Are Reservation Agreements Needed To Reduce Fall-Throughs

Back in the summer, the Government confirmed they would be completing a thorough 10-month research and trial into reservation agreements to see whether it would secure the home buying and selling process.

Currently, an offer can be withdrawn until contracts are exchanged which puts a transaction at high risk of falling through. This issue is common and happens to a third of all sales in England and Wales every year.

Introducing a legally binding agreement after acceptance of an offer will end the risk of a transaction collapsing and put an end to gazumping and gazundering.

Gazumping is when a seller accepts a higher bid close to completion which cuts out the person(s) who made the first original offer. Whereas gazundering is when a buyer withdraws their original offer and proposes a lower figure to the seller. This usually happens close to completion that the seller feels pressurised to accept the lower offer.

The introduction of a reservation agreement would also bring England and Wales in line with Scotland where a verbal or written offer is binding on both sides once an offer has been accepted.

The Government’s research project follows behavioural insight findings on the home buying and selling process which indicated a deep mistrust between both sides of the home purchase and an overwhelming lack of confidence in the process of buying and selling a property.

Almost half of sellers (46%) and a third (33%) of buyers are concerned that the other party will change their minds at some point in the sales process. Therefore, it would seem that buyers and sellers would welcome a binding agreement as half of buyers and 70% of sellers would be willing to enter into a legal commitment, such as a reservation agreement, after the acceptance of an offer.

The research hopes to help to create a clear consumer sounding board by assessing whether a binding reservation agreement can help to reduce these fears and restore a more robust confidence in the home buying and selling process.

The Government is keen to introduce the system of having legal binding agreements to reduce the number of transactions collapsing every year.

Paula Higgins, Chief Executive of the HomeOwners Alliance said:

“Reservation agreements will bring more certainty into the process. “Buyers and sellers will have more skin in the game when an offer is accepted, and the reservation agreement should encourage them to appoint conveyancers earlier in the process.”

Meanwhile, according to Quick Move Now, fewer property sales are falling through before completion, despite uneasy market conditions. The home buying company’s data revealed 22.39% of its sales fell through during Q3 which is down from a fall-through rate of 25.49% in Q2. According to their statistics, the rate of fall throughs this summer was almost 6% lower than the rate of 28% recorded during the same period in 2018.

Quick Move Now states that the most common reason for fall-throughs is buyers changing their minds, other reasons which followed included buyers or sellers pulling out because the process was too slow, buyers struggling to get an approved mortgage and property chains collapsing.

Quick Move Now Managing Director, Danny Luke said:

“[The data] shows that those who are pressing ahead with a property sale or purchase in the current market are committed and serious about the transaction. “The market is generally slowed and running at a more cautious pace, but those sales that do progress are more likely to make it all the way through to completion.”

Quick Move Now findings obviously show a reduction in fall-throughs meaning the market is more dedicated to transactions but a significant rate is still collapsing. The Government are working on the introduction of reservations agreements in the hope it will curb the many sales that collapse each year.

John Jones, Head of Conveyancing at BBH Legal Services Limited comments on the use of reservation agreements. He said:

“Even if you agree with the principle of ‘lock-in agreements’ or ‘reservations agreements’, it is not clear how adding that further layer to a conveyancing transaction will assist with the Government’s stated ambition that the conveyancing process needs to be ‘cheaper, faster & less stressful’.

“Sellers and Buyers will need advice on the implications and risks of entering into such a ‘reservation agreement’. This will require conveyancers being involved in the process much sooner but is likely to add to the costs for clients. Plus, even if the reservation agreement is proscribed by Government there will continue to be occasions when Sellers and Buyers change their mind resulting, no doubt, in disputes around the agreement. Disputes arise now following formal exchange of contracts albeit in a small number of transactions. Also, what does the Government mean by a ‘binding reservation agreement’? How will it be enforced?  It will be interesting to see the final version of this agreement and the guidance (or perhaps legislation?) that sits with it.

“I agree that Sellers and Buyers need reassuring that once an offer is accepted that the transaction will proceed to completion. I’m not sure that a reservation agreement, by itself, will give that reassurance. Accepting that a third of sales ‘fall-through’ before exchange, it must be noted that not all of those failures will be the result of gazumping or gazundering but unless some form of imposition is placed on Sellers and Buyers to behave reasonably with each other, then such behaviour will remain a problem.”

Today's Conveyancer