4 - The Contract and Exchange Flashcards
What are the aims of the lender in a property transaction, and how do they differ to that of the buyer when accepting risks?
Lender’s aims: The lender is only concerned with the property’s value and marketability to ensure the loan can be repaid.
Buyer’s aims: The buyer may have emotional or commercial reasons for purchasing the property, which may lead them to accept title risks to proceed with the transaction.
Key difference: A lender generally gives little leeway in accepting risk, while a buyer may be more willing to accept risks.
Can the same solicitor act for both the borrower and the lender in residential property transactions?
Under paragraph 6 of the Code of Conduct for Solicitors, a solicitor cannot act for two parties where there is a client conflict or significant risk of one, unless the clients share a substantially common interest.
Substantially common interest: Defined as a clear common purpose with strong consensus on how it is to be achieved.
Application: In residential transactions, the solicitor can usually act for both, as the buyer and lender share a common interest in ensuring that either:
- The property is worth what the buyer has paid (including the lender’s advance).
- The property is suitable for its purpose (e.g., residential use).
- The property is easy to sell if necessary (e.g., if the lender needs to repossess).
What are the conduct issues for a solicitor when acting for a lender in residential transactions?
The risk of conflict is low because:
- High street lenders typically use standard, non-negotiable mortgage terms, conditions, and prescribed documents.
- The solicitor’s discretion in acting for such lenders is limited by the Council of Mortgage Lenders (CML) Handbook, which provides standard instructions.
Therefore, acting for both the buyer and lender is generally allowed without conflict, as both parties share a common interest.
How does acting for a lender in commercial transactions differ from residential transactions?
In commercial transactions, most lenders will instruct their own solicitors due to a higher potential for conflict of interest.
For example, in a large site development, the lender may have rights to step in if the buyer defaults, leading to differing interests between the lender and buyer.
The lender’s solicitor will:
- Specify necessary enquiries and searches.
- Review the buyer’s solicitor’s searches and replies and request additional enquiries if needed.
- Draft the legal charge and security documents.
- Either draft or request the buyer’s solicitor to provide the certificate of title.
What are the key lending documents in a property transaction?
Mortgage offer: A formal offer from the lender to lend, subject to the lender’s satisfaction with the transaction and the property’s security.
Facility letter: The commercial equivalent of a mortgage offer, setting out the loan’s terms and conditions.
Certificate of title: A document in which a solicitor certifies the title to the property is satisfactory for lending.
- Residential certificates are usually simple, one-page forms.
- Commercial certificates are much more complex.
- A buyer’s solicitor should not exchange contracts unless the source of funds is confirmed. Exchanging without confirmation means the lender could have issues with the property and then not want to lend, leaving the buyer contracted to buy without access to the main source of funds. There would be financial penalties under the contract if the buyer did not complete.
Legal charge (or mortgage deed): The deed that creates the security interest, giving the lender the right to repossess. It is registered at the Land Registry.
What is a certificate of title and what is its purpose?
It is a document in which a solicitor certifies that the title to the property is satisfactory for lending purposes.
It confirms to the recipient matters relating to the property through a series of statements of facts and disclosures.
What is the CLLS certificate of title, and how does it function in commercial property transactions?
The City of London Law Society (CLLS) Certificate of Title is the industry standard for commercial property transactions, available on the CLLS website.
The format of the certificate is a series of statements that would be given if the property title is in perfect order.
The solicitor completing the certificate must give a disclosure after a statement if any of these statements is incorrect.
Example: Paragraph 3.2 of Schedule 3 states that the land abuts publicly adopted highway. If right of way is across private land, then a disclosure to this effect would need to appear beneath that statement.
The lender will rely on the solicitor’s certificate, and will be able to sue if there are any material errors or omissions.
Provide a summary of acting for the lender and certificates of title.
The buyer’s solicitor in a residential transaction usually acts for the lender as well. This does not usually present a conflict of interest, as the lender has standard documentation and precise instructions to the solicitor.
The lender in a commercial transaction will usually want their own solicitor, as the documentation will be non-standard and may be negotiable. The transaction may also be more complex.
The lender will issue a mortgage offer (residential) or facility letter (commercial) which indicates the terms and conditions of the loan.
A charge by way of legal mortgage is used to provide the lender with security over the property, and will give the lender the right to repossess and sell the property.
Usually in commercial transactions, the lender’s solicitor or the buyer’s solicitor will need to provide the lender with a City of London Law Society certificate of title.
What requirements must the property contract comply with to be valid?
A contract for land must satisfy the following requirements (s2, Law of Property (Miscellaneous Provisions) Act 1989):
The contract must:
- Be in writing.
- Incorporate all the terms which the parties have expressly agreed.
- Be signed by, or on behalf of, each party to the contract.
However, as it is not a deed, it cannot transfer the land.
Why use a property contract?
A property contract is not a deed, so it cannot transfer land. From this, the question arises as to why a property contract is used.
A contract can:
- Fix a completion date, so that all parties know when to have money ready and make practical arrangements (e.g., booking removal vans).
- Tie related transactions (e.g., using money from the sale to buy another property).
- Set out related obligations (e.g., buying furniture and other contents).
Include conditions (e.g., obtaining specific planning permission).
A contract is used in most property transactions, but sometimes it is unnecessary, such as:
- A gift of property between family members.
- Land of low value (e.g., selling a couple of feet at the end of the garden to a neighbour).
What are the different types of land contract and when are they used?
Standard form:
Residential transactions almost always use a standard form residential contract.
- It refers to the Standard Conditions of Sale.
- There is a similar contract for commercial transactions.
- The commercial contract incorporates the Standard Commercial Property Conditions.
Tailor-made:
Commercial transactions often use precedents from the firm’s own precedent bank or sources like Practical Law or the Encyclopaedia of Forms & Precedents.
- These contracts tend to run to more pages and usually incorporate the Standard Commercial Property Conditions, amending them as required.
- They may be weighted in favour of the seller, expecting the buyer’s solicitor to negotiate the terms.
What are the standard conditions of sale?
The Standard Conditions of Sale (SCS) are incorporated into residential contracts.
- If parties adopt the Law Society Conveyancing Protocol, the SCS are obligatory.
- They may also be used for simple or low-value commercial transactions.
- The SCS are currently in their fifth edition, updated to account for changes in law.
What are the Standard Commercial Property Conditions?
The Standard Commercial Property Conditions (SCPC) are incorporated into most commercial property transactions.
- They cover areas of relevance to commercial property, such as taxation and occupational leases.
- The SCPC are currently in their third edition, updated periodically to reflect changes in law.
What are special conditions in property contracts?
- The Standard Conditions of Sale can be amended, excluded, or supplemented with special conditions.
Example: If the standard condition requires a 10% deposit on exchange, but parties agree on 5%, a special condition should be drafted for this.
- Standard form contracts include some special conditions with tick boxes to select as appropriate.
- If the seller’s solicitor follows the Law Society Conveyancing Protocol, they can only add special conditions if absolutely necessary for the transaction.
- In other transactions, special conditions are a matter of negotiation between the parties.
Provide a summary for the key points regarding a property contract.
- A property contract must be in writing, signed by or on behalf of the parties and incorporate all the agreed terms
- A contract may not be needed for certain transactions, such as a gift of property between family members or land of low value.
- The contract allows the parties to fix a completion date and set out their respective obligations.
- There are standard forms of contract, which are always used in residential transactions, and used for some commercial transactions.
- More complex commercial transactions are likely to have a tailor made contract.
- Standard conditions of sale are usually adopted by the contract, and amended as necessary.
- Special conditions may be used to exclude, add to, or amend standard conditions.
What are the different types of key contract conditions?
Key contract conditions covered include:
- Specified incumbrances
- Title guarantee
- Completion date (and time)
- Contract rate
- Deposit
- Value Added Tax (VAT)
- Risk and insurance
- Indemnity covenant
What are specific incumberances?
Although the general principle is caveat emptor, the seller must disclose latent incumbrances and defects in title:
- Latent incumbrances: Rights burdening the property that are not apparent on inspection, such as covenants and easements.
- Defects in title: Issues that cast doubt on the seller’s ownership of the property or the rights that affect it, e.g., if a deed containing covenants has been lost.
Both the Standard Conditions of Sale (SCS) and Standard Commercial Property Conditions (SCPC) amend this duty and list incumbrances the seller need not disclose.
What is the difference between how specified incumbrances are set out in SCS and SCPC?
SCS 3.1.2: The incumbrances subject to which the property is sold are:
(d) Those, other than mortgages, which the buyer knows about.
(e) Entries made before the date of the contract in any public register except those maintained by the Land Registry or the Land Charges Department or by Companies House.
SCPC 4.1.2: The incumbrances include:
(d) Matters, other than mortgages, disclosed or which would have been disclosed by searches and enquiries a prudent buyer would have made before entering into the contract.
Difference:
SCS: The seller must disclose incumbrances registered at the Land Registry, Land Charges Registry (for unregistered land), and at Companies House.
SCPC: The buyer is deemed to buy subject to any incumbrances revealed by a prudent buyer’s searches and enquiries.
Example: If entry no. 2 of the charges register contains a restrictive covenant, the seller (under SCS) would refer to ‘the matter set out at entry 2 of the charges register of title number XXXXX’.
What is the title guarantee, and what are the three types?
An exception to caveat emptor is the title guarantee. The seller can offer one of three types:
Full title guarantee: This is the default under both SCS and SCPC, meaning the seller guarantees the property is free of all incumbrances other than those disclosed in the contract, or those which it didn’t and couldn’t reasonably have known about.
Limited title guarantee: Typically given by sellers with little knowledge of the property, such as executors of a deceased estate. No incumbrances have been created during the seller’s ownership.
No title guarantee: The seller does not guarantee the right to sell the property or that the property is free of incumbrances. An administrator or liquidator may offer no title guarantee.
What is the completion time and date in a property contract?
Completion date:
- Usually fixed by the parties.
- If not fixed, SCS and SCPC default to 20 working days after the date of the contract.
Completion time:
- 2 pm under both SCS and SCPC.
- The buyer’s solicitor must ensure the money is received by the seller’s solicitor before 2 pm.
- If the buyer is using money from a related sale, ensure sufficient time to receive and forward funds.
Example: If the buyer is buying a house for £150,000 and needs £100,000 from selling their flat, ensure the completion time of the flat is earlier (e.g., 2 pm for the flat and 2:30 pm or 3 pm for the house) to allow time for fund transfer.
