Reservation Contract Part 2 - What to be aware of

The previous article pointed out the reasons why it is a good idea for those interested in purchasing a property to have their reservation contract checked by a lawyer. It also described the provisions that should not be missing in a reservation contract. 

There are usually three parties to a reservation contract – it is concluded by a real estate agent, the property owner and the party interested in purchasing the property. Although it doesn’t happen very often these days, sometimes the real estate agent, especially a small one, presents to the interested party a draft reservation contract whose parties are only the real estate agent and the interested party. A few years ago this contract format was a rule. However, this practice was changed by a decision of the Supreme Court of the Czech Republic, ref. no. 33 Odo 332/2002 (similarly also 33 Cdo 3448/2012), in which the Court used a legal formulation saying that only the parties to the purchase contract as such may agree to enter into a purchase contract in the future.

The result of this decision is that the interested party’s obligation – whose participant is not the property owner – to enter into a purchase contract as stated in the reservation contract is invalid if the real estate agent is not an indirect representative of the property owner. That means that neither the interested party nor the property owner would be obligated to enter into the purchase contract. Most real estate agents have taken the aforementioned decision of the Supreme Court into account and enter into reservation contracts with both the interested party and the property owner.

On the face of it, it might seem that it is advantageous for the interested party to enter into the reservation contract only with the real estate agent because then the interested party could refuse to conclude the purchase contract without any penalty. However, the property owner being a party to the reservation contract is also beneficial to the interested party. In this way it is guaranteed to the interested party that the property owner, as a party to the reservation contract, will be obligated to enter into the purchase contract.

A crucial obligation resulting from a concluded reservation contract is the interested party’s obligation to pay a reservation fee, whose amount usually corresponds to the real estate agent’s brokerage fee for arranging the sale of the property. This amount tends to be quite high. I recommend that the reservation contract should include a provision saying that if the purchase contract is concluded, the full amount of the reservation fee paid will be used for the payment of the purchase price. In a vast majority of cases the reservation fee is paid directly to the real estate agent, who should return the reservation fee to the interested party if the purchase contract is not concluded for reasons on the part of the property owner. Therefore, two essential questions arise for the interested party: Can I rely on the real estate agent to return the reservation fee? And if not, what can I do? The reservation fee issue will be discussed in detail in my next article.