Reservation fees and Consumer Code for Home Builders – Tips and Traps for Developers
What are reservation fees?
A reservation fee is the consideration paid by a purchaser to secure an exclusivity period on a property purchase typically implemented in off plan sale transactions but used widely in the residential property market. An exclusivity period is the time accommodated by the developer or seller intended to be a reasonable period for the purchaser to complete their due diligence and exchange contracts on the expiry of the reservation period, legal enquiries having been satisfied, contract agreed, without the pressure of being gazumped by another purchaser.
A reservation fee is not a deposit, and a reservation agreement is not a legal commitment to sell a property. Either party may withdraw from a reservation agreement. Typically, if a developer withdraws the reservation fee will be refunded to the purchaser and if the purchaser withdraws the reservation is non-refundable excepting in limited circumstances. If the purchaser does not exchange within the reservation period but later exchanges contracts, it is generally the case that treatment of the reservation fee will be at the developer’s discretion and for the developer to determine whether to credit the reservation fee to the deposit.
In the super prime market, or in a rising market or for a scheme in high demand, what is the price to be attributed to offering purchaser exclusivity?
For a purchaser registered with their solicitor, funding in place and with a local authority search return time of 5-10 working days, or for a well advised purchaser ready to engage with their transaction, is it prudent to engage in reservation agreement negotiations which may distract or delay a transaction where the sale process might alternatively be initiated immediately and exchange achieved more expeditiously? In the super prime market, what relationship is engendered between the parties if a reservation fee is demanded on agreeing sale?
Key considerations:
- What is the purpose of the reservation fee?
- What reservation fee is commensurate to the purpose?
- Is the employment of a reservation agreement market practice for the property of the nature being sold?
- Is a reservation fee to be applied universally or on a case-by-case basis?
- How long is the reservation period?
- When is the reservation fee due to be refunded to the prospective purchaser?
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Tip: When appointing selling agents and addressing your marketing strategy consider whether you wish to universally apply a reservation agreement strategy when securing property reservations and the terms on which any reservation fee will be held.
| Tips |
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| 1. The Consumer Code for Home Builders (“the Code”) requires purchasers to be given a reservation agreement that clearly sets out reservation terms and requires that a reservation fee must be reimbursed if the reservation agreement is cancelled less any reasonable costs incurred (that could not have reasonably been mitigated). |
| 2. The Code applies to purchasers of new homes built by developers under the insurance protection of one of the new home warranty bodies including NHBC, Premier Guarantee, LABC Warranty and Checkmate. |
| 3. In an industry where reputational management is of paramount importance and social media often underpins business success, it is worth considering the treatment of reservation agreements with some sensitivity to avoid any potential negative publicity arising around this issue. |
| Traps |
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| 1. Offering exclusivity to an uninitiated purchaser in a bull market where a relatively small reservation fee is not a proportionate incentive to a developer. It is possible that engaging the reservation process is not a developer advantage if there are subsequently not insignificant delays incurred in the purchaser’s registration with a solicitor and finalising a reservation agreement. |
| 2. Taking a reservation fee in a market where demand for a property is not high, and the developer is unlikely to enforce the terms of a reservation agreement if an exchange is not achieved during the reservation period. |
| 3. A serious breach of the Code may be enforced by new home warranty bodies including sanctions such as withholding the issuing of certificates of insurance and removal from the new home warranty provider’s register as well as more onerous sanctions which may be applied. |
| 4. The Code does not apply to second-hand properties. However, under The Property Ombudsman Code of Practice for Residential Estate Agents unless a buyer and developer wish to utilise a reservation agreement, an estate agent should not generally facilitate pre-contract deposits. |
| 5. The Property Ombudsman offers an alternative dispute resolution procedure to use of courts to pursue a complaint. |
