1 (2) Freehold Property Transactions Flashcards
What happens during ‘exchange of contracts’
fixes the completion date and gives buyer time between exchange of contracts and completion, to make final preparations, point at which parties are bound to the transaction, buyer will pay deposit at this stage to be held by solicitor until completion
What happens during ‘completion’
The bulk of the purchase money is paid to the seller and the transfer deed is completed to transfer the property to the buyer, buyer pays balance of purchase money in exchange for the keys
Pre-Contract Stage: Role of Seller’s Solicitor
submit pre-contract package of documents to buyer’s solicitor, including draft contract and evidence of the seller’s property title
Pre-Contract Stage: Role of Buyer’s Solicitor
- check documents of title to ensure (1) seller can sell (2) no encumbrances (ie third party interests), must be thorough as contracts may prohibit further queries on the title
- Carry out additional searches about boundaries, access, disputes, outgoings, and previous works (which seller is not obliged to answer but likely will)
- Carry out pre-contract searches of statutory, public and private bodies to obtain property info (most incur a fee, Solicitor must pick and choose)
What happens if there is falsification by the seller during the pre-contract stage?
The buyer can sue using the cause of action of misrepresentation
When does the ‘Pre-Completion’ stage occur?
In between exchange and completion
What happens during ‘pre-completion’
(1) Spent insuring correct money and documents will be available at completion (2) Transfer deed prepared and executed (3) Buyer’s Solicitor: carry out pre-completion searches to check that information obtained at the pre-contract stage is still valid and registration will go smoothly
Post-Completion Stage; Seller’s Solicitor
ensure mortgage paid off and removed (given undertaking)
Post-Completion Stage; Buyer’s Solicitor
ensure Stamp Duty Land Tax (England) or Land Transaction Tax (Wales) is paid on the transfer, register client as new owner and register any mortgage
What is ‘CQS’ Membership?
Membership to the law society’s Conveyancing Quality Scheme, necessary condition to be on panels of solicitors approved by mortgage lenders to act for lenders
Can a solicitor act for both a borrower and a lender? On a property transaction
Only if the risk of a conflict of interest is low: ie. no substantial negotiation (standard terms and conditions on mortgage)
When is the risk of a conflict of interest in a property transaction high?
(1) Clients do not have equal bargaining power (2) mortgage not standard mortgage of residential property (3) mortgage is standard but does not use approved certificate of title
Can solicitors act for Joint Buyers? What should they advise them of?
Usually yes: so long as they comply with 6.2 in the CoC (Confidentiality, Exceptions) (2) Prudent to advise buyers separately about holding equitable interest in the property, particularly if they aren’t married / civil partners
When can solicitors not act for joint borrowers?
Solicitor should take caution when one partner is electing to use matrimonial property as security for a loan, and non-initiating spouse pleads undue influence to try to have mortgage set aside
What are the ‘Etridge Guidelines’: what duties do they impose on the lender
Applicable when advising joint borrowers who are also spouses (undue influence), the lender should provide the solicitor with the following:
a. Purpose of loan
b. current amount of debt
c. amount of current overdraft facility
d. amount and terms of the new loan
e. copy of any written application made by the borrower for the loan
What are the ‘Etridge Guidelines’: what duties do they impose on the solicitor?
The solicitor must:
a. explain to the spouse the purpose for which the solicitor has become involved;
b. explain that the lender will rely on the solicitor’s involvement to counter any suggestion that the spouse has been unduly influenced or has not fully understood the nature of the transaction; and
c. obtain confirmation from the spouse that they wish the solicitor to act for them in the transaction, and to advise them on the legal and practical implications of the transaction.
Guidance for Solicitors in Undue Influence Situations
a. Meet spouse face to face without borrower
b. Advise in non-technical language
c. Explain documents and consequences and risks and whether transaction is in their interest
d. Emphasise their freedom of choice
e. Ask spouse whether they would like solicitor to confirm matters have been explained to them (to the lender), which must not be done until they have the requisite documents from the lender and the express consent of the spouse
DEF: Contract Races
Pre-contract package sent to multiple buyers, competing for who is ready to exchange first
Are contract races permissible?
Yes, so long as buyers understand the race is occurring, application to paragraph 1.4 CoC (solicitor must not mislead buyers)
General Rule of Undertakings
Paragraph 1.3: solicitors should perform all undertakings, and do so within an agreed timescale.
Where should solicitors provide clients with information about costs including stamp duty, land tax etc.
The letter of engagement
When does a solicitor need authority under Financial Services and Markets Act 2000?
(1) When carrying out regulated activity in relation to regulated mortgage contract
DEF: Regulated mortgage contract
A regulated mortgage contract includes one where the borrower is an individual, the lender takes a first legal charge over property in the UK and at least 40% of the property is intended for occupation by the borrower or a member of their immediate family.
What activities of solicitors are regulated wrt mortgages? Which are not?
(1) arranging or advising on a regulated mortgage contract (ie a specific mortgage product)
(2) not giving generic advice such as the differences between types of mortgage, or arranging the execution of a mortgage chosen independently by the client or on the advice of an authorised person.
What if a solicitor is not regulated but is performing such mortgage activities?
(1) Exception for professional firms (s 327 exception) allows solicitors to carry out regulated activities if they are incidental to the provision by the form of professional services (those regulated by SRA) (2) solicitor must comply with SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules
What is included in the SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules
These rules do not allow a solicitor to recommend that a client enters into a regulated mortgage contract, except where the advice is an endorsement of a recommendation made to the client by an authorised person.
What are the two ‘main’ types of mortgages?
(1) Repayment mortgages
(2) Interest only mortgages
DEF: Repayment Mortgage
- Monthly payments made to lender (part instalments of original amount, part interest)
- IR may be SVR (standard variable rate), fixed, or be a ‘tracker’ rate (certain % above BoE base rate)
- Fixed or Tracker reverts to SVR at the end of the period
DEF: Interest-only mortgages
- Monthly payments only comprising interest chargeable on the loan
- End of period, borrower still owes lender entirety of the amount borrowed - must find an alternative way to pay it off
- Possible to have combined mortgage here*
Property Taxes: Residential buyers in England
Stamp Duty and Land Tax
Property Taxes: Residential buyers in Wales
Land Transaction Tax
Property Taxes: Residential sellers in England / Wales
Capital Gains tax but not if property is only or main residence
Property Taxes: Commercial buyers in England
Stamp Duty and Land Tax
Property Taxes: Commercial buyers in Wales
Land Transaction Tax
Who pays corporation tax?
Corporate landlords pay corporation tax on rent
Property Taxes: Commercial sellers in England / Wales
Corporation tax payable on capital gains
Who can claim relief from SDLT
(1) Relief can be claimed (1st time buyers) if property is main residence and purchase price no more than 625 000 (2) Nothing on purchases up to 425 000 and 5% on 425 001 to 625 000
RATES: SDLT for Normal Residential Buyers
| Equal to or less than 250 000 | 0% |
Greater than 250 000 but less than or equal to 925 000 | 5% |
| Greater than 925 000 but less than or equal to 1 500 000 | 10% |
| The remainder | 12% |
What is SDLT payable on? What is excluded?
Payable on land (including fixtures) not chattels, could apportion part of purchase price to chattels to save SDLT
RATES: SDLT for non-residential / mixed use freehold property
Equal to or less than 150 000 | 0% |
| Greater than 150 000 but less than or equal to 250 000 | 2% |
| Greater than 250 000 | 5% |
How is SDLT Paid? When?
(1) to HMRC online by bank transfer with form SDLT1 (2) within 14 days of completion (if not, transfer will not be registered and there may be penalties and interest)
Who can claim relief from LTT?
No relief for first-time buyers
RATES: LTT for Residential Buyers
Equal to or less than 225 000 | 0% |
| Greater than 225 000 but less than or equal to 400 000 | 6% |
| Greater than 400 000 but less than or equal to 750 000 | 7.5% |
| Greater than 750 000 but less than or equal to 1 500 000 | 10% |
| The remainder | 12% |
RATES: LTT for Non-Residential Buyers
Equal to or less than 225 000 | 0% |
| Greater than 225 000 but less than or equal to 250 000 | 1% |
| Greater than 250 000 but less than or equal to 1 000 000 | 5% |
| Greater than 1 000 000 | 6% |
DEF: Capital Gains Tax. Calculation.
(1) Charged on gains made on chargeable assets including freehold and leasehold property, interests of co-owners, sales incidental to the sale of land (ie. release from an easement), gifts (2) Calculated by deducting purchase price of property (or base value in 1982 if purchased earlier) from current sale price (3) Gain chargeable at Gov. declared rate after exemption taken into account
DEF: Private Residence Relief for Capital Gains Tax
(1) Can claim if house is a dwelling which is main / only residence and has been throughout the period of ownership (also available to trustees if property is principal residence of a beneficiary) (2) Certain periods of absence fine (job etc.) with certain conditions
Private Residence Relief rule for Gardens
If garden >0.5 hectares, gain on excess chargeable to CGT unless seller can prove extra garden was necessary for reasonable enjoyment of the home
DEF: VAT
Tax on ‘taxable supplies’: goods and services provided by a taxable person in the course or furtherance of a business (indirect tax)
What is a ‘taxable person’ wrt VAT
Supplier must be a taxable person to collect VAT, a person whose turnover is over 85 000GBP (past 12 months)
How is VAT collected
Every three months, online, by HMRC
DEF: Output Tax
The VAT charged by the supplier on their own goods and services (their output), output VAT separate on invoices
DEF: Input Tax
The VAT paid by a customer’s business on goods they purchase from a supplier
How would a supplier calculate VAT?
Deducts input tax paid against output tax charged and net amount is sent to HMRC, accounting to HMRC for the ‘value added’ by its business, input tax paid by the supplier is recovered
When is input tax recoverable?
When is can be attributed to a taxable (output) supply and there is an immediate and direct link between the two
VAT charges on (1) standard (2) exempt and (3) zero-rated supplies
(1) 20%
(2) Domestic fuel, construction, conversion, renovation = 5%
(3) Zero-rated = charged at zero rate
- Exempt supplies (ie land), supplier of land may be able to charge VAT
Types of Taxable Supplies: Properties
(1) Standard Rating = supply of construction services, professional services, sale of new freehold building
(2) Exempt = sale of greenfield site (subject to option to tax), sale of old freehold building (subject to option), grant of lease exempt (subject to option)
Do Commercial sellers need to charge VAT
(1) If new building (less than 3 years since completion) = YES
(2) Old building = choice, would need to notify HMRC
Why would a commercial seller want to charge VAT? What effect will this have?
If they have incurred alot of VAT during building process (input tax) they can recover some of this with the output tax. Has the effect of increasing purchase price if buyer cannot recover this input tax from their VAT
When should a commercial seller NOT charge VAT?
When trying to target buyers who are VAT sensitive (ie. banks, insurance company, building society)
