Hart Brown comments on Government’s proposed changes to the conveyancing system

Law firm Hart Brown has been privy to the sight of a first draft of the Government’s proposed “Reservation Agreement” between buyers and sellers, but finds it falls short of what the industry requires.

In the recent past the Government has floated the idea to change the conveyancing system, in order to remove the practice of gazumping, where a seller looks to increase the price following agreeing terms to sell their house and, by implication, gazundering, where a buyer looks to reduce the price in similar circumstances. The former generally happens in a bull market and the latter in a bear market.

As a firm Hart Brown have recently had sight of one of the first attempts to deal with the problem along with the request to feedback comments to those who have drafted the initial documents.

The idea is to introduce a “Reservation Agreement” to be signed by both buyer and seller with each placing a deposit with the selling agents. Should one party withdraw in breach of the agreement the deposit lodged will be lost to the other party. This type of agreement is not new as developers have utilised a similar version, albeit weighted massively in favour of the developer, and on rare occasions some sellers and buyers have entered into a “lockout agreement”. The latter tend to be more popular in a very hot bull market with the Central London market more often and not at the forefront due to the considerable change, in actual monetary terms, of the more expensive properties if there are large upward % revisions over a short period of time.

Historically lockout agreements have in many cases hindered the speed of the transaction due to the time it can take to argue over and agree the terms of the agreement. Each party’s solicitor is aiming to try and protect their client with time delays ensuing.

Lockout agreements are never completely water tight for a myriad of reasons. There are genuine reasons why a buyer can withdraw and reclaim their deposit. Sellers tend not to have to pay a deposit, so lockouts are financially one sided.

Commenting on the proposals, David Knapp, Partner and head of residential property at Hart Brown said:

“The first draft Reservation Agreement that we have seen is based on the traditional lockout agreements. Although the intention is well meaning as our residential conveyancing system is in great need of a real change, the first draft is sadly way short of what is required. Our feedback has pointed out where we can see obvious and fundamental flaws, as follows:

They state that the parties should take legal advice before signing it. As we know from Exclusivity Agreements, these hold up transactions while the terms are agreed
There would be many disputes particularly if the amount of the deposit is high but, if the deposit is too small, the agreements would not be of much effect apart perhaps from a psychological point of view.
The proposals would complicate matters and result in considerable extra cost
Who is going to pay the additional legal costs of the advice before signing it? Or are solicitors expected to work for free. These additional costs will add to the costs of the transaction for the parties.
Are they voluntary or compulsory? If there is a chain how can some sign up to them but not all the parties? If they apply to all the chain – how will agreeing timescales and simultaneous dating of the documents be achieved? A huge time (and cost) burden on the agents and solicitors before the transaction has even got going.
Are estate agents going to have regulated client accounts? What about indemnity insurance if they go bankrupt? We are heavily regulated to prevent loss of client money. Why would estate agents want that?
It is admirable that sellers should have some “skin in the game” as the highest burden of costs falls on buyers if it falls through. However, I note the only way a seller can pull out is if “he” is unable to buy a replacement home. Surely every seller could claim that and frustrate it? Much like HIPs the concept of a seller having to pay up front sounds good but does not work in practice.
There are a number of criteria on which a buyer can pull out without a penalty and again these can easily be manipulated to frustrate the contract. These include:-

a)“The Buyer’s mortgage application is refused [for any reason] [because the Sale Property has been valued for mortgage purposes at below the Sale Price”.

b)“Seller failing to progress the normal conveyancing process, or the Sale Property being affected by an adverse matter that cannot reasonably be covered by insurance”: very subjective for each conveyancer and will lead to a great deal of argument. Insurance can be obtained for many things but does not mean it is the correct way forward in all cases where there is a defect. For example, where there are no building regulations an indemnity policy is worthless compared to having the correct documentation, as no policy covers defective workmanship which is the main thrust of building regulations. Insurance is generally wholly inadequate.

c)The suggestion that a buyer can withdraw without penalty if their surveyor reveals defects amounting to over 1% of the value of the property is not workable. Does that mean that a Buyer has to wear the costs of defects provided they are under 1% of the sale price? How can buyers budget for that? I do not think this works or is fair. A buyer may not want to buy a house that has some problems even if they can be rectified.

d)“There are planning restrictions, title covenants or adverse rights that would prevent any of the following at the Sale Property”– again very subjective as to the wording of covenants. You cannot get insurance for covenants for work not yet done either easily or cheaply.

An arbitration clause is being suggested but there is no clue as to the identity of the deciding person. What qualifications do they have? How are they to be remunerated? More costs will necessarily be incurred by both parties.
How much is going to be paid as there is no guidance on the sum. A small sum, say £1000.00, will not prevent gazumping if the Seller is offered more money than that. £1000.00 to a person with a £2M property is a lot less important than to a first-time buyer buying for £250k.
How are timescales to be decided? The timescale will put a lot of pressure on the parties at a time when it is already stressful.
Are the terms mandatory as if not there could be various versions of this agreement in the chain or there may be a need to renegotiate the agreements entered into by the earliest link/s in the chain if the terms of those links negotiated at a later stage include other terms prejudicial to the earlier agreements.
Presumably a chain will need to be complete before the agreements are entered into as there will need to be simultaneous exchanges of the agreements throughout the chain. This then begs the question as to what happens to the rest of the deposit and agreements in the chain.

“As a firm we do not consider ourselves over negative and are keen for a change of some form to benefit clients. As an example, once surveys were removed from HIPS we were supportive of them if they were put together with full, as opposed to personal, searches.

“The proposals suggested do not seem to have been fully thought out and have perhaps been rushed. I also question who has been at the forefront of the drafting and thought process. Various stakeholders from different sectors and the sharp end of the residential property market ought to be invited to a forum to put forward changes that will be of real value to the public and practitioners alike,” concludes Knapp.

Kindly shared by Hart Brown Solicitors