Reservation agreements: A way to reduce failed transactions or yet another obstacle to homebuyers?

17th May 2018

The government recently published the outcome of its consultation on improving the home buying and selling process. One of the resulting proposals was the introduction of reservation agreements.

The government proposes the introduction of reservation agreements as a method of reducing the number of failed property transactions within the UK market. Figures vary but it is reported that between 25-30% of all property transactions in the UK fail, causing undue stress and a financial loss to those involved. So are reservation agreements the answer?

What are reservation agreements?

Reservation agreements are contracts between buyers and sellers, entered into at a point that an offer is accepted, creating a legal commitment to the transaction. Importantly this is done before either side spends any money.  The HomeOwners Alliance has proposed that as part of the reservation agreement, each party deposits £1,000 with their conveyancer. If the transaction proceeds to completion this sum will be refunded or put towards other costs, but if a party withdraws, this sum is paid to the other as compensation.

The government intends to develop a short standardised agreement suitable for all transactions.

Are they likely to be effective?

The proposal echoes aspects of successful systems operated in the likes of Scotland and the Netherlands. It is also worth noting that such agreements are already commonly used during high value transactions and new build property transactions. Although these agreements are not widespread throughout the UK property market, they are not an entirely new concept and have operated successfully where adopted.

The primary goal of the reservation agreement is to increase commitment to the transaction. Having some “skin in the game” alters the mind-set of the parties and discourages the disingenuous, thus reducing the number of failed transactions.

The reservation agreement will also require parties to a transaction to be more ‘transaction ready’ before they enter negotiations. The prospect of losing a deposit would encourage sellers to collate the required information and buyer’s to arrange the required funds before making/accepting an offer. This should result in a reduction in the time it takes to complete a typical transaction.

Although the standard form agreement is expected to be short, and should not require substantive legal input, entering into a legal commitment should encourage parties to instruct their lawyers earlier in the transaction. This should not only speed up the process but allow the instructed lawyer to manage their client’s expectations, advise on the transaction process generally and iron out any issues early on.

Despite its promise, there has been some discussion as to whether the proposal merely adds another stage to an already lengthy process and is yet another obstacle to those already struggling to save the required exchange deposit. The HomeOwners Alliance has proposed that those who cannot afford to pay a £1,000 deposit can take out homebuyers/sellers insurance. But again, this is at an additional cost.

Following the outcome of the government consultation, the proposal is set to undergo some behavioural insight research followed by a pilot before being introduced widely, as a standard part of the conveyancing process, so it is likely to be some time before we know for certain (i) the form these agreements will take; (ii) how they will be introduced to the market; and (iii) if they’re likely to be an effective method of reducing failed transactions.

For further information please get in touch with our Residential Conveyancing team.

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