Gazumping – Part 3: Further Possible Solutions
In the first of our posts on gazumping we looked at what it was and why it occurred. In the second gazumping post we considered lock-out, or exclusivity, agreements as a possible solution to gazumping. In this third post we will look at some of the other potential solutions to gazumping to which the Housing Minister referred when rejecting any proposals to legislate to prevent gazumping.
Before we look at the other possible gazumping solutions let us just remind ourselves of what evil gazumping causes. In a nutshell the practice of gazumping has two effects:
1. It causes the first buyer who has an offer accepted to waste money on surveyors’ and legal fees on what, through no fault of the buyer, proves to be an abortive transaction; and
2. It prevents the buyer form securing a home that he believed, acting in good faith, he would secure, either at all or certainly at the original price he thought he would have to pay for it.
With these two consequences in mind let us now look at the other possible solutions suggested by government as means of providing greater buyer certainty.
Options to Purchase
An option gives the buyer the right to acquire a property at an agreed price within an agreed period, but the buyer can choose whether or not to buy – it is his option. A fee is payable, which may be nominal, £10 or so, or may be substantial, thousands or more. If the buyer does not proceed, the seller keeps the option fee. In theory this looks like a possible solution to gazumping in that it allows the buyer to fix a price at which he knows he can buy a property if all of his investigations work out well. Also, in a quiet market, an option can allow the time that buyers may need to sell their own home, whilst satisfying a seller that they are serious.
However, there can be practical problems; the seller may not want to go through the complication of an option, and usually the extra time and expense that will be involved. An option agreement provides the seller with very little certainty – just the consolation that he can keep the option fee if the buyer decides not to proceed. Remember an option agreement really gives all the options to the buyer – is this really likely to be acceptable in the kind of market where gazumping is a problem i.e. a sellers’ market? An option agreement can show the good faith of the buyer but only if the option fee is something other than a nominal amount. How many buyers want to put a significant amount of money at risk when they have hardly begun their investigation of the property? Also, given that the buyer needs to undertake further enquiries and surveys after making the offer – how keen should he be to fix a price, which is effectively what he is doing in an option agreement? It is not beyond the wit of man to build some flexibility into the option agreement to deal with bad surveys etc – but it involves time and expense and the seller is unlikely to be happy about it. Therefore, in summary an option agreement is likely to work best for the buyer (which is not much of a selling point in a sellers’ market) but even for the buyer it carries risks and can cause problems and lead to wasted expense.
Conditional Contracts
We know from the first gazumping post that a contract for the sale of land must be in writing. In a normal conveyancing transaction that contract is only made at exchange of contracts and, therefore, up to that point gazumping remains a risk. A conditional contract would put a written contract in place at the time that the offer was originally accepted. However, given that the buyer still, at that stage, has to undertake surveys and investigations of title, the contract would be conditional upon those things not throwing up any problems. If they do not throw up problems then the contract becomes unconditional. If they do throw up problems, then the conditions are not met and the contract falls away. The real problem with this concept is the drafting of the conditions. It is almost impossible to draft the conditions appropriately such that both the buyer and the seller will be happy. For example, drafting that says that the contract is conditional on a “satisfactory survey” begs the question of what “satisfactory” means. If the survey discovers required works that would cost £1,000, is that a satisfactory survey? What about works costing £4,500? Another example is a condition based upon “satisfactory search results” being obtained. If a search uncovers a plan to build a Tesco store at the end of the road is that satisfactory? What about plans to build a half way house for young offenders? As you can see it is almost impossible to draft conditions that can be objectively tested and the courts, in looking at these kinds of contracts, have often come up with different interpretations of very similar wording. In summary therefore, a conditional contracts is likely to involve you in significantly increased legal fees, is unlikely to be popular with sellers and may cause as many problems as it solves.
Costs Guarantees
A costs guarantee is a contract entered into by the buyer and seller at the time that the offer is accepted. The contract provides that if either side pulls out of the transaction then that party will pay the other side’s costs incurred to date. Contracts like this obviously do not secure the property for the buyer they just give him comfort that, if the seller pulls out, he will not have wasted money on fees. They do however put greater risk on the buyer as he is agreeing (before he has done his investigations) that, if his investigations throw up significant problems, he will have to pay the seller’s costs if he pulls out. Additionally, of course, these guarantees are only possible if both sides agree to them. Insurance for abortive costs provides similar protection and, whilst it does involve the buyer in paying an upfront insurance premium, it is something that the buyer can sort out unilaterally if he is dealing with a seller that is not prepared to agree to a guarantee.
Conclusion
Gazumping is a problem inherent in the conveyancing system which operates in England and Wales. How much of a real problem it is will depend upon the market conditions at the time you are seeking to buy a property and the nature of your seller. In theory there are a number of means of reducing the risk or consequences of gazumping; however in practice none of them provide a complete, workable, solution. Whilst it is possible to protect yourself against abortive costs you are unlikely to be able absolutely to guarantee securing your dream home through any of the means discussed in these three posts.