Reservation Agreements – The Conveyancer’s View
As a conveyancing solicitor with over 25 years’ experience, I think I can say with some confidence that conveyancers do not like reservation agreements. Despite this, the government has indicated that it will press ahead with a reservation agreement trial in Spring 2020. In its simplest form, a reservation agreement allows a buyer to reserve the right to buy a property for a specified period of time upon payment of a reservation deposit. The quid pro quo is that the seller agrees not to sell the property to someone else during the reservation period. But, as with most things, the devil is in the detail.
The underlying purpose of a reservation agreement is to try to minimise the risk of either party withdrawing from the transaction once a commitment has been made and money spent. The difficulty in achieving this aim is how to include a sufficiently clearly defined sanction to be imposed on either party in the event of default during the reservation period.
So, what is it that conveyancers do not like about reservation agreements? This is the challenge which must be met if reservation agreements are to become a daily part of conveyancer’s lives.
One concern is complexity and agreeing the terms upon which either party might be able to withdraw from the reservation agreement during the reservation period. Such agreements are produced at the outset of the transaction and as such conveyancers can spend time at the beginning of the matter arguing with the other side before the conveyancing work has even started. This is often for little or no additional legal fees and, of course, could cause friction between the seller and buyer before they are past first base.
A major issue is identifying the circumstances which give the buyer right to withdraw from the agreement without losing their reservation deposit. The key to this is for the reservation agreement to be tightly drafted to ensure that only circumstances which can be proved with some certainty give the buyer the right to withdraw. It might sound harsh, but personal circumstances such as a job loss should not be an issue which allows the buyer to withdraw without penalty.
A further challenge with reservation agreements is the payment of the reservation deposit. If this is a sum of money paid by the buyer, the first problem is who would hold the money? The SRA and CLC have taken different views on this issue; the SRA suggesting that solicitors should not hold the reservation deposit and CLC taking the opposite view for licensed conveyancers. It is often difficult for buyers to find a cash sum at the outset of a transaction. This also presents their conveyancer with difficulties in relation to money laundering due diligence. There is an element of ‘closing the door after the horse has bolted’ if the conveyancer carries out source of funds and wealth checks on money that has already been handed over to someone else.
If a buyer is to make a payment upfront, this then raises the question of what should the seller be expected to pay to demonstrate their commitment? It is widely accepted that sellers will not be able or willing in most cases to pay a sum of money upon signing a reservation agreement. So, they could withdraw. The agreement might give the buyer to sue the defaulting seller – but this is an avenue that few disgruntled buyers are going to take. So, how does the seller get some ‘skin in the game’?
The government will have to address all of the above concerns if it is going to produce a reservation agreement which has the confidence of the members of the public using it and the conveyancers advising them.
This is the first of two articles in which Lorraine Richardson discusses the problems with reservation agreements and the solutions that Gazeal Limited have found to these issues.
By Lorraine Richardson (M.A.) Cantab