Your offer on your dream home has been accepted, and you’re counting down the days until you move in – only for a real estate agent to call you with the news that you’ve been blown away.
Unfortunately, this practice – of a buyer with a higher offer outbidding you before exchanging contracts – is common in today’s real estate market, accounting for a third of sales that fail.
Change is on the way, with a range of key reforms recently announced, including mandatory, legally binding sales agreements to prevent either party pulling out without a legitimate reason.
This long-awaited protection for buyers and sellers, which mirrors the Scottish system, will not be introduced until the end of 2029, but there are steps you can take to protect your interests now.
Reservation agreements
At present, buyers and sellers in England and Wales can withdraw from the deal at any time between acceptance of the offer and exchange of contracts. This is different in Scotland, where the use of reservation agreements is more common.
A reservation agreement (also known as a “binding conditional contract”) allows a buyer to reserve the right to purchase a property for a specified period of time upon payment of a reservation deposit to the seller. It is a contract between two parties agreeing on the price and conditions under which the property will be sold and is used instead of the usual exchange contract.
The holding deposit (usually a small portion of the property’s purchase price) is then deducted from the final purchase price following a successful sale. If the Buyer withdraws from purchasing the property after signing the Reservation Agreement, they will forfeit the deposit due to the Seller. An exception to this is if there is a reasonable reason whose terms are specified in the contract.
There are many benefits to lien agreements, such as deterring offers from speculative buyers and ensuring anti-money laundering (AML) compliance.
Change is on the way
In 2020, the government announced that it would trial the use of reservation agreements in two areas. However, the trial was eventually postponed due to the COVID-19 pandemic.
Reservation agreements then re-emerged as a hot-button issue when the government unveiled its consultation on buying and selling homes last year. The Government invited responses from interested parties on this topic (among others as part of the wider consultation), and asked four questions, including whether the most effective means of delivering them could be to incentivize estate agents to offer booking agreements as a service, raise consumer awareness or legislate their use.
While we are yet to see the details of how these binding agreements will work in practice, they are a welcome step toward better consumer protection.
Other changes include making important information about the property, such as its condition, rental costs and chain status, available to buyers early in the process via Sales Packets.
A new Code of Practice for estate agents will also be introduced to help raise standards.
The government says the reforms, which many in the industry have long been calling for, will save buyers an average of £650.
Transparency and other concerns
Homebuyers are set to benefit in the future, but lien agreements are the next best thing for those looking to buy a property now.
Until binding agreements become mandatory in 2029, reservation agreements can be concluded by the carrier if both parties are on board.
However, for reservation agreements to be workable, relevant information supporting the purchase must be available at an early stage to enable the buyer to enter into an agreement with confidence.
CLC encourages engaging with a licensed carrier and working with them to ensure that the reservation agreement is drafted with clear and fair terms about the exceptions stated (such as sudden job loss, divorce, providing misleading information) and how they will operate if any of these terms are included.
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You can find a list of CLC regulated conveyancing companies, as well as further guidance on buying and selling property,here.
Stephen Ward is Director of Strategy and External Relations at Board of Licensed Carriers
