Home Buying Reservation Agreement: a better-functioning conveyancing market?

6 min read
The Government has announced that it will introduce a compulsory home buying reservation agreement 'later' in 2019 to increase the likelihood that more residential conveyancing processes will complete.

This article examines:


    What are the issues that introducing Home Buying Reservation Agreements are set to address?

According to various pieces of research:
  • between 25% to 33% or more conveyancing transactions break down;
  • perhaps 57% of homeowners have experienced being gazumped;
  • the cost per failed transaction is more than £1,000 on average; and
  • failed transactions result in £270m per annum in lost solicitors' fees and disbursements.
Additionally, according to a World Bank report, the UK ranks only 47th regarding how easy it is to purchasing and registering a property.

According to the Department of Business, Innovation and Skills, some 70% of house hunters want legal changes to combat gazumping and additionally a YouGov poll found 75% support for the introduction of a reservation agreement requiring both buyers and seller to put down a non-refundable deposit to commit both sides earlier in the conveyancing process.

The YouGov poll also found that 80% would like to see buyers show proof of funds before being able to put in an offer to a seller.

Many experts have criticised the comparative ease with which either buyer or seller can pull out of a transaction, before exchanging contracts and posited that it is this aspect of the conveyancing process in England which needs to be firmed up.

Heather Wheeler, the Government's Housing Minister at press time, in announcing the plans to have a field trial of the agreements in 2019, 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 a standard practice. I believe the appetite is there.".

She added that buyers should not be allowed to pull out of transactions without consequences "just because they do not like the avocado bathroom suite."

Philip Freedman QC (Hon), chair of London firm Mishcon de Reya and a member of the Law Society's land law and conveyancing committee, is reportedly helping to design the agreements.

A number of jurisdictions, for example the Netherlands and notably Scotland, already employ systems which, as the agreements are intended to do, tie in buyers and sellers much more firmly and earlier in the process and in doing so successfully address some of the issues mentioned.

    How are Home Buying Reservation Agreements set to work?

Reservation agreements are contracts between buyers and sellers, which both sides enter into when the seller accepts the offer from the buyer and commit both sides to the transaction.

This is done before either side spends any money and one large housing organisation has proposed that, when the Government rolls out the trial of this particular scheme, each side should deposit £1,000 with their conveyancing solicitor and if either side can't afford the sum, they can take out home buyers' or sellers' insurance.

Should the transaction complete as intended, the sums are refunded or put towards other costs however if one side pulls out, the sum is then paid to the other in compensation.

The Government has appointed Philip Freedman QC (Hon), chair of prominent London law firm Mishcon de Reya and a member of the Law Society's land law and conveyancing committee, to help design the agreements and it intends to develop a short standardised agreement suitable for all transactions, i.e. 'one size fits all'.

Additionally, it's expected that this standard agreement should not require substantive legal input. The overall intention is to speed up the conveyancing process and make both buyer and seller transaction ready: the threat of losing the deposit money is intended to concentrate the mind of the seller to collate the required information and the buyer to arrange appropriate financing before both sides are in agreement to buy/sell. It should therefore help conveyancing solicitors better manage their clients' expectations.

Existing home buying agreements and home buying reservation agreements

Home buying agreements and home buying reservation agreements are already in use; most notably in high end transactions but the buyer is always tied in in this way with New Build properties and this therefore includes all properties currently sold under the Help to Buy (Equity Loan) scheme.

In essence, such an agreement:
  • Involves a written statement of intent (subject to contract and whether or not a fee is paid) to buy or sell a property);
  • The seller/builder/developer agrees not to sell to anyone else during the reservation period;
  • If the buyer goes ahead, any fee is deducted from the deposit paid on exchange of contracts.
There can be variance in terms of the 'forfeit' element for buyers; sometimes a buyer can cancel during the reservation period and get their reservation fee reimbursed after deduction of expenses (usually legal and administrative expenses) whereas some stipulate that if contracts are not exchanged, the seller/builder/developer keeps the reservation fee and the agreement expires.

All agreements should state, as per the guidance original set down in the Consumer Code for Homebuilders 2010, the amount of the fee, what is being sold, the purchase price, how long the price remains valid, the deadline date (when the agreement ends if contracts are not exchanged) and the expense that will be deducted from the reservation fee if contracts are not exchanged, if applicable.

Note that reservation agreements are different from exclusivity agreements - also known as lock-in or even lock-out agreements - which are used to provide the buyer with some security from being outbid by establishing a period of time during which the seller agrees not to enter into negotiations with another party. Under a reservation agreement, the seller cannot enter into another such agreement with a different party but can enter into negotiations.

Traditionally, reservation fees can be significant (perhaps tens of £1,000s at the higher end of the market) so it's strongly advisable for a legal professional to look the agreements over for the buyer before the buyer signs, however often, buyers sign them before instructing a solicitor. 

Additionally, SAM Conveyancing has previously written about non-refundable deposits for property buyers; interested parties should click for more details.


    How has the legal profession reacted to the proposals?

The question of the rules concerning the holding of the proposed deposits involved has arisen, with some industry voices in media reports arguing that solicitor firms should not hold reservation deposits for sellers before a sale has been agreed because at that point they are not offering connected legal services to the seller.

Reservation agreements might also add yet another stage to an already complicated and lengthy process. Also, given the need to stimulate first time buyer purchases, asking members of this group to fork out yet another sum when they are already struggling to save sufficient deposit (not to mention paying for mortgage products, searches and surveys) might actually diminish their numbers as a result.

Even though first time buyers might be able to opt to get insurance as referred to above, this is still yet another cost they have to find. 

But at the same time, if buyers or sellers can 'plead poverty' and effectively buy cover for a £1,000 deposit for perhaps £100, it would seem to be a very ineffectual penalty if they then decided to pull out.

Housing Minister Sajid Javid has stated his preference for voluntary rather than compulsory agreements, however it's clear that if the measure was purely a voluntary one, it would have greatly less impact, for good or bad.

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Buyer and seller agreeing on a pre contract deposit to be paid. SAM Conveyancing's guide on non refundable deposits when buying a house

Non Refundable Deposit for Property Buyers


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