Contract Conditions Flashcards
Advising a client
Pre-exchange of contracts (role of solicitors)
- The seller’s solicitor prepares the draft contract
- The buyer’s solicitor approves the draft contract
Purpose of the contract
Contracts for the sale of land must be in writing, contain all the terms and be signed by both parties
- A contract is not a deed, it does not transfer the land
The purpose is:
- fix a completion date
- tie related transactions
- set out related obligations
- include conditions
Standard Conditions of Sale
- Residential transactions
- SCS are expressly incorporated into residential contracts
- If parties are adopting Law Society Conveyancing Protocol - SCS are obligatory
Standard Commercial Property Conditions
- Incorporated into most commercial property transactions
Special conditions
Special conditions may be used in both residential and commercial transactions to add or amend the standard conditions
- For residential transactions, if the seller’s solicitor is adopting the Law Society Conveyancing Protocol, they can only add other special conditions if they are absolutely necessary
What are standard conditions in a property contract?
- specified incumbrances
- title guarantee
- completion date and time
- contract rate
- deposit
- VAT
- risk and insurance
- indemnity covenant
Where is risk and insurance found?
As a condition in the property contract
What is the legal position regarding risk and insurance (once contracts have been exchanged)
Upon the exchange of contracts, the risk passes to the buyer (under SCS / SCPC).
The seller is under NO obligation to insure the property (the buyer bears the risk at exchange)
What is the consequence of the risk passing to the buyer on exchange for a client?
Practical advice: It means that if the property is destroyed or damaged between exchange and completion, the buyer must still complete
How would you advise a buyer client?
The buyer’s solicitor would advise the buyer to obtain insurance quotes before exchange, ready to insure the property from the date of exchange
- This means whilst the buyer would suffer great inconvenience given the damage/destruction, they would not suffer financial loss
- Note that the lender may also want confirmation that insurance is in place before advancing completion funds
What needs to happen if it is more practical for the seller to keep their insurance policy going (e.g., building is still under construction)?
A special condition is needed (as this is not the default position under the standard conditions)
- If this is the case, SCS and SCPC contain standard obligations on the seller regarding insurance
Specified incumbrances
The seller must disclose latent incumbrances (rights burdening the property which are not apparent on inspection) and defects in title (issues that cast doubt on seller’s ownership or the rights)
The general rule under the SCS / SCPC is that the buyer takes the property free from all incumbrances, except those set out in SCS and SCPC.
- Any incumbrances not in standard form contracts must be set out in special conditions
What incumbrances does the seller disclose?
- Matters discoverable on inspection
- Matters the seller does not and could not reasonably know about
- Matters which the buyer knows about
- Matters discoverable by LLC search
Difference between SCS and SCPC for incumbrances?
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, the seller is in breach
SCPC
- 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 onus on the buyer to carry out relevant searches and enquiries
Title guarantee
The title guarantee is a contractual guarantee given by the seller (as to their right to sell and the incumbrances).
The seller can offer either:
- Full title guarantee (default in SCS and SCPC) and should be offered unless there is good reason not to. It means that the property is free of all incumbrances, other than those disclosed in the contract and those which it did not reasonably know about
- Limited title guarantee: means that no incumbrances have been created over the property during the seller’s period of ownership. It is given by seller’s with limited knowledge of the property (e.g., executor of deceased’s estate).
If seller selling with limited title guarantee, a Faruqi clause is inserted as a special condition in a contract - No title guarantee: 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 is a title issue arises after completion. (Common for liquidator or administrator selling property)
Completion date and time
Default completion time (in SCS and SCPC):
- 20 working days after contract
- before 2pm
Both SCS and SCPC state that time is NOT of the essence, until a notice to complete is served
- What this means for the client is that if a party fails to complete by the specified completion date and time, the non-defaulting party can claim damages for the breach, but CANNOT yet walk away from the transaction
Deposit
SCS and SCPC require the buyer to pay a 10% deposit on exchange of contracts (but this can be varied by a special condition)
- If the parties agree a lower deposit, but the buyer does not complete on time and the seller serves a notice to complete, the buyer must immediately pay the balance of the 10% deposit
- SCS - deposit can be paid by a cheque from buyer’s solicitor’s client account or electronically
- SCPC - deposit must be paid electronically
How is the deposit held by the seller’s solicitor?
- Both SCS and SCPC provide for the deposit to be held as stakeholder (rather than agent)
- Stakeholder: seller’s solicitor must keep the deposit safe and not pay it to the seller until completion. Seller cannot access the money
- Agent: the seller may demand the deposit immediately after exchange. Most buyers will not accept this, as there is a risk of loss to the deposit if the seller is unable to complete
SCS Exception:
- Enables part or all of the deposit to be applied to a related purchase. Any part of the deposit that is not used, is still held as stakeholder
VAT Residential Property
- Usually an exempt supply or a zero rated supply, which means 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
VAT Commercial Property
- VAT always needs to be considered
- Default position under SCPC is that the property is a standard rate supply - VAT payable on top of the purchase price at normal rate (20%)
Exceptions:
- If the property is over three years old, and the seller has not made an option to tax, there is no VAT to pay
- Parties should amend SCPC with a special condition
Indemnity covenants
The burden of positive covenants can be passed by a chain of indemnity covenants
- If the chain is unbroken as the seller has given an indemnity covenant, under the SCS and SCPC, there is an obligation on the buyer to enter into the indemnity chain, and give an indemnity covenant
- Under pannel 11 TR1 - the buyer gives the indemnity covenant
How to know:
- check the proprietorship register: entry in proprietorship register of indemnity covenant = seller gave indemnity covenant
What should the buyer’s solicitor do if the seller has not complied with the positive covenant?
Buyer would want a special condition which requires the seller to fix or repair
VAT and the contract - SCPC
SCPC VAT default position is that standard rated supply is included
- VAT will be applied (20%)
- can disapply this under special conditions if appropriate
Exempt supplies
- Residential property, except for newly constructed property
- Commercial property over 3 years old and the seller has not opted to tax
Standard rated supplies (20%)
Newly constructed commercial property (less than 3 years old)
- purchase price must be stated in the sale contract to be expressly stated as exclusive of VAT
Older commercial property if the seller has opted to tax
Zero rated supplies (relevant for new builds)
Newly constructed residential property
- If the buyer does not pay VAT, but the output is taxable, the seller can recover its input from HMRC
- Zero-rated means the seller does not charge VAT on sale price, but can recover VAT incurred in constructing the property
Transfer of Going Concern
If the property is used for the business of letting to produce rental income and the buyer will do the same
- VAT is not charged on TOGC - property is sold as an asset with an income stream which is not subject to VAT
The option to tax
- Enquiry 28.3 CPSE 1 asks the seller whether an option to tax has been made, and if so, provide a copy of the option and related correspondence with HMRC
- The option to tax is personal, so that the buyer cannot rely on seller’s option
SCPC and VAT
- Condition 2 provides by default that the property is standard rated
Special condition 9 provides tick boxes which override condition 2
- Tick box A1 - relevant for properties that are exempt from VAT (seller warrants that the property is not subject to VAT and the seller agrees not to exercise the option to tax)
- Tick box A2 - relevant for transactions that are a Transfer of Going Concern
