Are ‘reservation agreements’ folly or farsighted?

Leading agent Trevor Abrahmsohn picks apart Heather Wheeler's new idea.

The Government has announced that it will trial ‘reservation agreements’ this year. Although this is an admirable move, it is not clear as to how these will work in practice.

The principle is sound, in that buyer and seller both need ‘skin in the game’, when they have agreed on a deal and the conveyancing work is processed through their respective solicitors.

After agreement, the prospective purchaser spends good money on structural surveys and solicitor’s fees. This is in addition to scoring brownie points with the mortgage provider in order to consolidate the purchase.

Although the seller is also spending some money on solicitors’ fees, it is a relatively modest commitment compared to the buyer.

This is why it is so important to try to bind both parties morally, if not contractually, before the formal exchange of contracts take place. The latter could take several months after the initial agreement of terms.

Devil in the detail

Pressure has been put on the government for some time to ‘do something’ about this imbalance. The outcome is that if either party withdraws from the transaction, without good reason they are liable for a payment (effectively a penalty) of £1000. I have no issue with this, but as the old cliché goes, ‘the devil is in the detail’.

The Scottish or American-based conveyancing models, while slightly different in their composition, make a valiant attempt to organise matters between the buyer and seller. The result is that you exchange an instant contract and pay a deposit, subject to finance and perhaps structural survey.

This is in sharp contrast to the UK system, where exchange of the contract for purchase takes place only after all the due diligence has been carried out, vis-à-vis survey report, mortgage offer and conveyancing.

However, in the real world, even the US system can be abused by the canny purchaser. Tactics include deliberately frustrating the process of obtaining finance, in order to exit a contract to purchase which may have already been exchanged. Even a survey can be used to undermine the commitment you may have made, which in its most duplicitous model, could be a device to buy another property that may be better value.

Moral contract

Any commitment before contract allows an opportunity for a determined gazumper or gazunderer. That’s why at Glentree we organise an exchange of ‘moral contract’. This is to try to bind the parties to the agreement before the formal consolidation.

It proceeds as follows: we set up strategic meetings between buyer and seller, either for a sale or rental.  The common ground is not always obvious beforehand, or easily won, but once identified, we ask both parties to shake hands on the deal. Then intention is to bring moral cohesion to the proceedings.

In some cases, we discuss the scenario of gazumping/gazundering, which hopefully makes it more difficult for either party to renege.  This goes some way towards stitching the deal together whilst the due diligence is being carried out by solicitors.

Unsurprisingly, Glentree heads the industry with the lowest fall-out rate from agreement to consolidation.

Some solicitors recommend a ‘lock out’ agreement between the parties.  However, these can take so long to negotiate (especially between two prickly characters trying to prove ‘who’s the hardest’) that time is far better spent on dealing with the actual contract.

Ultimately though, ‘there’s nowt so queer as folk’, especially folk buying property.

We can pebbledash you with examples of sellers and buyers who, despite all our efforts, have turned tail and reneged on the agreement. The Financial Times asked Glentree if a ‘gentleman’s word’ has a particular value. Our response was: ‘as long as the agreed terms do not change by more than 10%’.

I agree with the intention of this government initiative. As the eternal optimist, if it works in 70% of the cases then in my view, it’s better than nothing.

What's your opinion?

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