3. The contract

Question 1

What is the standard rate of VAT?

Answer 1

20%

Question 2

What is the reduced rate of VAT?

Answer 2

5%

Question 3

What rate of tax is charged on the sale of newbuild houses by developers?

Answer 3

Zero rated supply

Question 4

What constitutes a “new” commercial property?

Answer 4

Within 3 years from completion

Question 5

Is the sale of a new commercial building liable for VAT?

Answer 5

Yes

Question 6

What other property transactions can be made into taxable supplies by the seller exercising the “option to tax”?

Answer 6

The sale of a greenfield site

The sale of an old freehold building

Grant of a lease

Question 7

Why would the seller make the option to tax?

Answer 7

In order to recover the cost of the input tax incurred in relation to the building

Question 8

What is the impact of the seller making the option to tax?

Answer 8

Seller charges VAT on purchase price - buyer can recover the input tax if they make taxable supplies

Question 9

What is the function and purpose of a contract in property transactions?

Answer 9

Provides certainty as to nature and extent of property, financial terms, timetable etc

DOES NOT transfer the land, as deed is needed for this

Question 10

Who usually drafts the contract?

Answer 10

Seller’s solicitor

Question 11

What are the two standard sets of conditions?

Answer 11

The Standard Conditions of Sale (residential)
The Standard Commercial Property Conditions (commercial)

Question 12

Where are all of the burdens against the property listed in the contract and by who?

Answer 12

Under “Specified incumbrances”

Seller’s solicitor

Question 13

When would a seller provide full title guarantee?

Answer 13

When they own the entire legal and equitable interest

Question 14

What would a seller provide limited title guarantee?

Answer 14

When they have a more limited knowledge of completeness of title, e.g. executor or trustee

Question 15

What is the implied covenant of limited title guarantee?

Answer 15

That the seller has not incumbered title to the property and seller is not aware anyone else has since last disposition for value

Question 16

What is the implied covenant of full title guarantee?

Answer 16

Land is disposed free from incumbrances other than those seller doesn’t know about and could not reasonable know about

S 6 LP(MP)A limits this covenant to exclude matters to which the disposition is expressly made subject, matters about which the buyer knows at the time of the disposition and matters which at the time of the disposal were entered on the registers of title

Question 17

What is the contract rate?

Answer 17

Rate of interest charged on purchase price that will be charged if a party is late in completing

Question 18

What is commonly used as the rate of interest?

Answer 18

“Law Society’s interest rate from time to time in force” which is 4% above base lending rate of Barclays Bank (currently 5.25%, therefore rate would be 9.25%)

Question 19

How do SCs and SCPCs require the deposit to be held?

Answer 19

As stakeholder

Question 20

When a contract uses SCPC, what is the position regarding the deposit under 3.2?

Answer 20

Buyer pays 10% deposit

Paid by electronic means

Will be held by seller’s conveyancer as stakeholder

Question 21

Can a deposit be used to fund a deposit on a related purpose, e.g. money from completion of another sale?

Answer 21

SCs = yes

SCPCs = no

Question 22

What are special conditions in a contract?

Answer 22

Terms which appear at the back of the contract relating to the individual characteristics of the property and particular circumstances of the transaction

Question 23

Are special conditions fixed?

Answer 23

No, they can be amended, or new ones incorporated

Question 24

What is the position regarding fixtures and chattels in the sale of a property?

Answer 24

Fixtures pass to buyer unless special condition included giving seller right to remove it

Chattels only included if special condition saying this

Question 25

Where could an indemnity covenant be included in the contract?

Answer 25

In the special conditions

Question 26

When does risk of damage to property pass?

Answer 26

On exchange of contracts Therefore, buyer will want to put insurance arrangements in place at moment of exchange

Question 27

What does SC 1.4 provide in the purchase of residential properties?

Answer 27

That purchase price and contents price are inclusive of any VAT and it is expected no VAT will be charged or paid

Question 28

What are the three ways in which the contract for the sale of commercial properties can deal with VAT?

Answer 28

1. Purchase price is exclusive of VAT and VAT will be added on top (SCPC 2) 2. Purchase price is inclusive of VAT so that VAT, if any, cannot be added on top (SC 1.4 or a special condition in an SCPC contract) 3. Purchase price exclusive of VAT, so VAT can be added on top if the law changes between exchange of contracts and completion to make an exempt supply chargeable at the standard rate, but seller is contractually obliged not to opt to tax (SCPC Part 2 Condition A1)

Question 29

When would a commercial seller choose to exclude VAT on purchase price and then add it on top (SCPC 2)?

Answer 29

Standard rated supply of a commercial building where seller has no choice to charge VAT (“new” buildings) OR Seller needs to opt to tax to recover VAT paid on refurbishment and/ or professional costs and the buyer is not VAT-sensitive

Question 30

When would a commercial seller choose to include VAT in purchase price (SC 1.4 or special condition in an SCPC contract)?

Answer 30

May be appropriate for supply of an old commercial building where the seller does not have input VAT to recover and so has no reason to opt to tax Popular option with VAT-sensitive buyers who cannot recover VAT paid on purchase price

Question 31

When would a commercial seller choose to exclude VAT but with the option to add if law changes (SCPS Part 2, Condition A1)?

Answer 31

Supply of an old commercial building where seller does not have input VAT to recover so does not need to opt to tax, but is not willing to take the risk that there will be a change in the tax regime between exchange and completion

Question 32

How are mortgages made legal?

Answer 32

By deed and completed by registration at Land Registry

Question 33

In what event can a solicitor not act for both the buyer and lender?

Answer 33

Commercial property transactions where the facility / loan agreement is not offered on standard terms

Question 34

What element of a commercial transaction could the buyer's solicitor also do for the lender?

Answer 34

Prepare certificate of title for lender which confirms good and marketable title to the property However, would not act for both parties on terms of loan

Question 35

What is the purpose of the certificate of title provided to the lender and what information is confirmed within it?

Answer 35

Confirms that the property is adequate security for the loan No legal problems Who will own property once sale is completed Completion date when funds are needed

Question 36

What is the certificate of title?

Answer 36

A conditional opinion that the title to the property is good and marketable - subject to any disclosures made and due registration at Land Registry of the transfer of the Property from the seller to the buyer

Question 37

What is the certificate of title produced by the City of London Law Society and when would it be used?

Answer 37

Commercial transactions Structured as a series of statements about the property which are pre-prepared and cannot be changed, which the solicitor then declares if they are correct or incorrect

Question 38

If information is wrong in the certificate of title, who can the lender sue?

Answer 38

The firm who provided the certificate, as there are warranties as to the correctness of information contained within it

Question 39

In regards to exchange of contacts, what is Law Society Formula A?

Answer 39

One solicitor holds both parts of the contract duly signed, and deposit sent by electronic means

Question 40

In regards to exchange of contacts, what is Law Society Formula B?

Answer 40

Each solicitor holds their own client's signed parts of the contract Undertaking provided that buyer's solicitor pay by banker's draft / solicitor's client account cheque - variation required for electronic transfer Undertaking provided that contract sent same day via first-class post or DX - variation required for next day

Question 41

In regards to exchange of contacts, what is Law Society Formula C?

Answer 41

Complex method used in residential property where there is a chain transaction

Question 42

What is the consequences of exchange on legal / equitable title in the property?

Answer 42

Seller retains legal title until completion but holds the beneficial interest on behalf of the buyer Seller must pay outgoing charges until completion