THE IMPORTANCE OF THE RESERVATION AGREEMENT
The main purpose of a reservation agreement (or also a lock-up deposit agreement) is to reserve the property for the buyer. In a properly constructed reservation agreement, the seller agrees to sell the property to the buyer on specified terms and the buyer agrees to purchase the property on specified terms. It is for these reasons that the reservation agreement is a key document in a real estate transaction. Sellers and buyers and possibly real estate agents (depending on how the contract is drafted) who have entered into a reservation agreement are in a much more secure legal position than if they had not entered into any reservation agreement.
The main importance of a reservation contract is that the parties know:
what exactly is being sold and at what price (often it is not only the property itself that is being sold, but also the land, co-ownership interests in the house, inventory, etc.),
how the transaction will proceed in terms of time and organisation,
how the buyer’s mortgage loan will be drawn down,
when and how the purchase price will be paid,
how the escrow of the purchase price will be handled,
how the purchase price will be paid out of escrow to the seller,
what are the restrictions on the ownership rights (pledges, easements) and whether they will be transferred to the buyer or terminated,
when the property will be handed over to the buyer,
what are the conditions of termination, i.e. under what circumstances the contract is cancelled,
what are the other obligations of the seller and the buyer,
what the penalties are in the event that either party breaches its obligations under the contract.
Advantages of a written booking contract
As a result of the above, a written booking contract helps the whole transaction to run more smoothly, reduces the scope for misunderstandings and gives the parties greater peace of mind knowing that the counterparty is bound by a contractual penalty in the event that it breaches its obligations. If you are selling or buying a property through our real estate agency RE/MAX Atrium, we always conclude a three-party reservation contract. The parties to the contract are the seller, the buyer and the real estate agency (RK as an intervening party).
Disadvantages of a written reservation contract
If you have the ability and intention to meet your obligations (i.e. to buy or sell on the agreed terms), then a reservation contract poses no risks to you. A reservation agreement poses a risk to the buyer if he or she does not get a mortgage and is thus unable to meet his or her obligations. However, even this situation can be dealt with largely in advance. RK RE/MAX offers buyers an appointment with our mortgage advisor to have their financial creditworthiness checked before entering into a reservation contract. This meeting is free of charge and without obligation, i.e. if the buyer wants to deal with the mortgage loan on his/her own, no one will prevent him/her from doing so. However, if the buyer takes advantage of the offer to check creditworthiness and arrange a loan through our mortgage advisors and still does not receive a mortgage, the reservation deposit will be refunded to the person concerned. However, this is on the condition that the buyer tells us the truth and does not otherwise frustrate their financial situation and mortgage by their actions.
Risks of buying and selling a property without a reservation contract
Without a reservation contract, the seller and the buyer have no obligations to each other and can change their minds about the sale at any time, which also happens sometimes. This makes the whole transaction uncertain from start to finish. If you are buying a property that you have fallen in love with, then you are living in uncertainty for weeks or months about whether you will actually become the owner. This is often stressful. Conversely, if you are selling, you are not sure until the last minute when and how you will get your money. Often the sellers have other intentions and uncertainty can be a problem.
Verbal agreements are often sufficient, but not when selling property. There is a lot of money involved and there are many things to negotiate. Even if both parties have clear intentions and don’t want to deliberately deceive each other, everyone may perceive the meaning of words differently in a verbal agreement. A real estate transaction is not a matter of a week. It takes weeks or months for the bank to process the mortgage and for everything to be finalized. And so it happens that people forget what they actually agreed to verbally at the beginning. All this creates room for disputes and misunderstandings. A written reservation agreement minimizes the problems.
Another risk of buying/selling without a reservation agreement is that it makes it more difficult to negotiate a loan with the bank. Banks normally prepare loan agreements on the basis of the submission of a reservation agreement or a draft purchase agreement or a forward purchase agreement. When you do not have any contract in hand, the loan negotiation becomes more difficult. The buyer then has no choice but to get the loan approved based on the draft purchase agreement. However, the draft contract has no legal weight.
Booking deposit (or blocking deposit)
The reservation of a property is usually subject to a reservation deposit. By depositing a reservation deposit, the buyer declares a genuine interest in buying the property. The seller is thus more confident that the buyer is serious about his intention to buy. There are two forms of reservation deposit and one of them is a bit of a trap for inexperienced buyers.
1. a deposit on the purchase price
The money you pay as a reservation deposit is part of the purchase price for the property. If the seller does not sign the purchase contract for reasons on his/her side, the real estate agent must return the deposit to you.
2. Deposit for commission
Some real estate agencies design booking contracts in such a way that the deposit paid is not a deposit on the purchase price, but a deposit on their commission. Some real estate agents have a sneaky clause in their contract that the deposit becomes commission when the buyer has the opportunity to enter into a purchase agreement. However, an opportunity to enter into a purchase contract is not the same as a closed purchase contract. If for some reason the seller does not sign the purchase contract, the real estate agency still does not have to return the reservation deposit because it has fulfilled its obligation, i.e. it has created an opportunity. The fact that the actual sale has not taken place is another matter. The buyer has neither the property nor the deposit. This is a very unscrupulous business practice and unfortunately you can see it from time to time. Some estate agents do not charge commission from sellers but from buyers. By booking a deposit, they are insuring that they get paid for brokering the sale.
Beware of bilateral reservation contracts
This situation can occur in essentially two cases. The first is when there is a bilateral agreement for a retainer deposit between the real estate agent and the buyer. With bilateral booking agreements (between the buyer and the estate agent), the buyer is at a significant disadvantage. He has no legal relationship with the seller and has no leverage to keep what he may have verbally promised. In fact, the estate agent representing the seller will never commit to pay the buyer a penalty in case the seller refuses to sell the property.
The second case is where the seller and the buyer enter into a reservation contract on their own without a real estate agent. This raises the question of where the buyer will put the reservation deposit. Buyers are often reluctant to pay a deposit to a seller they do not know and the usual result is that the sale is very shaky from start to finish.
It happens that sellers and buyers who are selling/buying a property on their own without a real estate agent ask the real estate agency not to process the transaction, but to complete the transaction for them administratively and legally. If you need to complete the transaction, please do not hesitate to contact us.
Where to next?
Do you want to know the value of your property? Feel free to contact me anytime.