Have you ever put an offer in on a property, your offer been accepted only to have the seller pull out because they have received a better deal? Or have you accepted an offer on your property and then, just before exchange, had the buyer pull out for no good reason costing you a fortune in solicitor’s fees?
A new type of buyer/seller agreement that aims to put an end to the misery of gazumping and house sale deals falling through is set to be trialled by the government early next year. ‘Reservation agreements’ that require a home buyer or seller who pulls out of a transaction without good reason, to pay compensation to the other party is set to be trialled next year a Ministry of Housing, Communities and Local Government (MHCLG) representative has confirmed.
Government research has shown that somewhere between a quarter and a third of all property transactions fail, costing consumers around £270 million per year, furthermore, research from the Department for Business found that 70 per cent of buyers and 66 per cent of sellers thought their sale wouldn’t go through to completion – even after the offer was accepted.
“Too many people are walking on a tightrope from the moment they put in that offer,” Housing and Homelessness Minister Heather Wheeler MP’s said in a speech at the Council for Licensed Conveyancers (CLC) annual conference in January.
To end these unnecessary costs and the climate of uncertainty, Matt Prior, lead official at the MHCLG, told delegates at the recent Bold Legal LIVE! conference in London that the government plans to run trials of property transactions utilising Reservation Agreements in two regions of the country early next year.
How Reservation Agreements Might Work
It is likely that many different variations of the reservation agreement will be trialled, but in essence the agreement will likely comprise buyers and sellers being asked to put a sum of money (either a flat fee ranging from £500-£5000 or a percentage of the purchase price) into escrow to enter into the reservation agreement once a formal offer has been accepted. If the purchase were to fall through for pre-defined, unacceptable reasons, such as accepting someone else’s higher offer, the person who reneged on the deal would lose their deposit while the person defaulted against would receive compensation for their losses.
Acceptable reasons to break the agreement may include incidences such as a family bereavement, a change in work circumstances, the inability to obtain a mortgage or if the survey revealed serious structural problems.
Although not mainstream, this sort of agreement is already used by some UK estate agents and is common with developers selling new-builds who ask buyers for a reservation fee to hold the property for a set amount of time. The fee is generally refunded upon completion.
Phil Spencer, founder of property advice website MoveiQ and co-presenter of popular property show Location, Location, Location, has partnered with Gazeal, a company that uses reservation agreements to firm up and speed up property transactions. He said at Gazeal’s launch: “Whatever the market conditions, the real culprit is the legal blind spot in the way homes are bought and sold in England and Wales. A legal system that allows buyers or sellers to abandon a sale a day before the exchange has always been a point of contention.”
These new reservation agreements are expected to be welcomed by genuine buyers and sellers, this sentiment is evidenced by Government research that found that 50 per cent of buyers and 70 per cent of sellers would have been prepared to enter into a legal agreement if they had known it existed.
Although the trial locations, agents and conveyancers have yet to be selected, the new pilot scheme could certainly help put an end to the heartache and expense caused by house transactions falling through.
Have you had a property deal fall through? Do you think reservation agreements will improve the homebuying process?