Why do real estate reservation agreements often end up being void?

Transactions involving real estate generally require notarised agreements, especially in the case of a sale and purchase of real estate. The same requirement applies to a preliminary agreement of immovable property sale, which obliges the parties to enter into a sales agreement in the future and on the same terms as agreed upon in the preliminary agreement.  

The Challenge of Reservation Agreements 

At the same time, however, the law does not explicitly provide a mandatory format for the so-called reservation agreement, which is frequently concluded in practice, whereby the seller undertakes (for a fee) to refrain from transferring the property to third parties for a certain period. Such simple (or even verbal) reservation agreements are often the subject of disputes, particularly when one party considers it a preliminary agreement as described above and seeks to have it declared null and void for failure to comply with the mandatory format requirement. 

Defining the Scope of a Reservation Agreement 

A recent judgment of the Supreme Court of Estonia (No 2-20-14179) has further narrowed the scope of what can be considered a reservation agreement. A reservation agreement must be aimed primarily at “reserving” the property, which means that a reservation agreement cannot oblige either party to a transaction, even indirectly. However, in the case of a reservation agreement, the obligations arising from the agreement must be assessed primarily based on the details of the obligation to pay a fee and the amount of that fee.  

Assessment of Financial Consequences 

If the agreement provides for a financially unfavourable consequence or other financial sanction in the event of non-acquisition or non-disposal of a particular property, it is an (indirectly) obligatory agreement since such a negative consequence inhibits the party’s freedom of choice. In other words, if a reservation agreement contains a contractual penalty in the event of non-acquisition or non-disposal of the property by one of the parties, it can be considered a rather preliminary agreement for the purchase or sale of the property and must therefore be concluded in notarial form. 

Navigating Complex Cases 

Another common case in practice is where the reservation agreement sets a financial burden on the person interested in acquiring the property in case the property is not acquired due to circumstances beyond the person’s control. In other words, if the reservation agreement provides that the purchaser will lose the amount paid for the ‘reservation’ if the sale of the immovable property is not concluded because of them, the reservation agreement rather has the characteristics of a preliminary agreement and must therefore be concluded in notarial form to be valid.  

The Intent of a Reservation Agreement  

The reservation agreement is intended for the purpose of acquisition (and is therefore subject to the notarial form requirement) even if the fee paid for the “reservation” exceeds the amount reasonably payable for the reservation. Thus, the seller cannot claim a sum which constitutes a substantial part of the purchase price for merely the reservation, i.e., for abstaining from selling the property to third parties for a certain period. In the case of an unreasonably high reservation fee, the agreement is no longer a reservation agreement without a format requirement and must therefore be concluded in a notarial form. 

Ensuring Legal Validity 

In practice, situations have often occurred where the seller has adhered to abstaining from the sale of a “reserved” building but still has had to return the amount paid for the reservation if the sale did not take place, as the reservation agreement was concluded simply in writing but required a notarial form. 

Therefore, it is always safer for the parties to a real estate transaction to conclude a notarised preliminary agreement that includes terms for the desired “reservation”.  

For help with drafting the necessary agreements for your real estate transaction, contact us

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