The Government has drawn up a draft “Reservation Agreement” for use in conveyancing transactions which it hopes will prevent gazumping. Law firm Hart Brown has had the opportunity to analyse the draft and finds that it is far from a perfect solution and is likely to cause delays and additional expense.
David Knapp, Partner and Head of Residential Property at Hart Brown listed his concerns about the draft agreement:
- “The paperwork states that the parties should take legal advice before signing it. As we know from exclusivity agreements, this holds up transactions while the terms are agreed.
- There would be many disputes particularly if the amount of the deposit is high but, if the deposit is too small, the agreements would not be of much effect apart perhaps from a psychological point of view.
- The proposals would complicate matters and result in considerable extra cost.
- Who is going to pay the additional legal costs of the advice before signing? These will add to the costs of the transaction for the parties.
- Are they voluntary or compulsory? If there is a chain how can some sign up to them but not all the parties? If they apply to all the chain – how will agreeing timescales and simultaneous dating of the documents be achieved? There would be a huge time and cost burden on agents and solicitors before the transaction has even got going.
- Are estate agents going to have regulated client accounts? What about indemnity insurance if they go bankrupt?
- Only one ground on which a buyer can pull out without penalty (see above).
- There are a number of criteria on which a buyer can pull out without a penalty and again these can easily be manipulated to frustrate the contract.”
- How much will buyers and sellers pay for a reservation agreement? There is no guidance on the sum. A sum of say £1,000 will not prevent gazumping if the seller is offered more money than that.
He went on to list several examples of this, before continuing:
- How are timescales to be decided? The timescale will put a lot of pressure on the parties at a time when it is already stressful.
- Are the terms mandatory? If not there could be various versions in the chain or there may be a need to renegotiate the agreements entered into by the earliest link/s in the chain if the terms of those negotiated at a later stage include other terms prejudicial to the earlier agreements.
- Presumably, a chain will need to be complete before the agreements are entered into as there will need to be simultaneous exchanges of the agreements throughout the chain. This then begs the question as to what happens to the rest of the deposit and agreements in the chain.”
Summing up his concerns, Knapp said:
“Although the intention is well meaning as our residential conveyancing system is in great need of a real change, the first draft is sadly way short of what is required.”
As a conveyancer, what are your thoughts on the proposed agreement? Will it help, or simply slow transactions down and cause more expense?