The Government’s proposed ‘reservation agreement’ is now in draft form – and has been sharply criticised by a conveyancing firm that has seen it.
It says that 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.
Reservation agreements have been proposed by the Government as a way of preventing fall-throughs.
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.
There 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 Knapp of Hart Brown, a Surrey-based legal firm, said that every seller would claim that.
He said: “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 (see 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:-
a)“The buyer’s mortgage application is refused [for any reason] because the property has been valued for mortgage purposes at below the sale price”.
b)“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
c) 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.
d )“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.
The current form of Reservation Agreement is still in a draft format and has been looked at recently by a number of experienced conveyancers. There has been a lot of positive and constructive feedback that is now being considered, including comments submitted by David Knapp.
Some of the more positive responses include:
“I have had a look through the Reservation Agreement documents and they look good to me.”
In principle I am in favour of Reservation Agreements.”
“The principle of both parties showing commitment to the transaction is positive.”
I think the time for commenting in detail on them should be later, after the ongoing thorough review process has come to an end.
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Is this like when a conveyancer says “We’ve had the local search in and it looks ok, but I haven’t gone through it properly yet”… I would say let’s get stuck in now, before it gets too much publicity and they ram it home like the tenant fee ban!
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Reservation agreements are not needed. What is need is good quality estate agents and trustworthy buyers and sellers. Good estate agents dont let sales fall through over minor issues and a well qualified buyer doesnt pull out willy nilly.
This is one big fat waste of time and money, will be another factor in restricting the supply of property coming to the market as vendors wont go up for sale until they have found somewhere they fancy buying.
Stop meddling with the blooming housing market and build more houses…that is where the real problem is.
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Four months into the sale (hold up with searches at the local council due to short staff)! the buyer on her fourth visit and a couple of days prior to exchange decided to pull out ‘due to a feeling’ If anyone could have predicted that I’ll buy them a pint!
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Another fiasco in Westminster. Is there anyone in control?
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Is the current system perfect? No
Could it be improved (even if it’s a small improvement)? Yes
Just a quick heads up on a plug as well, but we at Property Pledge have improved the process for many buyers and sellers since our launch. We don’t involve solicitors as they’re too busy sending shirty emails to each other, we offer the buyer and seller the choice of how much the reservation fee is and how long the exclusivity period is. It’s fair for both parties when it comes to surveys and failed searches etc.
There are ways to improve this outdated process, but a lot of it’s implementation will come down to estate agents and solicitors embracing and using something new.
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Solicitors emailing each other?? Where are you based? Down here solicitors still use the old fashioned dictation, typing letter, envelope letter, stamp letter, send office junior to post box with letter. A process that takes days!
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Times are moving on with more and more buyers and sellers entering into exclusivity agreements voluntarily and there are companies out there who will prepare exchange ready packs quickly at a very reasonable cost. It’s hardly rocket science because auctioneers have been doing this for years.
The problem comes in making this compulsory because it only works properly with committed sellers and buyers who are not in chains.
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And who are either cash ready and not bothered about survey defects?
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I agree with the article. I too was shocked by the quality of the draft – if I have seen the same one being discussed above.
What a complete distraction from just getting on with the conveyancing, rather than the Government perhaps legislating a legal requirement to have had a survey (or a statement that you are not having one) and a MIP, before you can make an offer
If there has to be a RA – and with a far less wordy Keys Facts statement to accompany it for the public – then I think we were all expecting to see something simple along the following lines: http://freepdfhosting.com/f024f5776d.pdf
(Any comment about auction packs is not appropriate, as has anyone ever seen a quality pack (personal searches, no anticipated answers to likely buyer enquiries, missing searches, missing deeds with no indemnity offered, the list goes on) and too often I feel, they smack of a quick commission grab. I’d always bid low at an auction, compared to a private sale.)
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