3. The contract Flashcards
What is the standard rate of VAT?
20%
What is the reduced rate of VAT?
5%
What rate of tax is charged on the sale of newbuild houses by developers?
Zero rated supply
What constitutes a “new” commercial property?
Within 3 years from completion
Is the sale of a new commercial building liable for VAT?
Yes
What other property transactions can be made into taxable supplies by the seller exercising the “option to tax”?
The sale of a greenfield site
The sale of an old freehold building
Grant of a lease
Why would the seller make the option to tax?
In order to recover the cost of the input tax incurred in relation to the building
What is the impact of the seller making the option to tax?
Seller charges VAT on purchase price - buyer can recover the input tax if they make taxable supplies
What is the function and purpose of a contract in property transactions?
Provides certainty as to nature and extent of property, financial terms, timetable etc
DOES NOT transfer the land, as deed is needed for this
Who usually drafts the contract?
Seller’s solicitor
What are the two standard sets of conditions?
The Standard Conditions of Sale (residential)
The Standard Commercial Property Conditions (commercial)
Where are all of the burdens against the property listed in the contract and by who?
Under “Specified incumbrances”
Seller’s solicitor
When would a seller provide full title guarantee?
When they own the entire legal and equitable interest
What would a seller provide limited title guarantee?
When they have a more limited knowledge of completeness of title, e.g. executor or trustee
What is the implied covenant of limited title guarantee?
That the seller has not incumbered title to the property and seller is not aware anyone else has since last disposition for value
What is the implied covenant of full title guarantee?
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
What is the contract rate?
Rate of interest charged on purchase price that will be charged if a party is late in completing
What is commonly used as the rate of interest?
“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%)
How do SCs and SCPCs require the deposit to be held?
As stakeholder
When a contract uses SCPC, what is the position regarding the deposit under 3.2?
Buyer pays 10% deposit
Paid by electronic means
Will be held by seller’s conveyancer as stakeholder
Can a deposit be used to fund a deposit on a related purpose, e.g. money from completion of another sale?
SCs = yes
SCPCs = no
What are special conditions in a contract?
Terms which appear at the back of the contract relating to the individual characteristics of the property and particular circumstances of the transaction
Are special conditions fixed?
No, they can be amended, or new ones incorporated
What is the position regarding fixtures and chattels in the sale of a property?
Fixtures pass to buyer unless special condition included giving seller right to remove it
Chattels only included if special condition saying this
Where could an indemnity covenant be included in the contract?
In the special conditions
When does risk of damage to property pass?
On exchange of contracts
Therefore, buyer will want to put insurance arrangements in place at moment of exchange
What does SC 1.4 provide in the purchase of residential properties?
That purchase price and contents price are inclusive of any VAT and it is expected no VAT will be charged or paid
What are the three ways in which the contract for the sale of commercial properties can deal with VAT?
- Purchase price is exclusive of VAT and VAT will be added on top (SCPC 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)
- 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)
When would a commercial seller choose to exclude VAT on purchase price and then add it on top (SCPC 2)?
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
When would a commercial seller choose to include VAT in purchase price (SC 1.4 or special condition in an SCPC contract)?
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
When would a commercial seller choose to exclude VAT but with the option to add if law changes (SCPS Part 2, Condition A1)?
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
How are mortgages made legal?
By deed and completed by registration at Land Registry
In what event can a solicitor not act for both the buyer and lender?
Commercial property transactions where the facility / loan agreement is not offered on standard terms
What element of a commercial transaction could the buyer’s solicitor also do for the lender?
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
What is the purpose of the certificate of title provided to the lender and what information is confirmed within it?
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
What is the certificate of title?
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
What is the certificate of title produced by the City of London Law Society and when would it be used?
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
If information is wrong in the certificate of title, who can the lender sue?
The firm who provided the certificate, as there are warranties as to the correctness of information contained within it
In regards to exchange of contacts, what is Law Society Formula A?
One solicitor holds both parts of the contract duly signed, and deposit sent by electronic means
In regards to exchange of contacts, what is Law Society Formula B?
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
In regards to exchange of contacts, what is Law Society Formula C?
Complex method used in residential property where there is a chain transaction
What is the consequences of exchange on legal / equitable title in the property?
Seller retains legal title until completion but holds the beneficial interest on behalf of the buyer
Seller must pay outgoing charges until completion
