Reservation agreement

What it means

A reservation agreement is a contract by which a developer or seller reserves a specific flat, house or plot for a buyer for a set time in exchange for a reservation fee. During the reservation the seller does not offer the property to others, and the parties prepare the next contracts.

The law does not regulate reservation agreements specifically; they are innominate contracts based on freedom of contract. They often precede a preliminary contract and the purchase contract itself, especially in development projects where flats are sold before completion.

It is essential to state clearly when the reservation fee counts towards the price, when it is forfeited to the seller and when it is refunded. Without that, disputes arise, for instance when the buyer fails to get a mortgage or the developer changes the terms.

How it works in practice

Before signing, the buyer should check ownership of the land, the status of permits, the project's financing and the developer's track record. The fee is better paid into notarial escrow or a blocked account rather than in cash.

When selling to consumers, the terms are subject to review for unfair contract terms. A clause stating that the fee is forfeited in every case, even if the sale falls through for reasons on the seller's side, may be invalid.

For the developer, the reservation fee is income whose accounting and tax treatment depends on the contract. If it is credited against the price, it is an advance and, for a VAT payer, may trigger VAT on the payment received; if it is forfeited, it is revenue.

What to watch out for

A reservation agreement usually does not oblige anyone to buy; it only reserves. If the buyer wants certainty that the purchase will go ahead on agreed terms, a preliminary contract with a deadline and the essential terms is more suitable.

The reservation period must be realistic, for example long enough for the buyer to arrange a mortgage. A very short period with strict penalties means the buyer could lose the fee because of a bank delay beyond their control.