It is common within the Phuket real estate market for developers or sellers of properties to ask a potential buyer to sign a reservation agreement. From a seller?s perspective, a reservation agreement might primarily be regarded as a marketing tool to achieve an early commitment from a buyer with the aim to close the sale within a short period of time. However, a buyer may also utilize a reservation agreement to negotiate with the seller at an early stage to determine essential terms and conditions of a future property acquisition. It is therefore recommendable for both seller and buyer to pay attention to the terms and conditions of a reservation agreement.

The minimum content of a reservation agreement will state the details of the parties involved and the object of the envisaged transaction. This document will also include the agreed purchase price and a specific period of time for which the parties shall be bound to the reservation. Although the length of the reservation period will mostly be predetermined in the reservation agreement supplied by a seller or an agent, it is noteworthy that such a period is freely negotiable between the parties.

An appropriate reservation period is ideal in the case of a foreign buyer who may not fully understand the legal implications of purchasing a property in Thailand. This will provide sufficient time to consult a legal advisor to conduct due diligence with regard to the land on which the property is built, and also with regard to the sales contracts, which are usually provided by the seller. It is common practise to provide a buyer with 30 days to conduct legal due diligence. However, a fair-minded seller should not reject an extended reservation period if more time is needed to complete due diligence, assuming the delay was not caused by the buyer.

Normally a developer or a seller will also ask for a percentage payment of the purchase price as a reservation deposit upon or shortly after execution of the reservation agreement. A fair reservation agreement will allow either that the reservation deposit can be held by a third and neutral party ? a sales agent appointed by the buyer, or the buyer?s legal advisor ? or the reservation agreement will state that any reservation payment is fully refundable to the buyer in the event of unsatisfactory due diligence results.

Furthermore, a reservation agreement can also be drafted and utilized for the benefit of the buyer and seller alike, to determine at an early stage the principal terms and conditions of the future sale contracts. A reservation agreement is not solely limited to high-value property transactions, but it can be specifically used to negotiate between a buyer and a seller or their legal representatives.

Principal matters on which the parties of the future transaction may additionally wish to agree upon at the time of execution of a reservation agreement could be: sharing of cost between seller and buyer regarding legal fees, taxes and transfer fees relating to the envisaged property purchase; fixing of the exchange rate, if payments regarding the property will be made from abroad; setting a fixed time frame for negotiating the terms and conditions of the final sales contracts; warranties of the seller regarding compliance of the property with legal regulations (e.g., building or environmental regulations); or specifying or limiting the reasons under which a seller or buyer may withdraw from the envisaged property purchase.

It is important to note that in legal terms a reservation agreement is not the sales contract itself. However, compliance with the terms and conditions of a reservation agreement, or non-withdrawal from a reservation agreement without cause by any party, can legally be ensured by agreeing including a penalty provision. Such a provision would usually state that any party which withdraws from the reservation agreement without cause, or refuses to enter into the final sales contract under the terms and conditions which were already agreed under a reservation agreement, is obliged to make a penalty payment to the other party.

In practice, the form and contents of a reservation agreement may vary widely depending on the purpose for which it was drafted. As for any legal document, it is advisable to take one?s time to read a reservation agreement carefully and to obtain a professional legal opinion on its contents prior to signing.

Ingo Müller is a senior associate based in the Phuket office of Belmont Limcharoen International Law Firm. www.belmontlimcharoen.com.