Reservation deposits and new build properties

The Consumer Code for Homebuilders (the Code) is an industry-led code of conduct for builders/developers and was originally developed with the intention of making the process of buying a new home more transparent and fair for buyers. The Code came into effect in April 2010, was updated in 2013 and applies to all home builders who are registered with the UK’s main new home warranty providers, being the NHBC, Premier Guarantee and LABC (Local Authority Building Control) Warranty. The Code consists of a number of requirements and principles that home builders must observe in relation to the marketing and selling of homes, as well as their aftercare service. Concern has been raised, however, as to the extent to which builders fully comply with the Code in practice and how effective the sanctions are, should they fail to do so. In this context, it is important to note that the Code is voluntary and does not apply to those builders who are not registered with one of the warranty providers listed above. However, the Code is mandatory for those who are registered with the listed providers. How relevant and useful is the Code in practice, for new home buyers and their advisors?

The overarching purpose of the Code is to ensure that new home buyers:

• are treated fairly
• know what service levels to expect
• receive reliable information before and after they sign the purchase contract
• know how to access speedy, low cost dispute resolution arrangements if they are dissatisfied

For the purposes of this article, we will concentrate on what the Code says about the collection of reservation fees (often referred to as “reservation deposits”) by builders, how this process is regulated under the Code and what level of protection the Code affords a buyer in this area, if things go wrong.

Reservation deposits are essentially payments taken by housebuilders/developers once a sale has been agreed, in order for a buyer to “reserve” the property in question, typically for a period of 28 days, in order to complete the necessary legal due diligence and get into a position to exchange contracts. Buyers will usually be asked by the builder or its sales team to sign a reservation agreement which will outline the terms of the reservation and invariably state that the deposit is non–refundable in the event of the buyer failing to exchange contracts within the agreed period. These fees/deposits can often be quite significant, particularly at the higher end of the market where payments of up to £20,000 are not unheard of, so it is important that the reservation agreement is reviewed by the buyer’s lawyer before it is signed. In practice, the majority of buyers tend to instruct their lawyer only after the reservation agreement has been signed.

What does the Code say about reservation fees/deposits?

The Code provides that homebuyers must be given a reservation agreement that sets out clearly the terms of the reservation, including (but not limited to):

• the amount of the reservation fee
• exactly what is being sold (eg does the price include a separate car parking space?)
• the purchase price
• how and when the reservation agreement will end
• how long the purchase price remains valid
• the nature and an estimated cost of any service charges or other management fees for which the homebuyer will be responsible
• the nature, and extent of, any deductions that are to be made from the reservation fee in the event that the reservation period expires or is cancelled by the buyer. Such costs may include legal fees incurred by the builder in providing the contract documents. Deducting a fixed percentage or fixed amounts from the reservation fee is not acceptable; the developer should return the reservation fee less any reasonable costs that have been genuinely incurred in processing/holding the reservation. Effectively, the builder will need to be able to demonstrate that the costs are reasonable should the matter be referred to the independent dispute resolution service that is available under the Code

For as long as the reservation agreement is in force, the builder must not enter into any new reservation agreement or sale agreement with another customer in relation to the property and nor may it cancel the reservation agreement while it is force.

What does this mean for potential buyers?

Potential buyers of new build homes should ask the home builder whether it observes the Consumer Code for Homebuilders, regardless of whether or not the builder is registered with one of the designated warranty providers; there is nothing to prevent home builders from agreeing to abide by the spirit of the Code and, should they decline to do so, then a buyer may perhaps see this as a potential red flag.

Buyers should check that any reservation agreement that they are asked to sign complies with the Code and makes it clear that in the event that the agreement is cancelled or the reservation period expires, only reasonable deductions may be made from the reservation fee. The reservation fee should not be described as “non-refundable.”

Any complaints need to be made initially to the developer/builder and if the buyer is not happy with the response, to the warranty provider who may then refer the complaint to the independent dispute resolution service for adjudication, although the maximum financial award is capped at £15,000. Failure to honour any award can result in the builder being removed from the relevant home warranty body’s register.

The Code does not apply to second hand properties, purchases by a buyer of several properties for investment purposes as part of a single deal, nor to properties that have been sub-sold or the purchase contract assigned to a third party. There are also some other (more limited) exceptions.

What does this mean for participating builders?

Participating new home builders (and their advisors) will need to:

• ensure that sales procedures comply with the Code
• check that reservation agreements reflect the Code’s requirements (eg to exclude reference to a fixed amount or percentage of the reservation fee being retained on cancellation)
• be aware that they may not enter into a new reservation agreement with another customer on the same property so long as an existing reservation agreement remains in force
  
  

Future Developments

Views are currently being sought on some proposed changes to the Code following the results of a consultation process undertaken last autumn. The next edition of the Code is expected to be published this summer, with the changes coming into effect on 1 February 2017. The consultation document acknowledges that the Code faces some challenges if it is to remain credible, visible and relevant to new home buyers and to be an important priority within the industry. One focus is likely to be increasing awareness levels. The Code is also looking to gain approval through the Chartered Trading Standards Institute’s (CTSI) Consumer Codes Approval Scheme (which has succeeded the previous Office of Fair Trading scheme). This would enable homebuyers to look out for the CTSI approved code logo, and then to approach the purchase process in the knowledge that they are dealing with a builder that adheres to the Code’s standards and requirements. There is no part of the consultation document that refers specifically to reservation agreements so it is perhaps doubtful that there will be any changes to the current arrangements governing reservation fees when the new Code comes into force.

Conclusion

The Code provides a useful framework within which new home buyers and builders should seek to operate. Reservation agreements do, undoubtedly, provide potential buyers with the benefit of a “clear run” at buying a property, giving them the time to arrange their finances and complete the legal due diligence. Equally, the Code acknowledges that a builder is likely to have incurred some costs in instructing solicitors (and possibly other administrative costs) in progressing a sale, once a reservation agreement has been signed, and should therefore be reimbursed (but only on a reasonable basis) in the event that the buyer does not proceed with the purchase through no fault of the builder. From a builder’s perspective, if the majority of the reservation fee has to be refunded to a defaulting buyer then there may be concern that this could encourage some potential homebuyers to reserve a number of properties at the same time, on different developments, with limited commitment; however feedback from the Code’s various stakeholders suggests there has been little evidence of this in practice.

Ultimately, until the Code is mandatory for all new home builders/developers and its scope and existence are widely recognised amongst consumers, its impact in the market will be limited. The proposed changes to the Code certainly acknowledge the need for profile-raising and so potential buyers and their advisors (as well as new home builders) should expect to become more familiar with the Code in the near future, particularly within a general climate of enhanced consumer protection affecting commercial businesses.