Before you sign a reservation contract for a real property
Posted on 10. 1. 2018 / You will read this in: 4 minutes
A reservation contract is the first contract you will come across when buying a real property via the real estate agency. Whereas the real-estate agent will probably exert a pressure on you, it is useful to know more about this reservation contract and NOT to sign it immediately when it is submitted by a real-estate broker.
What is it?
The reservation contract is mostly a bilateral agreement made by and between the real estate agency and a person who is interested in buying a real property. It can be referred to under various names – reservation contract, deposit agreement, reservation agreement – however, it is always a contract the essential elements of which are not determined by law and, therefore, it may stipulate the rights and obligations according to the will of its participants.
What are you obliged to do after signing the reservation contract? What does this contract regulate?
You undertake, usually with a contractual penalty imposed for noncompliance, to buy a real property which you have not examined and looked through in detail. You undertake to buy a real property under not otherwise specified terms and conditions, which means that you will have to buy the real property even when it has defects or your bank will not approve your mortgage. In other words, you undertake to make a sales contract of unknown wording.
You also undertake to pay a reservation fee or a deposit the amount of which is usually, by sheer accident, identical with an amount of the contractual penalty imposed in case you changed your mind and did not buy the real property for any reason whatsoever. The reservation contract also stipulates the obligation for the real estate agency not to offer such a real estate to other persons.
Why you should (not) sign the reservation contract? What will you get?
You will probably hear something like this: You will get:
- The time to find the defects in the real property or, more precisely, the factual and legal state of the real property
- The time to deal with the financing or mortgage
- Certainty that the real estate agency will not offer this real property to any other persons interested.
What does it, in fact, means?
You have no time to think about your purchase. It does not arise from the contract that you could change your mind about buying the real property. You must always know the state of the real property BEFORE you sign any contract.
This is not usually true; the contract does not imply anything like this – this option is provided by the more decent real estate agencies only.
The real estate agency cannot make a promise to you that such a real property will not be sold to any other buyer by another real estate agency or the seller itself. You will only be guaranteed that the real property will not be sold to another person if the seller itself undertakes to do so or if the real estate agency and the seller make the exclusive agency contract.
What is the reservation contract, in fact, good for?
The reservation contract is good for protecting the real estate agency.
What should the good reservation contract look like? What should the good reservation contract govern?
- It should be a tripartite agreement – also the seller should be included as a party to the contract; the bilateral reservation contract itself cannot stipulate any obligations for the seller (e.g. the obligation not to sell the real property for a certain period of time).
- It should contain the wording of the sale contract which defines the exact terms and conditions of the sale, such as the seller´s obligation to render cooperation in negotiating the mortgage or, more precisely, the obligation to sign the mortgage contract.
If the reservation contract contained all, in my opinion, appropriate elements, its content would make it closer to the preliminary contract. Why not to make the preliminary contract instead, then?
How does the reservation contract contribute to the process of purchasing the real property?
In no way; it is, basically, useless.
I signed the reservation contract for purchasing a certain real property with the real estate agency. I paid the reservation deposit but I do not want to buy the real property. Am I entitled to be returned the reservation deposit by the real estate agency?
If the reservation contract you signed is bilateral, i.e. the contract in which the owner of the real property is not the contractual party, you are entitled to be given the reservation deposit (or, in other words, blocking deposit) back. The contract made by and between the real estate agency and the person interested in the purchase may not stipulate any obligations that would exist between the person interested in the purchase (i.e. a potential buyer) and the third party – the seller. Such obligation of the person interested in the purchase to make the sales contract is invalid and may not be a subject of any sanction. The real estate agency should return the reservation fee to you or you can obtain it by court order.