4. The Contract Flashcards
Is a contract necessary in a property transaction?
Technically no, but should be used when there is any delay between agreement and completion to act as an assurance, also if any work needs to be done from the seller, or if there are concerns about a party withdrawing
What do the Standard Conditions of Sale Apply to
SCs apply to all residential transactions and some simple commercial transactions (eg. property is empty, title is straightforward and price is low)
What are SCPCs
Standard Commercial Property Conditions
- Apply to high value commercial properties
Part 1 + Part 2 of the SCPCs, when do they apply?
Part 1: Applies unless excluded
Part 2: Applies only if specifically INCLUDED
What do SCs and SCPCs provide about specified incumbrances?
SCs and SCPCs provide that property is sold free from incumbrances UNLESS they are
i. specified in the contract
ii. a type listed in SC 3.1.2 or SCPC 4.1.2
Consequences if the seller does not specify the incumbrances which the property is sold subject to
Breach of contract
Which specified encumbrances are listed in SC 3.1.2 and SCPC 4.1.2
- those specified in the contract
- those discoverable by inspection before the date of the contract
- those seller does not and could not reasonably know about
- public requirements
SC 3.1.2: - those (other than mortgages) which buyer knows about
- entries made before the date of contract in any public register EXCEPT LR, LCD and CH
SCPC 4.1.2:
matters, other than mortgages, disclosed or which would have been disclosed by the searches and enquiries which a prudent buyer would have made before entering into the contract.
When should a seller sell with full title guarantee
If they own the entire legal and equitable title to the property
When might a seller give limited title guarantee
If they know little about the property eg. they are an executor or trustee
Covenants given with limited or full title guarantee
i. they have the right to dispose of the lane
ii. they will do all they reasonably can to transfer the title
iii. leases: lease subsisting at the time of disposal and no breach of covenant will make the lease liable to forfeiture
iv. Full title guarantee only: land is disposed of free from encumbrances other than those those the seller does not know about and could not reasonably know about
Contract Rate Definition
Rate of interest that will be charged if a party is late in completing, which is charged on the purchase price (less the deposit if it is the buyer in default as the buyer has already handed this over on exchange)
- typically law society rate
If a buyer fails to complete, what can the seller do wrt the deposit already paid?
SC 7.4 and SCPC 10.5: Seller can forfeit and keep the deposit
Can a seller use the deposit paid to them towards a deposit on another house purchase?
Yes, if SC 2.2.5 is being used
What does it mean if the seller and buyer agree that their solicitor take the deposit as an ‘agent’ rather than a stakeholder?
Agent: solicitor can release deposit to their client immediately after the exchange
Stakeholder: deposit should not be released unless and until completion takes place
Where would a buyer look in the contract to see whether the house is being sold with any chattels or without any fixtures
Pre-printed Special Condition 3
If there is a a non-owning adult occupier of the property, what will the buyer want to see in the contract
An agreement from them to give vacant possession on completion / release their rights, Special Condition 7
What things would need to be new special conditions incorporated by either parties solicitor (instead of just included in standard SCs)
- appointment of second trustee for the purposes of the transfer
- arranging for seller to obtain or pay for restrictive covenant insurance policy
- disclosing a defect in title
- seller selling with limited or no title guarantee
- deposit of less than 10% and or deposit held by agent rather than stakeholder
- payment of VAT
- appointment of second trustee for the purposes of the transfer
After exchange of contracts, who does the risk of damage pass to?
SC + SCPCs: passes to the buyer (so they should get insurance)
If parties agree that the seller will remain liable for damage after exchange of contracts, what do the SCs / SCPCs require of the seller’s insurance
SC 5.1.3 and SCPC 8.1.2 require seller to maintain policy until completion and if property suffers damage prior to completion, the seller must hand the insurance proceeds over to the buyer or assign to the buyer all seller’s rights under the policy
Post-Exchange: Both buyer and seller have insurance and the home suffers damage. The buyer’s insurer reduces the payout because there are multiple policies, causing the buyer to be unable to recover the full amount of the damage - what should happen here according to SCs / SCPCs?
The seller should reduce the purchase price accordingly
Is VAT normally chargeable on residential transactions?
No
When is VAT payable on commercial properties
- Property is new (less than 3 years old)
- seller has exercised the ‘option to tax’
Three ways of expressing the purchase price + VAT liability
- purchase price is exclusive of VAT and VAT will be added on top
- Purchase price is inclusive of VAT
- purchase price is exclusive of VAT so VAT can be added on top if law changes to make an exempt supply (old building) chargeable at the standard rate, but seller is contractually obliged not to opt to tax
When would a seller opt to have purchase price exclusive of VAT and VAT added on top? What SCPC must be adopted in the contract?
- New commercial buildings
- Old commercial buildings with seller opting to tax
- SCPC 2
When would purchase price be made inclusive of VAT? Which SCPC is applied here
- Old buildings where seller does not want to opt to tax or selling to VAT sensitive buyers
- SCPC 1.4
If a party wants to make purchase price exclusive of VAT, with VAT added on top if there is a change in the law - how can they do this in the contract
SCPC contract incorporating optional standard condition Part 2: Condition A1 (which disapplies SCPC 2)
- Will be included in pre-printed special condition 9
When is certificate of title needed / why?
Res:
- Required by lender (mortgage giver) to reduce risk of conflict of interest when borrower and lender represented by the same person
Comm:
- lender needs more detailed Cert. of title
Who is the certificate of title addressed to?
Buyer or lender, sometimes just lender
What if a solicitor produces a certificate of title which ends up being incorrect? What can the lender do?
Sue the firm, as the solicitor has warranted that the information is correct
When is the certificate of title given to the lender?
Immediately prior to completion of the loan
- drafts are given at earlier stages
What is the ‘pre-contract report’? Who is it for and what does it do?
- Report summing up results of pre-contract searches and the investigation of title
- may also explain the terms of the contract ad mortgage offer
- For the buyer
- Includes disclaimers from solicitor about limits of their professional advice
Essential steps taken prior to exchange of contracts
- Pre-Contract Report sent to buyer
- Report to lender
- Deposit funds are made available (and cleared)
- Mortgage offer in place and mortgage funds are available that are required
- Arrangements put in place for insurance after exchange
- Contract is signed
Can a solicitor sign the purchase contract for their client?
Yes, if they have express authority
Three ways to exchange contracts
- In person (one solicitor goes to the other’s office and hands over the contract)
- By post (each solicitor signs their client’s part of the contract and posts to other’s office)
- Over telephone
When is Law Society Formula A used
One solicitor holds both parts of the contract duly signed
- Solicitor undertakes they will THAT DAY send their client’s signed part to other side by 1st class post, DX or by hand
- Buyer’s solicitor also undertakes that day to send other side a banker’s draft or client account cheque for agreed deposit with client’s signed part of contract
Law Society Formula B
Each solicitor has their client’s signed portion
- Each solicitor will, that same day, send the signed part of contract to other side by first class post, DX or by hand duly dated
- And buyer’s solicitor will undertakes that day to send other side a banker’s draft or client account cheque for agreed deposit with client’s signed part of contract
When is Law Society Formula C most used?
Used mainly in residential property work where there is a chain transaction
What certificate of title precedent is used in commercial transactions?
City of London Law Society Certificate of Title
When should the date of completion be agreed between the parties?
Prior to exchange of contracts (so it can be input on the contract)
