Government should be wary of introducing goodwill agreements

Sajid Javid, Secretary of State for Communities and Local Government, has launched a consultation on proposals to reform the house buying process, designed to make it cheaper, faster and less stressful for buyers and sellers.

A key concern is reducing the number of transactions which fall through. While there is currently no statistical evidence which indicates the proportion of transactions which fail, the report highlights the low levels of trust which commonly exist between buyers and sellers in a transaction. 

In a bid to reduce this mistrust, the government is exploring ways to increase commitment to a sale on both sides. One measure under consideration is encouraging contractual agreements to increase the levels of commitment from both parties to completing the transaction and potentially developing standard agreements to this effect, which it is hoped will also reduce instances of gazumping.

While the intent behind these proposed measures is laudable, they are not necessarily practical. There are already a number of options available to buyers and sellers in England and Wales designed to increase commitment to buying and selling, such as lock-in agreements and deposit schemes. 

These agreements generally operate on the basis that both parties commit a sum of money as a deposit and show of faith, which is returned upon the successful completion of the transaction, or forfeited should one of the parties cause the deal to breakdown. Both parties would also usually commit to completing the formalities of the transaction within a set, timely period.   

However, such measures are not, and could not be, a defence against frustrating and costly events like gazumping. If a prospective buyer emerges during a transaction, and offers a figure for the property which exceeds the sum committed by the seller in their deposit, the incentive for the seller to honour the agreement and remain committed to the first buyer will evaporate. There is little that can be done to avoid this; increasing the deposit required would be a disincentive to participate in the scheme at all, and it is impossible to quantify the potential size of offers which may appear.  

The consultation points to figures which show that 50% of buyers and 70% of lenders would be prepared to enter into a legal commitment agreeing to maintain the transaction, subject to agreed conditions such as a satisfactory survey and obtaining a sufficient mortgage. 

However, while the current available measures are legal, any move to make them more binding and commit both parties to the deal earlier in the process could be illegal. There is an important legal maxim in England and Wales that one cannot contract to contract, or in other words agree to enter into an agreement and it is difficult to picture how a commitment agreement could be worded in a way that would not breach this principle. 

Properties in England and Wales are sold subject to contract, and on the basis of caveat emptor (buyer beware). Consequently, buyers will survey the property and instruct a conveyancer to perform due diligence. 

A ‘goodwill’ agreement must not commit a buyer to a transaction without permitting exit in the case of unsatisfactory surveys or due diligence. For example, in a transaction for a property valued at several million pounds, an unsatisfactory survey result would probably result in the buyer disputing the previous price agreed or potentially wanting to withdraw. In such an event, who could mediate this dispute and at what cost? 

Although the intent behind this consultation is to be commended, and there are certainly measures which could be taken to improve the experience of buyers and sellers, I don’t believe introducing binding ‘goodwill’ agreements is not the right path to take. 

*Howard Freeman is Partner and Head of the Residential Real Estate team at Seddons