Reservation Contract Part 1 - What to be aware of

Most properties are currently offered for sale by real estate agents who look for potential buyers on behalf of the owners and they organise tours of the properties for such interested buyers and arrange all negotiations between the two parties. Then a particular interested person is given a draft of the reservation contract.

A reservation contract is usually an agreement on the conclusion of a future purchase contract because in a reservation contract the interested person agrees to enter into a purchase contract by a particular date. If they do not enter into the purchase contract by that date, there is a relatively high contractual penalty. Many of those interested in purchasing a property make the mistake of not regarding the reservation contract as very important and sign it without having it checked by an attorney.

In my opinion, the reservation contract is the most important document of the whole property purchasing process because it should stipulate the scope of the future purchase contract. It is necessary to avoid such reservation contracts under which the interested person agrees to enter into a purchase contract without the reservation contract saying anything about the contents of the purchase contract. Then the interested person may be unpleasantly surprised when they are presented a purchase contract whose contents are disadvantageous for them or even mean a risk to them. The interested person is then in a difficult situation being pushed by the real estate agent to enter into such a disadvantageous purchase contract because if they don’t do so, they will have to pay a contractual penalty.

For this reason it is suitable for the reservation contract to include the terms of the purchase contract. Such terms are usually provisions stipulating that the purchase price amount will be deposited with an attorney, notary or bank; when the purchase price will be deposited by the interested party (acting as the purchaser); under what conditions the purchase price will be paid to the seller; under what conditions the property will be handed over to the purchaser; and that upon the conclusion of the purchase contract, the property will not be encumbered by any legal defects and if that condition is not met, the interested party may withdraw from the reservation contract.

If the interested party is going to pay part of the purchase price by a mortgage loan, this fact should be included in the reservation contract along with the seller’s obligation to cooperate with the interested person in that matter, which means, above all, to conclude with the interested party’s mortgage bank an agreement on establishing a right of lien on the property for the benefit of the bank, and if such cooperation is not provided by the seller, the interested person may withdraw from the reservation contract.

If such a provision was not included in the reservation contract and the seller didn’t provide the interested person with such cooperation, the interested party wouldn’t be given the mortgage loan and wouldn’t, in fact, have the funds to pay the purchase price and as a result they would risk again that the seller might require them to pay the contractual penalty or damages. An alternative to the aforementioned (i.e. the terms of the purchase contract are included directly in the reservation contract) is that the purchase contract draft is an appendix to the reservation contract.

However, this method delays the conclusion of the reservation contract because the seller and the interested person begin to discuss such details of the purchase contract that are not important and could be solved by the parties just before they enter into the purchase contract. What may happen is that the seller becomes annoyed by the discussions with the interested person before entering into the reservation contract and in the end gives preference to another interested person before concluding the reservation contract.

The next articles will be dealing with other pitfalls of the reservation contract as such.