What is a reservation agreement? Reservation agreements are designed to reduce the number of residential property transactions that fall through. They might fall through due to gazundering, gazumping or one party dropping out.
This type of contract is designed to show commitment to a transaction by making it more difficult for buyers and sellers to pull out of a property purchase or sale in between the offer being accepted and contracts being exchanged.
Government figures show that about one in three sales falls through, often causing property chains to collapse.
A house reservation agreement can be used when an offer is accepted on a property.
At the point of agreeing the price, the homebuyer and seller commit to proceeding with the transaction. If either side pull out, they will have to pay the other side a sum of money.
Do I need to sign a reservation agreement?
Reservation agreements aren’t commonly used in second-hand property transactions in England and Wales.
A government trial of reservation agreements was due to take place in 2020 but it was postponed due to Covid.
The only time you’re currently obliged to sign a reservation agreement in England and Wales is if you buy a new build home. You’ll pay a fee, and the builder or developer then commits to not selling the property to another party during the reservation period.
Reservation agreements are also commonly used in commercial property transactions and for residential sales in countries such as Scotland and the Netherlands.
Are reservation agreements legally binding?
Yes. On signing a reservation agreement, either for a new build or when buying a house via an estate agent, you are signing a legal agreement that is legally binding.
Some parties may insist on a reservation agreement to reduce the chances of a sale falling through.
But, as things currently stand, there’s no legal requirement to sign a reservation agreement.
What does a reservation agreement typically include?
Currently, because reservation agreements aren’t mandatory in England and Wales, there isn’t a default or standardised agreement. But reservation agreements typically include:
- The fee amounts.
- The details of the property being offered.
- The agreed purchase price of the property
- How long the agreed purchase price is valid for
- The length of the reservation period after which the agreement will expire
- The estimated deductible expenses if contracts are not exchanged.
You can ask your solicitor to draft an agreement or buy one from a third party.
There are some reservation agreements available via estate agents. These offer a legally binding agreement that commits both the buyer and seller to the sale unless certain conditions are met (a survey reveals structural faults, for example).
Usually, both the buyer and seller pay a deposit of a few hundred pounds and if either party pulls out of the transaction without a justified reason, they are then obliged to pay the other side of circa £2,000.
Another variation under consideration is that each side would compensate the other for direct costs actually incurred.
Can a reservation agreement stop sales from falling through?
The idea is that it would stop people pulling out of a transaction because they have changed their mind, found another property to buy, or accepted a higher offer from another buyer (gazumping).
It would also reduce instances of gazundering. This is where a price is agreed for a property, but the buyer tries to renegotiate the price immediately before exchange of contracts.
How long is the reservation period?
The reservation period typically lasts for a period of 28 days. If, after this time, both sides want to continue with the transaction, they can agree to extend the deadline. But if one side has failed to meet their obligations (such as arranging a mortgage) then they will be deemed to have pulled out, and have to pay the other side.
Always seek legal advice. If you need a good solicitor, we can help with that.
Last Updated: August 15th, 2022