Contract and Exchange Flashcards
The Property Contract
Pre-exchange of contracts - what is the role of each solicitor
Seller = prepares draft contract
Buyer = approves draft contract
What must a contract for sale be? (s2 LPMPA)
- in writing
- incorporate all the agreed terms
- signed by or on behalf of each party
Standard conditions are expressly incorporated into a contract for the sale of land
What is the purpose of the contract?
- It is not a deed - it cannot transfer the land
Purpose:
- fix completion date
- tie related transactions
- set out obligations
- include conditiions
When is a contract unnecessary?
- Gift
- Land of low value
How are standard conditions incorporated into the contract and what is the standard form?
They are always incorporated - expressly incorporated
- Standard Conditions of Sale = residential transactions
- Standard Commercial Property Conditions = commercial transactions
When are special conditions used?
In both residential and commercial transactions to add to or amend the standard conditions
What happens if parties adopt the Law Society Conveyancing Protocol?
- Standard Conditions of Sale are obligatory
- in residential transactions, the seller’s solicitor may only add other special conditions if they are absolutely necessary
What are conditions of the contract?
- specified incumbrances
- title guarantee
- completion date and time
- contract rate
- deposit
- VAT
- risk and insurance
- indemnity covenant
Specified incumbrances
- The seller must disclose latent incumbrances and defects in title
- General rule in SCS and SCPC is the buyer takes the property free from all incumbrances, except those set out in SCS/SCPC
What is the difference between SCS and SCPC for incumbrances/defects?
SCS:
- seller needs to disclose any incumbrances registered at Land Registry, Land Charges Registry and Companies House
- these must be disclosed as specified incumbrances
- if they do not = breach
SCPC:
- the buyer is deemed to buy the property subject to an incumbrances which would have been revealed by a prudent buyer’s searches and enquiries
- the onus is on the buyer
What is title guarantee?
The seller can offer a title guarantee as to the quality of the title of the property
(different to proprietorship title as to the seller)
Full title guarantee
- default in SCS and SPCP and should be offered unless there is good reason not to
- means the property is free of all incumbrances, other than those disclosed and those it did not/could not reasonably know about
Limited title guarantee
- means no incumbrances have been created over the property during the seller’s period of ownership
- given by seller’s with little knowledge of property, such as executors of a deceased estate
The transferor covenants that they have not created any third party rights, but cannot confirm if anyone else has
- if a seller is selling with limited title guarantee, a Faruqi clause is inserted as a special condition
No title guarantee
The seller does not guarantee the seller’s right to sell the property or that the property is free of all incumbrances
- if an administrator or liquidator is selling
What is the default time for completion (both SCS and SPCP)
- 20 working days after the contract
- before 2pm
Both SCS and SCPC state that ‘time is not of the essence’ until a notice to complete is served
- this means the non-defaulting party can claim damages for a delay/failure to complete, but cannot walk away from the contract
What is a notice to complete?
A party to is ready, able and willing can serve a notice of complete and make time of the essence
If time is of the essence = 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
The deposit
SCS and SCPC require the buyer to pay a 10% deposit on exchange
- SCS: can be paid by a cheque from buyer’s solicitor’s client account or electronically
- SCPC: deposit must be paid electronically
- Deposit can be held by seller’s solicitor as stakeholder or agent
VAT
Residential property
- usually an exempt supply or zero rate supply - no VAT payable
- SCS - purchase price is inclusive of VAT
Commercial property
- VAT must always be considered
- default position is property is standard rate (20%)
- Exception:
o If the property is over three years old, and the seller has not made an option to tax, there will be no VAT to pay
o Parties should amend SCPC with a special condition
Risk and insurance
Once contracts are exchanged, the risk passes to the buyer under both SCS and SCPC
- seller under no obligation to insure the property: buyer bears the risk
- buyer’s solicitor should advise buyer to obtain insurance quotes before exchange
Indemnity covenants
Burden of positive covenants can be passed by an indemnity covenant
- SCS and SCPC make it a contractual obligation for the buyer to enter into the indemnity chain
- check proprietorship register for whether the seller has given an indemnity covenant
How to find out if seller has given an indemnity covenant?
Check the proprietorship register
- entry which says “indemnity” and “covenant”
- Pannel 11 TR1 where the buyer gives the indemnity covenant
Find out if seller has complied with positive covenant
- if not - want a special condition which requires seller to fix/repair
Special conditions
- subject to terms of the contract, the seller is to transfer the property with either full title guarantee or limited title guarantee, as specified on front page
Allows the parties to amend the title guarantee from full to limited
- Limited title guarantee - insert Faruqi clause
Special condition 3
Allows parties to specifically include and exclude contents on an attached list
- fixtures and fittings
Special condition 4
- Property sold with vacant possession - means the property is sold without any occupiers
- Property is sold subject to leases or tenancies
- if there is a risk of someone in the property (not vacant possession), need to get them to sign a contract to vacate
Special condition 5
Allows parties to agree a different time by which completion takes place
Special condition 6
Gives seller some protection against misrepresentation by limiting liability to written statements
- does not exclude for fraudulent or reckless
Effect of special condition 6:
- either party may rely on any representations made by the other, provided these were made in writing
Special condition 7
Is concerned with adults who live in the property other than the seller
* Replies to enquiries should reveal any such occupiers
* Concern is that they may have an overriding right to occupation and refuse to leave
* By signing the contract, the occupiers give the buyer comfort of getting vacant possession
* For the seller’s solicitor to obtain this signature, an occupier is advised to seek independent legal advice (seller’s solicitor cannot advise as would be a conflict of interest)
Special condition 9 for commercial transactions
Options to tick for VAT treatment
Unfair terms in contract
- Governed by CRA 2015 for contract between company and consumer
What is VAT exempt supplies for property?
- Residential property, except for newly constructed property
- Commercial property over 3 years old and the owner has not opted to tax
What is standard rated supply for property?
- Newly constructed commercial property (less than 3 years old)
- purchase price must be stated as exclusive of VAT
- Older commercial property if the seller has opted to tax
What is zero-rated supply for property?
- Newly constructed residential property
- seller does not charge VAT on sale price but can recover it (offset)
Option to tax
With older commercial property, the seller can opt to tax
- Enquiry 28.3 CPSE1 asks seller if they have opted to tax
- option to tax is personal
SCPC and VAT
Condition 2 (SCPC) provides by default that property is standard rated
- seller warrants that property is standard-rated
- buyer agrees to pay VAT over purchase price in exchange for VAT invoice from seller
Special condition 9
- Box A1 - brings in conditions that override condition 2 - relevant for properties that are exempt from VAT
- Box A1 - relevant for transactions that are treated as a Transfer of Going Concern
What is the effect of Box A1
Exempt supply
- seller warrants that the property is not subject to VAT
- seller agrees not to exercise option to tax
What is effect of Box A2
TOGC
- seller warrants it is using the property for business of letting to produce rental income
- parties agree various other matters
What are SCS for how seller’s solicitor holds a deposit?
Situation where seller has a related purchase and also has an existing mortgage on the property she is selling
All or part of the deposit may be used as a deposit on the seller’s related purchase, with the balance held as stakeholder until completion
- deposit cannot be used to repay the seller’s mortgage prior to completion
- deposit must be held as stakeholder
Standard conditions as to occupation (SCS)
Standard Conditions provide that occupation (if buyer wants to move in pending completion) will be permitted on the basis that the buyer is a licensee, not a tenant
SCS - minimum period before completion date within which the draft transfer must be submitted
Eight working days
What is the normal rate in standard residential contract?
4% above the base rate of a specified high street bank
CPSE1 what is the effect of seller giving the response ‘not so far as seller is aware’
Such response implies the seller has made all reasonable investigations before giving the response
What should the solicitor check before deciding whether to include an indemnity covenant?
Whether there is a condition in the contract in respect of the inclusion of an indemnity covenant
Who must sign the contract for sale of a deceased sole owner’s proeprty?
Two executors acting
- but only one executor needs to sign the contract provided they have the authority of the other to do so
How should a client’s priority prior to completion be protected if there is going to be a long time between exchange and completion
(e.g., OS1 search will have run out in time)
Apply for entry of an agreed notice in the register in respect of the contract
How must a legal charge on a property be registered following completion?
It must be registered at both HM Land Registry (to take effect at law) and Companies House (to be binding on company’s creditors, administrators and liquidators)
What is the effect of a seller becoming bankrupt upon a buyer’s purchase
- revealed by pre-completion bankruptcy search
The contract is binding on the trustee in bankruptcy and on completion the buyer should take a transfer of the property from the trustee
What step in pre-exchange of contract involves seller’s solicitor giving an undertaking to buyer’s solicitor?
The ‘release’ of the seller’s part of the contract to the buyer’s solicitor on exchange of contracts under Formula C
What is the effect of the seller’s death on a contract (where contracts have been exchanged)?
The contract remains valid and is binding upon the seller’s personal representatives
- death of seller does not render the contract void or voidable
Law Society Formula B
Undertakings on the solicitors
* To hold the signed contract to the other solicitor’s order
* to post the signed contract to the other solicitor that day by first class post or DX or by hand delivery
* In the case of the buyer’s solicitor, to send the deposit in the form of payment specified by the contract
o The deposit is sent by the buyer’s solicitor to the seller’s solicitor
o The outstanding mortgage s dealt with at completion
(Law Society Formula B) What undertaking is given at point of exchange?
Seller’s solicitor gives undertaking to forward seller’s part of contract of buyer by DX
Formula C
Used for chain transactions
- solicitor releases the contract to the solicitor who is dealing with related transaction
- time limits are strict
- buyer’s solicitor must have client’s irrevocable authority to exchange using Formula C
When would a contract for exchange which is effected by post be binding?
When the seller’s contract is posted to the buyer’s solicitor
- common law rule on acceptance of contracts
How must be contract be signed (Formula B)
Each party signs their respective part of the contract. There is no requirement for the signatures to be witnessed
- two identical copies
When will be a legally binding contract under Law Society Formula B - telephone call?
During the telephone conversation between the solicitors
When does a second trustee need to be appointed to sign the transfer deed?
Where there is a surviving beneficial tenant in common selling the property
- appoint second trustee to overreach beneficial interest
Not needed if there is a surviving sole joint tenant - as the deceased’s interest passes to them by survivorship and they are the surviving sole legal owner
Under whose name is the OS1 search carried out against?
- the name of the buyer client
- unless they have a mortgage, in which case it is carried out in the name of the bank (lender)
What are the methods authorised by Companies Act for a company to execute the transfer in Form TR1?
Signature by two authorized signatories, or by a director of the company in the presence of a witness who attests the signature
