Reservation Agreements – Is This The Answer?

Reservation Agreements – Is This The Answer?

The current conveyancing process may be described as being slow, uncertain, stressful and one of financial risk.

Various schemes have been piloted to address these issues with limited success – many Buyers and Sellers have found themselves with no legal or contractual right to bring a claim for financial losses resulting from a transaction that has failed through no fault of their own.

What are Reservation Agreements?

Buyers and Sellers are not legally bound to one another until contracts in the sale/purchase are formally exchanged and consideration, by way of a deposit (usually 10% of the agreed sale/purchase price) has been paid. So, a non-committed party can withdraw from the sale/purchase transaction at any time without recourse to the other party.

A Reservation Agreement requires a Buyer and Seller to lodge a sum of money into a bank account once negotiations are finalised and the conveyancing process commences. If the transaction goes abortive the defaulting party is required to pay the reasonable fees incurred by the non-defaulting party.

What is their purpose?

They seek to promote commitment by both parties – neither party will be able to withdraw from a transaction without incurring financial penalties.

Will they resolve the current issues?

They seem to provide a remedy for a non-defaulting party but what would happen if one party has a genuine reason for not being able to proceed – (for example bereavement or redundancy)?

Has the concept been used before?

In newbuild transactions a “reservation fee” is paid to a Developer and relinquished if a Buyer fails to achieve various deadlines or withdraws for a reason that is not the fault of the Developer.

What are the alternatives?

Sellers could be required to provide as much information as possible to a Buyer to enable a Buyer to make an offer on an informed basis.

Alternatively, a Buyer and Seller could each commit a sum of say £500 or £1000 before the sale is agreed. They then stipulate the basis on which a defaulting party is penalised for backing out of the sale/purchase.

However, both of the above give rise to further issues and add an extra layer to the conveyancing process with the possible increase in the Parties’ legal costs.

Issues for Solicitors

Solicitors are unable to back a process that could potentially amount to a breach of the rules that regulate them. Solicitors can only accept funds if they are directly related to the provision of legal services.

Improvements to the current process need to be made but whether Reservation Agreements is the answer remains to be seen. The current alternatives still require careful consideration before being integrated into the conveyancing process.

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