing on a sale price with the original bidder.

One downside is that a Reservation Agreement would represent another financial outlay for consumers at what is already a very expensive time. There are also concerns over what would constitute a legitimate withdrawal from a transaction on either side.

What are the latest developments and plans?

The government recently confirmed that some form of Reservation Agreement will be introduced in the near future.

Speaking at the annual Council for Licensed Conveyancers Conference in January, Minister for Housing and Homelessness Heather Wheeler said that a standardised Reservation Agreement between buyers and sellers would provide 'greater accountability'.

She quoted figures from the Department for Business, Energy and Industrial Strategy showing that 50% of buyers and 70% of sellers would be happy to enter into some form of Reservation Agreement.
At the same event, Matt Prior, the lead officer at the Ministry of Housing, Communities and Local Government, said that Philip Freedman QC, chairman of law firm Mishcon de Reya, has already drafted a two-page standardised Reservation Agreement.

He added that the government is currently doing market research to determine how much money should be put down, while looking at the circumstances which would allow a mover to get out of a Reservation Agreement.

Prior also said that he hoped Reservation Agreements would be a 'temporary measure' while the moving process currently 'takes so long'.

What happens next?

So far there is no date set for an introduction of formal Reservation Agreements, but many housing commentators expect an announcement to be made later this year as the government ramps up its plans to improve the buying and selling process. 

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