Reservation Agreements for House Buyers
Buying property through an Estate Agent may now include a ‘Reservation Agreement’ AKA ‘Reservation Contract’.
It is a ‘legal document’ that can cost you DEARLY.
The principle / idea was intended to sort out the ‘time wasters’ from ‘legitimate buyers’. Based on both the vendor and the buyer signing an agreement to buy with substantial penalties if either party doesn’t complete with the purchase.
The contract has ‘small print’ outlining the Terms and Conditions. By law there has to be a 14 day ‘cooling off period’ after signing the document.
Estate Agents use the relatively new ‘Reservation Agreement’ as ‘added revenue’. If they do not sell the property, they still receive their commission. The suppliers of the document also receive their payment.
What are the the actual details though?
Both parties to the possible sale sign to agree to pay a considerable sum of money if the sale doesn’t go though completely. If either party decides to ‘pull out’ from the sale a named ‘sum’ has to be paid.
Who receives the money which will be £1,000s or £10,000s of thousands of pounds?
The T&C include exceptions for completion. However, they have to be in written format and passed through to the ‘Contract provider’ for arbitration. An additional fee is required for the ‘service’.
A real life example: A lady, ‘Ms X’
A lady, Ms 'X' has just become divorced and had to find another place to live with her very young children. Plenty of stress there. She finds a property that is within her budget via an Estate Agent.
Ms X likes the property and puts in an 'offer' via the Estate Agent. The Estate Agent informs Ms X that she MUST sign a 'Reservation Agreement' if she wants the 'offer' to be entered.
The Estate Agent tells her that by signing the document it will stop anyone else buying the property or 'guzumping'. The vendor can ONLY sell it to her. (There is a time frame written in the contract). Ms X signs the contract and is given a copy to take away with her. She has 14 days cooling off period if she wants to change her mind.
The property was built in 1907. A Victorian / Edwardian semi-detached house. Her cousin recommended that she should have a Full Building Survey carried out on it.
The survey identified:
- New roof covering was urgently needed - The original Welsh slates were about 120years old and nearing the end of their useful life span.
The property had been previously bought by a 'builder' and 'modernised'. The current vendor had been living there about 10 years and now wanted to move out of the area.
The survey report included photos showing:
- 'Illegal' drainage work, a new bathroom had been installed without the required Building Regulation Permission - (the work wouldn't have complied anyway).
The surface water drain was blocked. The rainwater pipe had been modified so the water ran directly out of the property and over the Public Footpath.
A guide figure to carry out 'essential' building work would be at least £35k. The property was on a narrow plot and had about 1.50m front garden. The roof work would require the minimum of a full scaffold. Permission to erect on the neighbour's property and from the Council would be required. The road was 'Parking Permit' only and skips would require special licences.
There were several other significant issues which included no original damp proof course (not unususal for 'Villas' built at that time). There was evidence that 2 separate attempts at 'injected DPCs' had failed.
Meter readings indicated that the moisture levels at just above the skirting boards were in excess of 30%mc - some were 46%mc.
Ms X, after reading the survey report and inspecting the digital photos decided not to proceed with buying the property. After phoning the Estate Agent and confirming her decision in writing Ms X received a demand for £2,500. It was her share of the £5,000 fee for not proceeding with the purchase. The vendor also received a demand for £2,500 for the aborted sale.
The T&C of the Contract included exceptions for failing to complete. Another 'fee' had to be paid for 'arbitration'. A copy of the Full Building Survey including digital photographs showing the specific issues, plus a covering document by a fully experienced and qualified Building Surveyor was submitted.
You've guessed it. The outcome from the 'adjudicator' stated that the £5,000 cancellation fee had to be paid.
A letter received by Ms X stated that she must pay the cancellation fee immediately or it would be passed to a 'debt collecting firm'.
Legal help and advice please!
A solicitor was contacted to enquire whether it was 'legal contract'. Unfortunately it complied with English Law. Two identified parties had signed to say they accepted the T&C of the contract.
Asking whether in the circumstances that Ms X was forced to sign the contract if she wanted to put the 'offer' in?
The legal advice: 'To go to Court would probably cost more than the £2,500 Ms X had to pay and there was no guarantee of winning'.
Looking at the practicalities of the 'Agreement'
In a similar way to a road sign indicating a maximum speed limit of 30mph doesn't stop vehicles speeding. The Estate Agent basically was using very bad advice in an endeavor to make more profit - sharp practice.
In English Law (it is different in Scotland), a property is not sold until the 'Exchange of Contracts' has taken place. Up until then either party can pull out of the 'Contract'. The aggrieved party has no redress and could lose legal fees and or survey fees without compensation.
The 'idea' behind the 'Reservation Agreement' is promoted as 'stopping' that happening as the party withdrawing from the 'intention to buy' would have to pay a 'penalty fee'. There is a stated 'fee' when taking out the 'Reservation Agreement'.
[Like a speeding vehicle is not going to be stopped by a road sign (unless it crashes into it), the 'Reservation Agreement' doesn't stop the vendor from accepting a higher price. For example: another buyer wants to buy the property. He agrees to pay £10k more than the asking price. Paying the 'fine' of £2,500 would be worth it].
Tradition
The traditional method for buying property was for the buyer to put in an offer with a 'deposit' via the Estate Agent. It showed that the buyer was interested in buying the property. It was normally 'refundable’ if the buyer changed their mind. If the sale went through the deposit was deducted from the 'sale price' - effectively being used as part of the payment.
In contrast: the 'Reservation Agreement Fee' is 'NOT refundable'. In many 'Reservation Agreements' the Fee is not deducted from the purchase price. It is therefore a substantial ON COST.
There are various claims made by firms that provide the documentation. Such as being recommended by the Government. Completely UNTRUE.
The Government Website mentions the 'Reservation Agreements', but does not recommend them. It explains what a 'Reservation Agreement' can be used for. It cites other Countries that use the scheme.
However, it is NOT obligatory to use a 'Reservation Agreement'
Estate Agents that insist you sign or you cannot put in an offer or proceed with the purchase are doing it for their financial gain. It is not in the interests of the vendor or the potential buyer.
Discuss with the vendor using another Estate Agent. Like many 'schemes' promoted by organisations such as 'PPI' and other 'money making promotions', they are later found to be 'legally immoral' and 'compensation' for the 'bad practice'.
I hope you have found this blog helpful and practical. There are lots more useful and helpful information in the 'House Buyer's Handbook'.
You can buy your copy direct from the Publishers for £18.99 which includes Free Postage.
