Government’s Reservation Agreement’ Proposal Is "Incapable Of Working In Practice"

Reservation agreements have been proposed by the Government as a way of preventing fall-throughs. However, despite now being in draft form – it has been sharply criticised by a conveyancing firm that has seen it.

The firm has stated the draft is “way short” of what is required and full of obvious and fundamental flaws. It has been compared with Home Information Packs as being well-intentioned, but incapable of actually delivering.

The ideology behind the agreement is that both seller and purchaser would hand over money which, in the event of one of them pulling out, would be given to the other side to offset their wasted costs; however, here are a few exceptions where sellers and buyers do not lose their money if they pull out.

In the draft document, sellers are apparently given only one exemption – if they cannot buy a replacement home.

But solicitor David Knappof Hart Brown, a Surrey-based legal firm, said that every seller would claim that.

“Much like Home Information Packs, the concept of a seller having to pay up-front sounds good but does not work in practice.”

Knapp also said that the proposals seem rushed and badly thought out.

Hart Brown is one of several organisations to have seen the draft, and to be invited for feedback.

Knapp detailed his own reservations about the reservation agreement:

• The paperwork states that the parties should take legal advice before signing it. As we know from exclusivity agreements, this holds up transactions while the terms are agreed.
• There would be many disputes particularly if the amount of the deposit is high but, if the deposit is too small, the agreements would not be of much effect apart perhaps from a psychological point of view.
• The proposals would complicate matters and result in considerable extra cost.
• Who is going to pay the additional legal costs of the advice before signing? These will add to the costs of the transaction for the parties.
• Are they voluntary or compulsory? If there is a chain how can some sign up to them but not all the parties? If they apply to all the chain – how will agreeing timescales and simultaneous dating of the documents be achieved? There would be a huge time and cost burden on agents and solicitors before the transaction has even got going.
• Are estate agents going to have regulated client accounts? What about indemnity insurance if they go bankrupt?
• Only one ground on which a buyer can pull out without penalty (above).
• There are a number of criteria on which a buyer can pull out without a penalty and again these can easily be manipulated to frustrate the contract. These include:-

1. “The buyer’s mortgage application is refused [for any reason] because the property has been valued for mortgage purposes at below the sale price”.
2. “Seller failing to progress the normal conveyancing process or the sale property being affected by an adverse matter that cannot reasonably be covered by insurance”. This would be very subjective for each conveyancer and will lead to much argument. Insurance can be obtained for many things but does not mean it is the correct way forward in all cases. For example, where there are no Building Regulations approvals, an indemnity policy is worthless compared to having the correct documentation, as no policy covers defective workmanship which is the main thrust of Building Regulations
3. The suggestion that a buyer can withdraw without penalty if their surveyor reveals defects amounting to over 1% of the value of the property is not workable. Does that mean that a buyer has to wear the costs of defects provided they are under 1% of the sale price? How can buyers budget for that? I do not think this works or is fair. A buyer may not want to buy a house that has some problems even if they can be rectified.
4. “There are planning restrictions, title covenants or adverse rights that would prevent any of the following at the sale property”– again very subjective as to the wording of covenants. You cannot get insurance for covenants for work not yet done either easily or cheaply. An arbitration clause is being suggested but there is no clue as to who would arbitrate or who would foot the bill. More costs will necessarily be incurred by both parties.

• How much will buyers and sellers pay for a reservation agreement? There is no guidance on the sum. A sum of say ￡1,000 will not prevent gazumping if the seller is offered more money than that.
• How are timescales to be decided? The timescale will put a lot of pressure on the parties at a time when it is already stressful.Are the terms mandatory? If not there could be various versions in the chain or there may be a need to renegotiate the agreements entered into by the earliest link/s in the chain if the terms of those negotiated at a later stage include other terms prejudicial to the earlier agreements.
• Presumably a chain will need to be complete before the agreements are entered into as there will need to be simultaneous exchanges of the agreements throughout the chain. This then begs the question as to what happens to the rest of the deposit and agreements in the chain.

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The view expressed herewith is exclusively my own. The contents of this article is not legal advice and should not be relied upon as such. Please note no attorney-client relationship shall be formed should any adverse consequence arise from reliance upon the information provided within this article.