Reservation Agreement: A Guide for Homebuyers and Sellers
When selling your home, having a reservation agreement when an offer is accepted can provide peace of mind. It gives a degree of certainty between buyer and seller and reduces the likelihood of either party withdrawing unexpectedly from the purchase. Let’s explore what a reservation agreement is, how it works and how it can benefit both the seller and buyer.
What is a reservation agreement?
A reservation agreement is a contract between a home buyer and a home seller that agrees on the price and terms under which the property will be sold.
The buyer has exclusive rights to purchase the property. Within a set timeframe and on this basis, the seller removes the property from the market.
If either side withdraws for whatever reason, they will be liable to pay a compensation fee.
In essence, this type of agreement is designed to show commitment to a transaction and certainty of sale.
Are reservation agreements common?
Reservation agreements are most commonly used when you buy a newly built home or buy/sell using the modern auction method.
Reservation agreements are also commonly used in commercial property transactions and residential sales in countries such as Scotland and the Netherlands.
Are reservation agreements legally binding?
Yes. On signing a reservation agreement, either for a new build or when buying a house via an estate agent, you are signing a legal agreement that is legally binding.
Some parties may insist on a reservation agreement to reduce the chances of a sale falling through, but there is no obligation to do so.
What does a reservation agreement typically include?
Because reservation agreements aren’t mandatory in England and Wales, there isn’t a default or standardised agreement. But reservation agreements typically include:
- The reservation fee amounts and terms of payment.
- The details of the property being offered.
- The agreed purchase price of the property.
- How long the agreed purchase price is valid.
- The length of the reservation period after which the agreement will expire.
- Consequences for breaching the agreement.
- Specific conditions under which the reservation fee is refundable or non-refundable.
- The estimated deductible expenses if contracts are not exchanged.
You can ask your solicitor to draft an agreement or buy one from a third party.
There are some reservation agreements available via estate agents. These offer a legally binding agreement that commits both the buyer and seller to the sale. Unless certain conditions are met (a survey reveals structural faults, for example).
Usually, both the buyer and seller pay a deposit. If either party pulls out of the transaction without a justified reason, they are then obliged to pay the other side compensation.
Another variation under consideration is that each side would compensate the other for direct costs incurred.
Benefits of using a reservation agreement
The main benefit of using a reservation agreement is the security it provides as it reduces the risk of the property sale falling through.
But there are also benefits for the seller. By ‘reserving’ the property to a prospected buyer, it means that you’re home does not have to be on the market for a prolonged period.
For the buyer, it provides a guarantee that the house is not getting sold to someone else. This protects you from ‘gazumping’. This is where a seller accepts a higher offer from another buyer after having accepted your initial offer.
The agreement serves as a mutual commitment, where clear terms and expectations have been set from the outset.
The role of estate agents
An estate agent’s expertise can play a crucial role if you’re considering a reservation agreement as an agent is likely to have experience using them and will be able to explain this for you.
They can also assist in negotiating the details such as the reservation fee, and the duration for which the agreement is valid.
When choosing an estate agent, consider the following:
- Their industry accreditations
- Their experience of your local area
- Reviews and testimonials from previous clients.
- Their approach to handling reservation agreements and other contractual documents.
FAQ’s about reservation agreements
Here are the answers to your frequently asked questions about reservation agreements in house sales:
Can you reserve a house before selling yours?
Yes, you can reserve a house before selling your current home. However, doing so may require you to demonstrate to the seller and their estate agent that you are making progress towards selling your current property. Or that you have the financial means to proceed with the purchase regardless.
How long is the reservation period on a house?
The reservation period typically lasts for a period of 28 days. If, after this time, both sides want to continue with the transaction, they can agree to extend the deadline. But if one side has failed to meet their obligations (such as arranging a mortgage) then they will be deemed to have pulled out and have to pay the other side.
Always seek legal advice. If you need a good solicitor, we can help with that.
What do I need to reserve a house?
To reserve a house, you generally need to provide:
- Proof of your financial ability to purchase the home, such as a mortgage in principle or proof of funds.
- A reservation fee, which is typically a percentage of the purchase price or a fixed amount.
- Personal identification and possibly details of your legal representation.
Is a reservation fee a deposit?
A reservation fee is not the same as a deposit. It is a fee paid to reserve the property and take it off the market, which is usually non-refundable if the buyer decides not to proceed with the purchase.
A reservation fee secures the buyer’s exclusive right to purchase the property within the agreed reservation period. It compensates the seller for taking the property off the market during this period and reduces the risk of the buyer withdrawing from the sale without proceeding to the contract.
A deposit, on the other hand, is a portion of the purchase price paid to secure the property under contract. Typically refundable under certain conditions laid out in the purchase agreement.
Do you get the reservation fee back on completion?
The reservation fee is typically non-refundable and not deducted from the final purchase price. However, the terms can vary depending on the agreement. In some cases, the fee may be partially refundable or credited towards the purchase price. But this should be clarified in the reservation agreement.
How long can you reserve a property for?
The duration for which you can reserve a property is typically agreed upon in the reservation agreement and can vary based on negotiation between the buyer and seller. Commonly, a property can be reserved for about 28 days. This period can be shorter or longer depending on the circumstances and agreements made.
The impact of a reservation agreement
If you’re anxious about your home sale after an offer has been excepted than a reservation agreement can provide in some ways peace of mind. Of course, it is not a guarantee of the property sale not falling through but it can reduce uncertainties.
Ready to move forward with confidence? Partner with a skilled estate agent and discuss your options.
Last Updated: September 22nd, 2024
