Far more frequently than you may expect, we receive details of a new conveyancing transaction where it transpires a ‘reservation deposit’ has been agreed. Well-intentioned estate agents or seemingly savvy sellers understandably think believe they are helpful tools to keep the sale of a property together.
Conveyancing transactions in England and Wales are almost always agreed ‘subject to contract’, meaning that until the contract has been entered into (exchanged) either party can withdraw for any reason and neither party owes the other anything, despite potentially significant costs (legal, survey, valuation etc) having been incurred.
A reservation deposit is a sum of money paid by the buyer to the seller, which is often considered ‘non-refundable’, which the buyer risks losing if they pull out of the deal or don’t exchange contracts on the deal by a certain deadline.
In addition to this, if paying a reservation deposit the buyer would usually expect a clear run at things without the chance of the seller switching to another buyer. Gazumping is unfortunately a fairly common scenario which leaves buyers in a truly awful position both financially and mentally. The parties would therefore usually agree a ‘lock-out’ period within which the seller cannot negotiate with any other parties.
The details of the reservation payment and the terms of the lock-out are usually contained in what is called a reservation agreement (also sometimes called a lock-out agreement or an exclusivity agreement).
When you look at it like that, it’s natural to think reservation deposits and lock-out terms are a good idea – both parties have good intention and good will baked into the transaction from day one – what’s not to like?
Sadly, the answer to that is detail. Spoiler alert: they are in fact rarely a good idea.
The key issue is that a buyer would be very poorly advised to pay a meaningful sum by way of a reservation deposit on a truly ‘non-refundable’ basis. There are a few obvious issues – what if the ‘seller’ doesn’t actually own it and can’t pass title to the buyer? What if it turns out there are squatters in the property? A buyer would understandably want their reservation deposit back quick sharp.
Such stark defects are quite clear an obvious, but others are not. What if there is an adverse survey or adverse searches? Or an adverse title? What on earth does adverse mean? It’s a wholly subjective term that is begging for an argument.
By way of example, let’s say a survey report reveals damp at the property and the buyer gets a quote for £4,500 to rectify it. Does that make it an adverse survey? A seller might understandably argue that you are purchasing a Victorian house and therefore you should expect a bit of damp. Or the local authority search reveals that there is no building regulation approval for an extension carried out twenty years ago. “So what?” says the seller. But the buyer responds “that’s adverse to my mind”.
But hang on, aren’t there clever lawyers involved on this transaction? Surely, they can stretch their legal muscles and agree wording that satisfies everyone? Don’t believe it. It’s got nothing to do with how clever or skilful they are – a lawyer’s number one priority is to act in the best interest of their clients – one will inevitably want the agreed definition of ‘adverse’ to be as wide as possible whereas the other lawyer will want to limit as closely as possible.
From these two very different standpoints it can be nigh on impossible to agree something that both parties are happy with. Even if something is agreed, they are impossible to draft so as to be completely watertight and there is always likely to be a dispute later on if the reservation deposit is called upon to be refunded.
The real problem though is the time spent on this. It is likely that you would have lost days or even weeks arguing over the wording, delaying the transaction horribly. In that time, any goodwill that existed between seller and buyer (or even their respective lawyers) is likely to have dissolved to nothing – after all, the negotiations on such issues will most likely be seen as one party questioning the integrity of the other.
Invariably, therefore, what one ends up with is a delay, a very grumpy seller and buyer and, often, no outcome agreed. Indeed, deals often fall through precisely because of difficulties with these agreements. It’s not looking so compelling now, is it?
Indeed, it has often been the case that if this was never suggested and the lawyers just got on with it, working together pragmatically and efficiently (as one would hope would be the case) you could often have exchanged contracts in the time it took to realise the reservation deposit arrangements were dead-end.
Nothing kills a deal like the passing of time. A close second is a fundamental breakdown of relations between parties. Deals are hard enough to get over the line at times so adding this dynamic is rarely a good idea.
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If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Residential Conveyancing team on 01737 854 543 or by emailing [email protected]