The Government has been considering implementing binding reservation agreements in conveyancing transactions and have now decided to proceed to a trial phase.
The Ministry of Housing, Communities and Local Government (MHCLG) has been keen to produce policies creating a financial bind before the completion of a property sale or purchase in order to reduce gazumping and gazundering. There is said to be an estimated 25%-33% housing purchase failure rate, which causes £270m in wasted fees annually, causing consumers to perceive the current process as uncertain.
The first research stage included a three month consumer consultation to gain behavioural insights and determine the parameters of the reservation agreement, so that it is fair to both property buyers and sellers.
Research found that:
- 46% of sellers and 33% of buyers were concerned that the other party would change their mind during the course of the transaction
- 70% of buyers and 66% of sellers anticipated that there would be a problem causing their transaction to fall through
- Of sales/purchases falling through:
- 40% pulled out because of a change of mind
- 33% pulled out due to perceived slow progress
- 20% fell through due to not being able to secure a mortgage, and
- Nearly 7% was due to the chain collapsing.
Because of this, 50% of buyers and 70% of sellers said they were willing to enter into a legal commitment after their offer being accepted. The results of the research therefore led the Government to decide to proceed with a trial of a binding reservation agreement system, which is due to start in early 2020.
Binding reservation agreements
The Government is working with industry to develop a short standardised reservation agreement which can be used in any property transaction. Under this agreement, if a party pulls out of a transaction, they will face a financial penalty and lose their reservation deposit. Certain circumstances would be exempt from all penalties, including family bereavements, job losses and unforeseen issues with the property. The aim is to lock both parties into an early agreement through a financial deposit which should prevent failed sales and purchases, and therefore reduce unnecessary financial loss and increase confidence and trust in the process of buying or selling a property.
MHCLG are looking to gain support from estate agents and conveyancers by trialling this process in two regions of the UK. The regions, agents and conveyancers are yet to be selected, and further details of the trial are still being determined by a company instructed by MHCLG. It is expected that different variations of the reservation agreement will be trialled, along with a range of reservation fees. Costs and enforcement (particularly in a chain transaction) are key areas to be ironed out, as well as determining what will be deemed as a 'reasonable' reason for withdrawal.
As well as considering binding reservation agreements, the Government is also considering measures requiring sellers to provide more information to buyers up-front, gathered prior to the marketing of a property. The information would be available in one document or portal, similar to the Home Information Packs which were suspended from use in 2010. These potential reforms are again being considered with the hope of providing more certainty to parties involved in property transactions and reducing the time taken to complete a sale or purchase.
If implemented, binding reservation agreements should bring more confidence and protection to the conveyancing process, however both parties will have to make more considered decisions due to the consequences of withdrawal. Their full impact will be seen once the Government determines the final parameters of the agreement as well as associated costs and penalties.