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Property Practice II > Contract and Exchange > Flashcards

Contract and Exchange Flashcards

1
Q

Acting for a lender

A

Lender has similar but not identical aims to the buyer.

Buyer: may be emotionally or commercially significant

Lender: only interest is whether the property has sufficient value and marketability to repay the loan

Buyer may therefore be temped to accept certain title risks in the interests of allowing the transaction to proceed whereas a lender generally is not willing to accept risk.

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2
Q

Conduct issues // acting for lender

A

Residential: generally solicitor will act for both lender and buyer to save time and costs.

This is not a conflict of interest because the lender and buyer both have a substantially common interest, as there is a clear purpose between the clients and a strong consensus on how it is to be achieved.

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3
Q

Substantially common interests of a lender and buyer

A

Will both want a property that is:
- worth what the buyer has paid (including lender’s advance)
- which is suitable for its purpose
- easy to sell if the buyer wants to move or the lender needs to repossess and sell the house

Risk of conflict is low because:
- high street lender will have standard non-negotiable mortgage terms and conditions and prescribed documents
- solicitor’s discretion in acting for a high street lender is limited by standard instructions

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4
Q

Lender’s solicitor in commercial transactions

A

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 the buyer’s solicitor to provide it

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5
Q

Lending documents

A
  • Mortgage offer
  • Certificate of title
  • Facility letter
  • Legal charge
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6
Q

Mortgage offer

A

Formal offer by the lender to lend, it is subject to the lender being satisfied with the transaction and security

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7
Q

Certificate of title

A

A document in which a solicitor certified 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.

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8
Q

Facility letter

A

Roughly the commercial equivalent of a mortgage offer.

Both mortgage offer and facility letter set out the terms and conditions of the loan.

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9
Q

Legal charge

A

Also called mortgage deed - is a deed that creates the security interest and is registered at the Land Registry.

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.

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10
Q

CLLS certificate of title

A

City of London Law Society (CLLS) Certificate of Title: industry standard

Certificate of title is for a commercial property - similar to a report on title but the format is prescriptive.

Format: series of statements that would be given if the property title is perfect
- Solicitor then gives a disclosure after a statement if any of them are incorrect

Lender relies on the solicitor’s certificate and will be able to sue if there are any material errors or omissions.

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11
Q

Why use a property contract?

A

A contract can:
- fix a completion date so all parties know when they will need to have money and make practical arrangements
- tie related transactions (e.g. using money from one sale to another)
- set out related obligations (e.g. buying furniture and other contents)
- include conditions such as obtaining specific planning permission

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11
Q

Requirements for a property contract

A

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

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12
Q

When might a property contract be unnecessary?

A
  • gift between family members
  • land of low value such as neighbour agrees to sell the other couple of feet at the end of the garden
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13
Q

Contract forms

A

Standard form or Tailor made

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14
Q

Standard form contract

A

Residential transactions almost always use a standard form residential contract.

Standard form residential contract refers to the Standard Conditions of Sale.

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15
Q

Tailor made contracts

A
  • Common in commercial transactions
  • Contracts tend to run more pages
  • Usually incorporate the Standard Commercial Property Conditions and amend them as required

Note: may initially be weighted in favour of the seller in the expectation that the buyer’s solicitor will negotiate the terms

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16
Q

Standard Conditions of Sale (SCS)

A
  • incorporated into residential contracts
  • if the parties are adopting the Law Society Conveyancing Protocol then the SCS are obligatory
  • May also be used for simple or low value commercial transactions
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17
Q

Standard Commercial Property Conditions

A
  • SCPC are incorporated into most commercial property transactions
  • Cover more detail on areas of relevance to commercial property such as taxation and occupational leases
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18
Q

Special conditions

A

Standard Conditions can be amended, excluded or supplemented with special conditions.

Standard form contracts have some special conditions included with tick boxes so they can be chosen as appropriate.

May only add other special conditions if they are absolutely necessary for the purposes of the transactions (if using Law Society protocol) - otherwise matter of negotiation.

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19
Q

Contract conditions: specified incumbrances

A

Seller must disclose latent incumbrances and defects in title.

Latent incumbrances: rights burdening the property that are not apparent on inspection. (e.g. 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 sets of standard conditions amend this duty and list incumbrances which the seller need not disclose.

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20
Q

SCS - specified incumbrances

A

3.1.2 Incumbrances subject to which the property is sold are:

a) those specified in the contract
b) those discoverable by inspection of the property before date of this contract
c) those the seller does not and could not reasonably know about
d) those, other than mortgages, which the buyer knowns about
e) entries made before the date of the contract in any public register except those maintained by the Land Registry, or Land Charges Department or by Companies House
f) public requirements

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21
Q

SCPC - specified incumbrances

A

SCPC 4.1.2 Incumbrances subject to which the property is sold are:

a) those specified in the contract
b) those discoverable by inspection of the property before 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

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22
Q

Difference between specified incumbrances in SCS and SCPC

A

SCS: seller needs to disclose any incumbrances registered a the Land Registry, Land Charges Registry and at Companies House

SCPC: buyer is deemed to buy the property subject to any incumbrances which would be revealed by a prudent buyer’s searches and enquiries.
Places onus on the buyer to carry out all relevant searches and enquiries.

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23
Q

Title Guarantee

A
  • Full title guarantee
  • Limited title guarantee
  • No title guarantee
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24
Q

Full title guarantee

A

Default in the 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 it didn’t and couldn’t reasonably have known about.

25
Q

Limited title guarantee

A

Given by sellers with little knowledge of the property (such as PRs).
Means no incumbrances have been created over the property during the seller’s period of ownership.

26
Q

No title guarantee

A

Means that the seller does not guarantee the seller’s right to sell the property or that the property is free of incumbrances.

The buyer has no remedy against the seller if an issue arises after completion.

An administrator or liquidator selling property may offer no title guarantee.

27
Q

Completion date and time

A

The completion date is usually fixed by the parties.

If not fixed, the SCS and SCPC default the date to 20 working days after the date of the contract. (rare)

Time for completion under SCS and SCPC is 2pm. For the buyer’s solicitor this means that the money must be received by the seller’s solicitor before 2pm.

If the buyer will use money from a related sale to buy the property, the the buyer’s solicitor should ensure that there is sufficient time to receive and forward the funds.

28
Q

What if party fails to complete in time

A

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 party can claim damages for the breach but cannot yet walk away from the transaction.

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.

29
Q

Time is of the essence

A

Time is of the essence 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 damaged for the breach.

30
Q

Deposit

A

Both SCS and SCPC require the buyer to pay 10% deposit on exchange - this can be varied by special condition (e.g. 5%)

If 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.

Make sure to check with client before agreeing to a reduced deposit.

Balance of purchase price payable on completion is the purchase price less the deposit

The balance of the purchase price payable on completion is the purchase price less the deposit.

SCS: cheque or electronically

SCPC: electronically only

Deposit may be held as agent or stakeholder.

31
Q

Stakeholder vs Agent

A

Stakeholder: means the seller’s solicitor must keep the deposit safe and not pay it to the seller until completion.

Agent: the seller may demand the deposit immediately after exchange. Most buyers will not accept this.

Default in conditions: stakeholder (unless deposit is needed for a related transaction)

32
Q

VAT

A

Residential property: usually exempt supply or zero rated meaning there is no VAT payable. Under SCS the purchase price is inclusive of VAT so buyer does not need to worry.

Commercial Property: need to consider VAT. Default - property is a standard rated supply, so payable at 20% on top of purchase price. If older than 3 years, seller has the option not to tax and there will be no VAT to pay.

33
Q

Risk and insurance

A

Once contracts are exchanged - the risk passes to the buyer under both SCS and SCPC

! means if the property is damaged or destroyed between exchange and completion the buyer must still complete !

  • the buyer’s solicitor should therefore advise the buyer to obtain insurance quotes before exchange - ready to insure the property from the date of exchange

Lender may also want confirmation that insurance is in place before advancing the completion funds

In some cases it may be better for a seller to keep their policy going (i.e. under construction) in which case a special condition is needed

If this is the case the SCS and SCPC contain standard obligations on the seller regarding insurance.

34
Q

Indemnity Covenants

A

Both SCS and SCPC make indemnity covenants an obligation of the contract.

However, if the seller did not give an indemnity covenant then this obligation does not apply.
The parties may want to agree the wording and set this out in a special condition

35
Q

Example indemnity covenant

A

The Transferee covenants with the Transferor to observe and perform the covenants contained or referred to in entry no 3 of the charges register of title number XXXX and to indemnify the Transferor against any liability for any future breach or non-observance of those covenants.

36
Q

7 Pre-written special conditions in the standard residential contract

A

1) incorporation of the Standard conditions of sale

2) allows the parties to amend title guarantee from full (default) to limited by changing the front page

3) Allows the parties to specify included and excluded contents on an attached list

4) two options and one is deleted 1- vacant possession (property is sold vacant) or 2-sold subject to leases or tenancies (with space to fill in the box)

5) Allows parties to agree a different time by which completion must have taken place without having to draft a special condition from scratch

6) Gives the seller some protection against misrepresentation by limiting liability to written statements. (but not if fraudulent or reckless even if said)

7) Concerned with adults who live in property other than the seller. (concern is they may have an overriding interest in occupation and may refuse to leave) - by signing contract occupiers give the buyer comfort of getting vacant possession.
Note: for seller’s solicitor to obtain this signature and occupier should be advised to seek independent legal advice.

37
Q

Special conditions: commercial contracts

A

3) tick box for limited title guarantee

6) allow parties to specify deposit and purchase price balance will come from an account other than the buyer’s solicitor’s client account.

8) space for specific terms of the transfer or draft transfer to be annexed

9) options to tick for the VAT treatment, capital allowances and rights of residential tenants

37
Q

Overreaching: special conditions

A

The sole surviving tenant in common will be named as the ‘Seller’ in the contract and will agree (by way of a special condition) to appoint the second trustee on completion. A trustee will usually agree only to give limited title guarantee as it has limited knowledge of the property.

38
Q

VAT principles

A

VAT is charged on any taxable supply, namely the supply of certain goods or services by a taxable person in the course of business

Taxable person: VAT registered business. When it supplies certain goods or services it must charge VAT on the sale price.

Every 3 months the VAT registered business pays the VAT collected to HM Revenue and Customs

The business therefore functions as a tax collector on behalf of HM Revenue and Customs

39
Q

Output and Input tax

A

Output tax: tax that the supplier charges its buyers (tax on the outputs of the business)

Input tax: VAT that the supplier pays on the goods which it purchases for its business - this can be offset against the output tax it has paid.

i.e. 50,000 in output tax, 40,000 in input tax = 10,000 to HMRC

40
Q

Who must register for VAT with HMRC

A

Businesses which have a taxable turnover of more than £85,000 each year must register for VAT with HMRC

Adv of registration: business will be able to offset the input tax is has paid to suppliers against its output

Some businesses only make exempt supplies so are unable to recover input tax.

41
Q

Property and VAT

A

If a VAT registered business sells property that is a standard rated supply, it must charge VAT on the purchase price.

The VAT on the land it sells is output tax.

If the business has had to pay VAT in connection with the property then it can offset that input tax against the output.

42
Q

VAT on different types of property

A

Exempt supply:
- residential property except for newly constructed property
- commercial property over 3 years old and owner has not opted to tax)

Zero rated supplies
- newly constructed residential property is zero rated
- buyer doesn’t pay VAT but because the output is taxable the seller can recover its input from HM Revenue and customs

Standard rates supply
- Newly constructed commercial property (less than 3 years old) is standard rated.
- Older commercial property is standard rated if the seller opted to tax

43
Q

“Opting to tax”

A

If the seller opts to tax property that is over 3 years old, then a subsequent sale of that property is standard-rated.

Any tenants of the property would also have to pay VAT on their rent.

44
Q

Option to tax

A

Enquiry 28.3 of Commercial Property Standard Enquiries (CPSE) asks seller whether option to tax has been made.

Whether VAT is payable on the property could be a particular concern if the buyer is not able to recover the VAT. For such a buyer the VAT is a 20% increase on the price.

45
Q

SCPC and VAT

A
  • Condition 2: default the property is standard rated

Tickbox A1: brings in conditions that override condition 2 - exempt from VAT and VAT is not payable in the contract.

Tickbox A2: brings in conditions that override conditions 2 and are relevant for transactions that are treated as a transfer of a going concern.

46
Q

Transfer of a going concern

A

Transaction where the seller uses the property for the business of letting to produce rental income, the buyer will do the same and meets certain other requirements.

A transaction that qualifies as a TOGC is not a taxable supply for VAT.

47
Q

Who prepares the draft contract?

A

The seller’s solicitor

48
Q

How is the draft contract prepared?

A

The seller’s solicitor will refer to the heads of terms and to the seller for instructions on any point on which there is doubt and to the title.

If the Law Society Conveyancing Protocol is adopted, then the contract should be in standard form and official copies and protocol forms will be sent to the buyer’s solicitor at the same time.

These papers are collectively known as the contract bundle.

49
Q

Checking the contract

A

The buyer’s solicitor checks the contract against the heads of terms and the buyer’s instructions.

The buyer’s solicitor may want to amend the contract if it is weighted towards the seller, or to take account of matters that arise from the buyer’s solicitors’ investigations.

In commercial transaction: the contract may go back and forth a few times.

50
Q

Preparing for exchange

A

Until exchange, losses are limited to whatever expenses they have incurred so far.

After exchange, the parties are committed and there is the potential for significant financial loss if all is not in order.

Before exchange, then, both seller and buyer need to ensure that they are ready. Some solicitors use checklists to ensure nothing is missed.

51
Q

Buyer’s checklist before exchange

A
  • check have received all search results and replies to enquiries and followed up and issues arising from them as needed
  • check that buyer has received survey and is satisfied with it
  • advise buyer that insurance must be in place from exchange of contracts
  • check that have cleared funds from the buyer for the deposit (10% usually)
  • for a commercial transaction, ensure that the lender’s solicitor has approved the draft certificate of title
  • ensure that have reported fully to the buyer on title and advised on any issues of concern
  • send contract to the buyer for signature
  • obtain instructions on proposed completion date
  • obtain authority of the buyer to exchange contracts (do not rely on merely having a signed contract as authority to exchange) and if necessary check again just before exchange
52
Q

Seller’s checklist before exchange

A
  • obtain a redemption figure (amount needed to pay off the loan in full) from the lender to check that the proceeds of sale will cover it
  • reply to any outstanding additional enquiries (the buyer’s solicitor will likely refuse to exchange without this in any case)
  • prepare engrossments (final versions) of the contract and send one copy to the seller for signature and the other to the buyer’s solicitor
  • obtain seller’s authority to exchange contracts (again, do not rely on signed contract) and check immediately again before exchange
53
Q

Exchange of contracts

A

Point at which the parties enter into a binding contract.

Traditionally this involved the parties meeting and exchanging paper copies of the contract. Contracts are now almost always exchanged by telephone.

Solicitors carry out exchange according to Law Society Formula B - a prescribed set of steps and obligations.

54
Q

Law Society formula B - telephone call

A

Buyer’s and seller’s solicitor will let each other know when they are ready to exchange.

Before doing so they need to have received their respective client’s signed contract.

Conversation involves solicitors:
- identifying any blanks left in the contract and agreeing what wording/figures need to be inserted
- agreeing any handwritten amendments or special conditions
- agreeing and writing in the completion date in the appropriate space

Once both solicitors are happy that the contracts are complete and identical they agree that they will exchange the contracts under Law Society Formula B, agree the date and time of exchange and give each other their names to write on the contract.

The contract is then exchanged and from that time onwards the parties are legally obliged to complete.

55
Q

What is an undertaking?

A

A formal promise in the course of acting as a solicitor to take some action. A solicitor can be disciplined for breaching an undertaking so a solicitor should only give an undertaking that they know they can perform

56
Q

Formula B undertakings

A

Both:
- hold the signed contract to the other solicitor’s order - meaning the buyer’s signed part belongs to the seller and vice versa
- post the signed contract to the other solicitor that day by first class post, DX or hand delivery

Buyers solicitor:
- send the deposit in the form of payment specified by the contract

57
Q

Formula A and C

A

A: used when solicitor holds contracts signed by both seller and buyer. e.g. one solicitor will be abroad at time of exchange (so wouldn’t be able to send).
- solicitors have a similar telephone conversation as with Formula B but the solicitor who holds both parts undertakes just to send their client’s signed contract to the other solicitor.

C: used for chain transactions (one property’s sale is used to sign the next). However is complex so usually parties use Formula B and time the transaction carefully.
- agree to exchange on A with ‘release’ until a certain time (e.g. 3pm)
- then exchange on B
- then confirm exchange on A
- as long as confirm before 3pm the buyer’s solicitor cannot refuse to exchange

58
Q

After exchange

A
  • each party should prepare ‘memorandum of exchange’ with key contract terms.
  • also wise to keep copy of contract
  • risk passes to buyer so should make sure insurance in place
  • buyer now holds equitable interest in the property which can be protected by notice on the register or as a land charge (but only necessary if long time until completion)
  • parties should start to make arrangements for completion
    + submit certificate of title to the lender
    + request the mortgage funds in time for completion date
    + book moving vans

Property Practice II (12 decks)

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