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Last edited 27 Dec 2021
Reservation agreement for property purchase
A reservation agreement can be used in the purchase of new homes when a buyer reserves the right to purchase a property for a period of time. During this time (known as the ‘reservation period’), the seller agrees not to sell to another party. As part of the agreement, the buyer pays a deposit (known as the ‘reservation fee’). The reservation period typically lasts for a period of 28 days.
On the exchange of contracts, the fee is deducted from the deposit that is then placed. However, at any time during the reservation period the buyer can decide not to proceed with the purchase and can cancel the agreement. The fee is then reimbursed minus expenses such as the legal and administrative costs incurred by the seller.
Introduced in 2010, the Consumer Code for Homebuilders (‘the Code’) stated that the reservation agreement should set out the costs likely to be incurred for which the buyer will be liable. The seller may only deduct an amount that has been genuinely incurred in processing and holding the reservation and it is unacceptable to deduct a fixed percentage or amount.
Reservation agreements differ from exclusivity agreements, which are used to provide the buyer with some security from being outbid by establishing a period of time during which the seller agrees not to enter into negotiations with another party. Under a reservation agreement, the seller cannot enter into another such agreement with a different party but can enter into negotiations.
Since reservation fees can be significant (up to £20,000 at the higher end of the market), the agreement should be reviewed for the buyer by a legal professional before signing. However, in practice, it is typical for buyers to sign reservation agreements before instructing their lawyer.
A reservation agreement usually includes:
- The fee amount.
- The property being offered.
- The purchase price of the property.
- How long the price will remain valid.
- The length of the reservation period after which the agreement will expire.
- The estimated deductible expenses if contracts are not exchanged.
Before signing a reservation agreement, sellers should check that the terms reflect the requirements of the Code and ensure they do not enter another agreement for the same property with another party.
The New Homes Quality Board Glossary of the terms used in the Code and Guidance, published by The New Homes Quality Board in 2021, defines a reservation agreement as: ‘an agreement when a Customer and a Developer jointly make a written statement of intent (subject to Contract of Sale and whether or not a fee is paid) giving the Customer an exclusive period of time to enter into a Contract of Sale to buy a New Home. Reservation, Reserved and Reserve carry the corresponding meanings.’
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