Reservation Agreements

Sealing the deal on your Cyprus Property, properly

3 key tips to avoid costly mistakes and protect your investment.

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Contents

Introduction
What makes a proper Reservation Agreement when purchasing Cyprus property?
3 key matters to address in your Reservation Agreement
Case study 1
Case study 2
Bonus tip
Key takeaway

Introduction

Whether you're purchasing your first home or adding to your investment portfolio, reservation agreements are often the first concrete step in securing property for sale in Cyprus.

But, sign a reservation agreement which fails to define and mitigate your upcoming risks in the transaction, and you will have made a costly mistake whether the sale goes through or not.

Signing a reservation agreement for property with the benefit of sound legal advice is crucial. Drawing on our extensive hands-on experience in real estate transactions and property litigation, we’ve drafted this article to provide actionable insights for buyers and sellers on key points to consider in any reservation agreement for Cyprus real estate.

This article moves beyond the question of what a reservation agreement is and whether it is a necessary step in your real estate acquisition journey. We assume, for the purposes of this article, that you've already determined that a reservation agreement is required for your sale transaction.

If you haven’t, and you wish to learn more on what reservation agreements are and whether reservation agreements might be useful to you as a prospective buyer or seller of real estate in Cyprus, you might want to read our shorter guide on the potential benefits and drawbacks of entering into a reservation agreement (coming soon).

The question we’re really addressing in this article is this:

What makes a proper Reservation Agreement when purchasing Cyprus property?

This a question you’d want to see answered properly, because the answer could be the difference between effectively safeguarding your investment in Cyprus property or ending your property purchase journey before it has even begun (cue costly mistakes).

If it is not a bad one, a Reservation Agreement will provide for the retention of the reservation fee by the prospective seller if the deal falls through or its deduction from the deposit on the purchase price of the property if a sale agreement is signed.

If it is a good one, it will ensure retention or release of the reservation fee in the event there is no deal are tied to specific obligations of the parties.

A proper Reservation Agreement for your Cyprus property should provide clarity to the prospective buyer and seller on what they must do to successfully see the transaction through, how, if, and when they might walk out of the deal, and what they will be giving up if they do.

Think of it this way:

Average Reservation Agreements may or may not get the job done, but at what cost?
Good Reservation Agreements may get the job done and may or may not fully protect your interests.
Proper Reservation Agreements will get the job done and will fully protect your interests. Not having a proper Reservation Agreement will put your Cyprus property investment at risk.

3 key matters to address in your Reservation Agreements

1. Make it stick

When entering into a reservation agreement, you need to ensure you’re contracting with the right person.

This is a basic but crucial consideration that is overlooked by potential buyers surprisingly often, nearly always to their detriment.

Consider this surprisingly common scenario:

A buyer signs a reservation agreement for the purchase of property with a real estate agent furnishing an exclusivity order for the property signed by the property owner.

Can the buyer make the reservation agreement ‘stick’ against the property owners themselves in this scenario?

The answer is no. The buyer has no binding contract with the property owners themselves and therefore no recourse or remedy against the property owner in the event the terms of the reservation are breached. What the buyer is really getting is the right to sue a third party (the agent) for the breach of a promise of a promise.

The right person to enter into a reservation agreement for property with is the property owner themselves or the person who can actually prove they are in control of the right to transfer title to the property to you in the event of a sale.

2. Dig in early

Details often define outcomes in property transactions and when it comes to protecting your interests, it pays to be proactive with your due diligence.

Reservation agreements for property for sale in Cyprus should always include provisions for thorough due diligence.

A proper reservation agreement is meant to afford the buyer the time needed to ‘do their due diligence’ the property, which involves thoroughly checking a series of legal, financial, planning, environmental and other matters concerning the property. These matters can range from verifying the seller actually holds title or a right to title for the property, checking for existing mortgages, encumbrances or claims against the property and ensuring any planning or building permits issued in connection with the property have been complied with.

Taking early action with due diligence when signing a house reservation agreement or a plot reservation agreement can prevent major problems.

Case study

Our team recently saw this in practice, in a transaction where we represented the buyer of a plot under division.

Making targeted requests for documentation to the seller even before a reservation agreement was signed, we discovered a planning issue that would have prevented our clients – aspiring home-owners – not just from building their dream home on the property, but from building any home on the plot.

Getting started on due diligence for the property early made a crucial difference in outcome for our clients. Instead of seeing our clients walk away from an objectively bad deal having nothing to show for it other than time spent, other opportunities missed and a hefty price for the trouble (the reservation fee), we were able to develop and deploy a solution to salvage their property deal even before the reservation period began. We also secured their right to walk away from the deal with their reservation fee in hand if the issue remained unresolved by the sale agreement signing date.

3. Lay down the rails

Clear the path to completion as early as your Reservation Agreement by agreeing on material terms for the sale, setting clear timelines for the parties’ obligations during the reservation phase and identifying the consequences if you don’t get to the finish line in time.

The strongest Reservation Agreements clearly outline the path from reservation to purchase completion.

To protect your interests, ensure your Reservation Agreement covers these critical topics:

1. The Reservation Agreement should address as many of the material terms of the sale transaction as possible.

Material terms in a property sale agreement will touch on key topics such as:

The property's purchase price
Who pays the VAT and other taxes
Payment terms, including deposit amount
Payment schedule and agreed damages for late payment.

Addressing these key matters early – even as early as the reservation stage – will limit scope for disagreements that could derail your deal later.

Agreeing on the form and format of sale agreement that will be signed if the deal goes through and attaching a template of the sale agreement to your reservation agreement will do well to eliminate future surprises, while helping the parties understand exactly what they’re working toward.

2. The reservation agreement should set clear deliverables and timelines for both buyer and seller:

Ensuring well-defined deadlines and deliverables in your reservation agreement helps eliminate guesswork, reduce miscommunication risks, and create a smoother transaction process for both buyers and sellers.

A proper Reservation Agreement must include all these key elements:

Set a realistic reservation period with buffer time for delays. If you expect to need 45 days, include 60 days in your agreement.
Clearly specify the exact method and deadline for how buyers must notify sellers when ready to purchase the property.
Include the date when a draft sales contract will be provided if an agreed draft is not already included in the reservation agreement.
Establish firm deadlines for when sellers must deliver important documents such as search certificates, property specifications, and all due diligence materials.

3. The reservation agreement should set clear conditions for the retention and release of the reservation fee:

A well-written reservation agreement must clearly state when buyers can get their reservation fee back and when sellers can keep it. This creates certainty for all parties involved and prevents disputes.

Setting clear conditions for the retention and release of the reservation fee will often require evaluating factors beyond your control including mortgage rejections, undisclosed structural problems with the property, planning issues, and legal complications found during property searches.

The most important element, however, is using clear, simple language. Poorly written agreements create confusion and may not fulfill their intended purpose.

Case study

Consider the following two clauses in a reservation agreement for the purchase of a commercial plot we recently advised on:

“if the sale does not materialize due to a fault of the buyer, part of the reservation fee will be kept as costs for the delay arising from the cancellation of the sale”

and

“the reservation fee will be reimbursed to the buyer in full if the Bank refuses to approve a loan for the buyer concerning the property in question within 5 business days”

The reservation agreement – which was not drafted by a legal professional – did not grant the seller the range and protection they thought they were getting. In fact, its provisions produced more questions than answers:

Which “part” of the reservation fee would the prospective buyer be getting back if the sale did not go through on account of their own fault?
What did “the fault of the buyer” entail? What did that phrase even mean?
Could the rejection of the buyer’s loan application by the buyer’s bank due to a fault of the buyer (such as the buyer not providing due diligence documentation requested by the bank to process the application) entitle the seller to part of the reservation fee?

Vague "catch-all" provisions such as the ones above will often fail to provide the protection you expect and may create obvious escape clauses that allow one of the parties to easily back out of the deal.

The combined effect of the use of ambiguous language and ineffective mechanisms in the reservation agreement created a loophole for the prospective buyers. They could legally walk away from the deal and receive their full reservation fee back if they failed to secure financing for any reason whatsoever. The buyers had, in fact, obtained a clear escape route with no financial consequences.

Bonus tip: Steer clear of reservation agreements not prepared by legal professionals.

There are usually telltale signs in the text of such agreements, such as the use of improper grammar and syntax, vague language, and an overall generic look and feel. Reservation agreements handed down by real estate agents directly are more likely to fall within this category. These types of reservation agreements tend to be overly simplistic, failing to cover for or address crucial aspects of the property sale-purchase down the line.

Key takeaway

Proper reservation agreements are your first line of defense when investing in property for sale in Cyprus.

By ensuring you're dealing with the right person, starting your due diligence early, and establishing clear terms, timelines and consequences for not meeting them, you can avoid costly pitfalls that might derail your property dreams.

Whether you're purchasing your first home or adding to your investment portfolio, taking the time to get this initial step right can save you significant headaches and money down the road.

That starts with having the right lawyer.

How we can help

Pericleous Michail LLC has built a solid Cyprus property law practice helping both local and international buyers and sellers find a clear path forward in their property sale or purchase in Cyprus.

Our property lawyers provide specialized legal advice on reservation agreements tailored to protect your interests in the Cyprus real estate market. We ensure your property investment is legally sound from the first step.

Read more about our Real Estate & Construction Law practice.

Schedule a free direct initial consultation with our Cyprus property law team or call us!

+35725000070