Chapter 5: Contract and Exchange Flashcards
1 Acting for a lender and certificates of title
1.1 Acting for a lender
A lender has similar, but not identical aims to the buyer. To the buyer, the particular property may have emotional or commercial significance. To a lender,
their only interest is whether the property has sufficient value and marketability to repay their
loan. The buyer may be tempted to accept certain title risks in the interests of allowing the transaction
to proceed. A lender generally gives little leeway in accepting risk.
1.1.1 Residential transactions
In residential transactions, the same solicitor usually acts for both buyer and lender to save time and costs. Ordinarily this will not create a conflict of interest because their aims are similar:
* to ensure that the property is worth what the buyer has paid (using the lender’s advance)
* to ensure it is suitable for its purpose (eg, a house needs to be usable for residential purposes)
* the property needs to be easy to sell if the buyer wants to move or the lender needs to repossess and sell the house
Additionally, the risk of conflict is low because:
- a high street lender has standard non-negotiable mortgage terms and conditions and mortgage documents
- the solicitor’s discretion in acting for a high street lender is tightly controlled by standard instructions
1.2 Commercial transactions
1.2.1 Lender’s solicitor in commercial transactions
Most lenders in commercial transactions will instruct their own solicitors, as there is much more
potential for conflict.
Example
Buyer is buying a large site for development, The lender has rights to step in and develop the site if the buyer defaults. The buyer’s and lender’s interests will differ and negotiating these rights will present a conflict.
The lender’s solicitor will:
- specify what enquiries and searches are needed
- ask the buyer’s solicitor to send copies of all searches and replies to enquiries
- review them and ask the buyer’s solicitor to make such additional enquiries as the lender’s solicitor requires
- draft the legal charge and other security documents
- either draft the certificate of title or ask the buyer’s solicitor to provide it
1.3 Lending documents
The mortgage offer is a formal offer by the lender to lend. It is subject to the lender being satisfied with the transaction and the security (ie, the property). A certificate of title is a document in which a solicitor certifies that the title to the property is satisfactory for lending purposes.
A certificate of title for a residential mortgage is usually a one page form which is completed and
signed. A commercial certificate of title is much more complex
1.3 Lending documents
A facility letter is roughly the commercial equivalent of a mortgage offer. Both mortgage offer and facility letter set out the terms and conditions of the loan. The legal charge (or mortgage deed) is the deed that creates the security interest and is registered at the Land Registry
1.3 Lending documents
Strictly, the security is a charge by way of legal mortgage but you may hear practitioners use the terms charge and mortgage interchangeably. The charge by way of legal mortgage gives the lender the right to repossess.
1.3.1 The CLLS certificate of title
The certificate of title for commercial property is similar to a report on title, but unlike a report that can follow any format, the certificate of title is prescriptive. The industry standard is the City of London Law Society (CLLS) Certificate of Title, which is freely available on CLLS’s 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 or has the benefit of a right of way to that highway. If access to the highway were by permission of the neighbouring land owner, a disclosure would be needed.
* The lender will rely on the solicitor’s certificate, and will be able to sue if there are any material errors or omissions.
1.4 Summary
- 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.
1.4 Summary
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.
2 The property contract
2.1 Formalities of a contract for the sale of land
A contract for the sale of land must satisfy the following requirements (s2, Law of Property (Miscellaneous Provisions) Act 1989):
* 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. So why have a contract at all?
2.2 Why use a property contract?
A contract can:
* fix a completion date, so that all parties know when they will need to have money and make
practical arrangements (eg, booking removal vans)
* tie related transactions, eg, if using the money from the sale to buy another property
* set out related obligations, such as buying furniture and other contents
* include conditions, such as obtaining specific planning permission
A contract is used in most property transactions, but sometimes it is unnecessary. Examples might
be:
- a gift of property between family members
- land of low value, such as when one neighbour agrees to sell the other a couple of feet at the end of the garden
2.3 Different types of contract
Standard form
* Residential transactions almost always use a standard form residential contract
* The standard form residential contract refers to the Standard Conditions of Sale
* There is a similar contract for commercial transactions
* The commercial standard contract incorporates the Standard Commercial Property Conditions
Tailor made
- Commercial transactions commonly use precedents from the firm’s own precedent bank or from sources such as Practical Law or the Encyclopaedia of Forms & Precedents
- These contracts tend to run to more pages
- They usually incorporate the Standard Commercial Property Conditions and amend them as
required - They may be weighted in favour of the seller in the expectation that the buyer’s solicitor will negotiate the terms
2.4 Standard Conditions of Sale
- The Standard Conditions of Sale (SCS) are incorporated into residential contracts
- If the parties are adopting the Law Society Conveyancing Protocol, then the Standard Conditions of Sale are obligatory
- They may also be used for simple or low value commercial transactions
2.5 Standard Commercial Property Conditions
- Standard Commercial Property Conditions (SCPC) are incorporated into most commercial property transactions
- They cover more detail on areas of relevance to commercial property, such as taxation and occupational leases. Both sets of standard conditions are updated from time to time to take account of changes in law. The SCS are currently in their fifth edition, and the SCPC are in their third edition.
2.6 Standard form contracts
2.6.1 Residential
A specimen form of contract incorporating the Standard Conditions of Sale can be found at
https://www.lawsociety.org.uk/topics/property/standard-conditions-of-sale
This contract is commonly used in residential transactions.
2.6.2 Commercial
For an example of a typical commercial property contract incorporating the Standard Commercial Property Conditions, see:
* the Practical Law precedent ‘Contract for the sale of freehold land with vacant possession (incorporating the Standard Commercial Property Conditions (Third Edition – 2018 Revision)’ or
* Form 75 in volume 36 (Sale of Land) of the Encyclopaedia of Forms and Precedents
2.7 Special conditions
The Standard Conditions of Sale may be amended, excluded or supplemented with special
conditions
2.7 Special conditions
The standard form contracts have some special conditions included with tick boxes so that they may be chosen as appropriate. If the seller’s solicitor is following the Law Society Conveyancing Protocol, they may only add other special conditions if they are absolutely necessary for the purposes of the transaction. In other transactions, it is a matter of negotiation between the parties.
2.8 Summary
- 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.
2.8 Summary
- 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
3 Contract conditions
Both sets of standard conditions contain much detail. However, this section will focus on the
following
- Specified incumbrances
- Title guarantee
- Completion date (and time)
- Contract rate
- Deposit
- Value Added Tax (VAT)
- Risk and insurance
- Indemnity covenant
3.1 Specified incumbrances
You will recall that although the general principle is caveat emptor, the seller must disclose latent
incumbrances and defects in title:
* Latent incumbrances are rights burdening the property that are not apparent on inspection.
Examples would be covenants and easements.
* Defects in title are issues that cast doubt on the seller’s ownership of the property or the rights
that affect it; for example, if a deed containing covenants has been lost.
Both sets of standard conditions amend this duty and list incumbrances which the seller need not disclose.
3.1.1 Standard Conditions of Sale (SCS) vs Standard Commercial Property Conditions (SCPC)
SCS 3.1.2
The incumbrances subject to which the property is sold are:
(a) those specified in the contract
(b) those discoverable by inspection of the property before the date of this contract
(c) those the seller does not and could not reasonably know about
(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
(f) public requirements
SCPC 4.1.2
The incumbrances subject to which the property is sold are:
(a) those specified in the contract
(b) those discoverable by inspection of the property before the date of this contract
(c) those the seller does not and could not reasonably know about
(d) matters, other than mortgages, disclosed or which would have been disclosed by searches and enquiries which a prudent buyer would have made before entering into the contract
(e) public requirements
SCS
The seller needs to disclose any incumbrances registered at the Land Registry, the Land Charges Registry (for unregistered land) and at Companies House. If they do not, then the seller is in breach of SCS 3.1.2 (d) and (e).
SCPS
The buyer is deemed to buy the property subject to any incumbrances which would be revealed by a prudent buyer’s searches and enquiries. This places the onus on the buyer to carry out all relevant searches and enquiries.
3.2 Title guarantee
An exception to caveat emptor is the title guarantee. The seller can offer one of two types of guarantee or none as to the quality of title of the property. Both types of title guarantee confirm that the seller has the right to sell the property.
Full title guarantee – this is the default (SCS and SCPC), and should be offered unless there is a
good reason not to. This means that the property is free of all incumbrances other than those disclosed in the contract, and those which the seller didn’t and couldn’t reasonably have known about
3.2 Title guarantee
Limited title guarantee is given by sellers with little knowledge of the property, such as executors
of a deceased estate. This means that no incumbrances have been created over the property during the seller’s period of ownership. No title guarantee means that the seller does not guarantee the seller’s right to sell the property, nor that the property is free of incumbrances. The buyer has no remedy against the seller if a title issue arises after completion. An administrator or liquidator selling property may offer no title guarantee.
3.3 Completion date and time
The completion date is usually fixed by the parties. If the parties do not fix a completion date, then the SCS and SCPC default to ‘the date that is 20
working days after the date of the contract’. This is rare in practice
3.3 Completion date and time
The time for completion under both SCS and SCPC is 2 pm. For the buyer’s solicitor, this means that the money must be received by the seller’s solicitor before 2 pm. If the buyer will use money from a related sale to buy the property, then the buyer’s solicitor should ensure that there is sufficient time to receive and forward the funds.
3.3 Completion date and time
Both SCS and SCPC state that ‘time is not of the essence until a notice to complete is served’. This means that if a party fails to complete (the ‘defaulting party’) by the specified completion date and time, the other (the ‘non-defaulting party’) can claim damages for the breach, but cannot yet walk away from the transaction.
3.3 Completion date and time
However, the party who is ready to complete can serve a notice to complete and make time of the
essence. The contract rate sets the interest that is payable by the defaulting party for the delayed
completion
Time is of the essence:
This wording means that the contract must be performed by the specified time, and if not, the non-defaulting party can walk away from the contract and claim damages for the breach
3.4 The deposit
- Both SCS and SCPS require the buyer to pay a 10% deposit on exchange of contracts, but this
can be varied by special condition (say 5%). - If the parties agree a lower deposit, but the buyer doesn’t complete on time and the seller serves notice to complete, the buyer must immediately pay the balance of the 10% deposit (unless this provision is also amended by special condition).
- When acting for a seller, always advise the client and check with them before agreeing to a reduced deposit
3.4 The deposit
- The balance of the purchase price payable on completion is the purchase price less the deposit.
- Under SCS, the deposit can be paid by a cheque from the buyer’s solicitor’s client account (not
a cheque from the buyer) or electronically. - Under SCPS, the deposit must be paid electronically.
- The deposit may be held by the seller’s solicitor as stakeholder or agent.
3.4.1 Stakeholder
When the seller’s solicitor holds the deposit as stakeholder, it means that the seller’s solicitor must keep the deposit safe and not pay it to the seller until completion. Think of putting a stake in the ground – it stays where it is!
3.4.2 Agent
If the seller’s solicitor holds the deposit as agent for the seller, the seller may demand the deposit
immediately after exchange. Mostly buyers will not accept this, as there is a risk of loss to the deposit if the seller is unable to complete (particularly if insolvent)
3.4.3 Default position of SCS and SCPS
Both SCS and SCPC therefore provide for the deposit to be held as stakeholder. As a residential seller may need the deposit for a related transaction, however, SCS provides that part or all of the deposit may be used for the deposit on that transaction. Any remaining deposit
is still held as stakeholder.
3.5 VAT
3.5.1 Residential property
Residential property is usually an exempt supply or a zero rated supply, meaning that no VAT is payable by the buyer. Under SCS, the purchase price is inclusive of VAT. The buyer does not need to worry about the possibility of VAT on top of the purchase price.