Reservation agreements: an end to home buying and selling chaos
The home buying process is set to get quicker, cheaper and more certain as the government starts to reform the system and our proposal for reservation agreements gain ground. Here’s a look at the problem, the solution and latest on the changes ahead…
What’s the problem?
If there is one thing that everyone agrees on, it is that the home buying and selling process – at least in England and Wales – is not fit for purpose. We see gazundering, gazumping, collapsing chains, and one in three sales falling through.
The house buying and selling process takes too long, is too uncertain, and too often homebuyers can end up paying huge costs without having even bought somewhere to live.
We estimate that £400 million is wasted every year on house sales that don’t complete. Even when the purchase does go through, it is unnecessarily nerve wracking.
And every failed house sale costs…
Our research, polled by YouGov in 2018, found that 51% of sellers lose an average £2,700 when a sale falls through with a further 12% reporting that they were out of pocket by more than £5,000.
The costs can include conveyancing bills, survey fees on an onward purchase and search costs.
More than two thirds of home sales fell through because of buyer related reasons, including the buyer changing his mind/finding another property and the buyers finances not being in order.
Why do house sales fall through?
The primary reason is that homebuyers and sellers enter into a non-binding agreement, and start spending thousands of pounds, with absolutely no legal obligation of any sort on either side.
Homebuyers and sellers can pull out of an agreement for bad reasons or no reasons, and too often do. This makes chains of home sales particularly precarious, because it only requires one transaction to fall through.
There is very little information until quite late in the process.
According to our 2018 HomeOwner Survey, more than 300,000 property transactions collapse every year due to broken chains and buyers simply changing their mind.
More certainty through reservation agreements
The HomeOwners Alliance has called for the government to bring more certainty into the process by introducing a standardised and legally binding “reservation agreement”. At the point of agreeing the price – but before either side spends any money – the home buyer and seller commit to being “genuine” to proceed with the transaction, and to pay the other side £1000 if they pull out, to pay towards their costs.
We are members of the industry-wide Home Buying and Selling Group that has been advising government on reforms to improve the process for buyers and sellers. The government has plans to trial ‘reservation agreements’ in the new year.
Reservation agreements aren’t new
The idea isn’t new. Our proposal takes the best of other systems, in particular Scotland and the Netherlands, to create a contract that protects buyers and sellers before they start spending money. We only have to look at the successful reservation system used by homebuilders, where buyers have to post a £1,000 deposit when putting their name down for a property to show they are genuine, to see that reservation agreements would succeed.
Reservation agreements would help to eliminate the problem of gazumping and gazundering from the buying and selling process.
We think they will make the home buying and selling process more certain and less expensive overall.
How reservation agreements could work
What we propose takes the best of other systems, in particular Scotland and the Netherlands. And this is similar to the successful reservation system used by homebuilders, where buyers have to post a £1000 deposit when putting their name down for a property to show they are genuine. The reservation agreement would be exchanged between conveyancers, and would require buyers and sellers to be more “transaction ready” before they enter the market than they are at the moment.
The process would involve…..
- At time of marketing, estate agents publish the full sale particulars of the property to comply with consumer laws and the Property Ombudsman’s Code of Practice. This information should be accurate and not misleading and include detailed information on leasehold properties. Sellers would be required to provide additional information such as disputes and complaints, changes to the property, fixtures and fittings, boundaries etc. Currently this information is only given to the buyer after an offer has been agreed. [4]
- Homebuyers put in offers to estate agents as now
- When a price is informally agreed in the negotiations conducted by the estate agent, the homebuyers and sellers formally agree the offer through a standardised “reservation agreement” between their solicitors, where they commit to being “genuine” sellers or buyers, and agree to pay the other side £1000 if they pull out. Each side must deposit £1000 as a bond with their conveyancer, which will be refunded (or go towards other costs) unless they pull out of the sale. Crucially this is done before either side starts spending any money, and can be done within hours of the price being agreed via the estate agent.
- With the reservation agreement signed, the two sides then proceed to exchange of contracts, and start spending money doing searches, surveys, mortgage arrangement fees etc. (as now), and then proceed to completion (as now).
The details of how the reservation agreement would work are as follows:
- The reservation agreement needs to be short and standardised, so that its contents are not made more complex and subject to negotiation between solicitors.
- Both sides agree to pay the other side £1000 if they pull out of the transaction for any reason. If you decide to pull out of a transaction (even if it is no fault of your own), it is fair enough that you know you will pay the costs associated with that. Another variation is that each side just compensates the other for direct costs actually incurred, but this is more bureaucratic and will require proof of expenditure etc, and will be less fair to those who have suffered stress and lost opportunity from a failed sale, but have not yet incurred any costs (eg sellers at the end of a chain).
- Those caught in the middle of a chain that collapses will both pay and be paid £1000, and so will not lose out – only those that cause the collapse of the chain will have to pay (and will pay £2000 if they are both buying and selling and pull out of both transactions at the same time). This new system will make chains far more stable, as an increase in commitment in each link of a chain makes the probability of collapse much less.
- There would need to be a backstop date for completion of the purchase, say three months after the reservation letter. If both sides want to continue with the transaction, they can agree to extend the deadline, but if one side has failed to meet their requirements (eg not arranged a mortgage), then they will be deemed to have pulled out, and have to pay the other side £1000.
- Both sides pay their conveyancer/solicitor a repayable £1000 bond to cover the payment if they do pull out. Interpretation should be covered by standard industry guidance, or failing agreement between the conveyancers, by the property ombudsman or then small claims court.
- If either side is worried about being able to afford the £1000, they can take out homebuyers/sellers insurance.
- Before the reservation agreement, the homeowner will have to have proof of funds such as a mortgage in principle. This is good practice – and indeed estate agents are obliged to find out this information and pass it onto the seller as stated in their code of practice[5]. It is irresponsible to agree to buy a house without the money in place to do it – and there is no reason they cannot do this before they make an offer to estate agent. In the reservation agreement, the buyer’s solicitor will confirm to the seller’s solicitor that the buyer has sufficient funds.
- Sellers will have to fill out TA6 (the standard property information form which includes all material information such as length of lease and ground rent, if leasehold) before the reservation agreement. Again, this is simply good practice, and there is no reason they cannot do this before putting their house on the market (and the estate agent can provide it to the buyer), and the estate agent can then provide those details to the seller before they make an offer.
- If any previously undeclared material issues emerge during the surveys and searches that potentially affect the value of the property by more than 1%, then either side has the right to renegotiate the price to reflect the impact of the matter that has emerged. If they can’t agree a change of price, then the side that is detrimentally impacted by the new information (invariably the buyer) will have the right to pull out without losing their £1000 bond. This will provide a powerful incentive for the seller to disclose all material issues during the sales negotiations. If either side pulls out over matters that are financially less than 1% of the value of the property (eg over whether a cooker is included) they will be liable to pay the other side £1000.
- If either side breaches their commitment to being a “genuine” seller or buyer – (eg by putting the property back on the market, accepting a higher offer from another buyer, or the buyer putting in a lower offer after the sale price has been agreed) – then they will be deemed to have pulled out of the transaction, and are liable to pay the other side the £1000.
- Signing the reservation agreement should be minimal work for the conveyancer, and they should include the cost of it in their normal conveyancing fee paid at the end of the process.
- The fact that both sides will have to be “transaction ready” before they agree a price – establishing proof of funds, arranging a mortgage in principle, appointing a conveyancer, completing a property information sheet TA6, putting up £1000 – then the transaction after the sale is agreed should be a lot quicker.
In the meantime
A routine part of our work is helping homeowners navigate through the system and helping when things go wrong. We have regularly highlighted the problems with the current regime in media, and promoted reforms to government officials and ministers.
For example, below is an audio clip from a July 2021 episode of BBC Radio 4’s You and Yours, in which Paula Higgins, our Chief Executive, talks about the problems of the current system.
Whilst changes are underway, we offer homebuyers protection insurance to protect home buyers from the associated costs if their house purchase falls through. Find out more with our guide to Homebuyers Protection Insurance: is it something I should consider?
********************************
[4] Consumer Protection from Unfair Trading Regulations 2008 require estate agents to disclose information about a property that is accurate and not misleading. As stated in the Property Ombudsman Code of Practice (7k), with leasehold properties this should include service charges, ground rent, length of years remaining on the lease and any known conditions.
[5] See section 10a of the Property Ombudsman Code of Practice for Residential Estate Agents.
