Due Diligence 1

Question 1

A solicitor has been consulted by a client who has just purchased a freehold property. The property consists of a large house with two large detached garages at the bottom of the drive. The client would like to convert the two garages into holiday cottages for let but has discovered that one of the garages is being used by a neighbour to park his two classic cars. The neighbour has shown the client a written document, which was signed by the previous owner eight years ago. The document states that the neighbour has been granted an exclusive right to occupy the garage for a period of ten years at a rent of £200 per quarter, with no other monies paid upfront. There was no record of this document in the official copy of the register.

Does the agreement bind the client?

Answer 1

Yes, because there is a legal lease, which did not need to be registered.

Option B is correct as this falls within the parol lease exception, s.54(2) LPA 25. It is not a fixed term legal lease (not created by deed as per s.52(1) LPA 25) nor fixed term equitable lease (not created in accordance with s.2 LP(MP)A 89). However, on the facts rent is paid quarterly so there is an implied quarterly periodic tenancy, which will fall within the parol lease exception, s.54(2) LPA 25. It is for less than three years (each period of the lease is 3 months), at best rent, without a fine (no upfront payment mentioned in the facts) and in immediate possession. This will be overriding under Schedule 3 Paragraph 1 LRA 02.

Question 2

A client enters into an agreement to purchase a field and the transfer is completed a week later. The client then grants a lease of part of the field to a farmer, and the parties sign a five year lease with the farmer paying a premium of £2,000. The client also grants a neighbour permission to run drains though the field until the neighbour has finished building a house on the neighbouring land. The client later promises another neighbour that no building will take place on the field for a period of three years.

Which of the following statements correctly describes the formalities required for the valid transfer of the legal estate and the valid creation of third party rights in the field?

Answer 2

A deed is required for the transfer and the lease.

Option E is correct. A deed is required for the transfer of land (s52 LPA 1925). A deed is not required for the creation of a contract for the sale of land (but it must satisfy the requirements of s2 LP(MP)A 1989). A deed is required for the creation of a legal lease where the term exceeds three years (the parol lease exception would not apply as the lease is for a five year term and the farmer paid a premium). The grant of the permission to run drains through the land is not the grant of legal easement since it is not equivalent to a fee simple or a term of years absolute under s1(2)(a) LPA 1925. The promise not to build could be a restrictive covenant - these are often created by deed – however there is no requirement for a deed since restrictive covenants are equitable in nature.

Question 3

A solicitor is advising the buyer of a commercial property. The buyer has agreed in principle to purchase the property, provided the buyer can obtain planning permission to alter the property. The seller wants to incur as few solicitors’ fees as possible and therefore wants there be no exchange of contracts.

Which of the following statements provides the best advice for the buyer client?

Answer 3

Exchange of contracts is useful where, as here, the parties are agreed that conditions must be fulfilled before completion can take place.

Option A is the best advice because it makes the seller commit now to selling the property to the buyer client if, in the future, the buyer’s application for planning permission succeeds. If the buyer’s application is unsuccessful the buyer does not have to buy the property.

Question 4

A seller and buyer reach agreement on the sale of a residential property. A contract for the sale of the property is agreed by their solicitors and contains all the agreed terms. Having first obtained their client’s authority, each solicitor signs an identical copy of the contract on their client’s behalf. Having agreed that completion will take place a week later, the solicitors exchange contracts.

Does the buyer now have an equitable interest in the property?

Answer 4

Yes, because the contracts for the transfer of the property were in writing, contained all the expressly agreed terms and were signed on behalf of the seller and the buyer.

Option D is correct. A contract for the sale of a freehold estate creates an equitable interest so long as it satisfies the requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, ie:

. It must be in writing;
. Where, as here, identical contracts are exchanged, each identical copy must contain all the expressly agreed terms; and
. Taken together, the identical copies have been signed by or on behalf of the seller and buyer.

As these conditions are satisfied in this case, the buyer now has an equitable interest in the land (an estate contract).

Question 5

A solicitor is acting on the purchase of a residential property. Contracts have been exchanged and the solicitor is preparing the draft transfer deed. The official copies name the Registered Proprietors as Baljit Pall and Chelsea Adebayo. However, before exchange the solicitor was supplied with a death certificate for Baljit Pall. The Proprietorship register contains the following entry:

“RESTRICTION: No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court”.

Who should be named as the Transferor or Transferors in the transfer deed?

Answer 5

Chelsea Adebayo and an additional trustee.

Option C is the correct answer. The restriction indicates the beneficial interest in the property is held as tenants in common. On the death of a tenant in common their share in the beneficial interest in the property passes under their will (or under the intestacy rules). To overreach the beneficial entitlement, a second trustee should be appointed and will need to be named in the transfer deed.

Question 6

A solicitor is advising the sole proprietor of a freehold property with registered title. The proprietor confirms that he holds the property on trust for himself and his two sisters, both of whom are under the age of 18 years. He is not aware of any other interests in the property.

The solicitor establishes that the property has been registered with absolute title.

Which of the following statements best describes the proprietor’s ownership of the property?

Answer 6

The proprietor owns the legal estate subject only to all entries on the register, overriding interests and the interests of his sisters.

Option C is correct because the proprietor of a property which is registered with an absolute title has vested in him the legal estate subject only to entries appearing on the register, overriding interests and, where the proprietor is a trustee, minor interests (third party rights) of which he has notice. Here the proprietor holds the property on trust for himself and his two sisters (the beneficiaries under the trust) and is aware of the interests of his sisters and so owns the land subject to these interests as well.

Question 7

A solicitor acts for a buyer of a registered freehold property. The official copies have revealed that there is a covenant in the charges register not to use the property for any commercial purpose. The covenant was created in 1930 for the benefit of land then owned by a neighbour. The property has been used as a hairdressing salon for the last ten years but the buyer wants to use the property as a gift shop.

What is the best advice to the buyer as to how to proceed with the purchase?

Answer 7

The buyer should ask the seller if they have a restrictive covenant insurance policy for the breach of covenant and if not, require the seller to obtain one.

Option D is the best advice. This is a difficult question as it is a matter of professional judgment.

Question 8

A solicitor acts for the seller of a house and sent a pre-contract package to the buyer’s solicitor last week. The estate agent acting for the seller has told the solicitor that there is another person interested in buying the house and that this other person viewed it yesterday. The estate agent has also told the solicitor that the seller may be about to instruct the solicitor to send a pre-contract package to this other person.

Which of the following statements best describes the position of the solicitor once they receive the seller’s instruction to send a pre-contract package to the other person interested in buying the house?

Answer 8

The solicitor will probably breach The Code of Conduct if, having obtained their client’s consent to the disclosure, they fail to inform the buyer’s solicitor that a pre-contract package is being sent to another interested person.

Option E is correct.

Once the solicitor receives the instruction from the seller to send the additional pre-contract package, then the obligation not to mislead described in paragraph 1.4 of The Code of Conduct is relevant. However, the solicitor also has a duty of confidentiality to the seller client in paragraph 6.3; they cannot disclose the contract race to prospective buyers without their seller client’s consent, so option D is wrong.

Question 9

What are the two main milestones in a freehold property transaction?

Answer 9

Exchange of Contracts and Completion.

Question 10

What does caveat emptor mean in the context of property sales?

Answer 10

Buyer beware - the buyer is responsible for discovering defects.

Question 11

At what stage is a deposit, typically 10%, paid in a property transaction?

Answer 11

At the Exchange of Contracts stage.

Question 12

What is the final stage where the property is legally transferred to the buyer?

Answer 12

Completion.

Question 13

Can a solicitor act for both the buyer and seller in a property transaction?

Answer 13

No. The Law Society has stated that the “SRA’s exception for circumstances where two clients have a “substantially common interest” does not apply to a property purchase.’

Question 14

What are the Etridge guidelines in relation to join borrowers?

Answer 14

Guidelines ensuring non-borrowing parties understand mortgage implications and are not under undue influence.

Question 15

What are the key taxes involved in property transactions in England and Wales?

Answer 15

Stamp Duty Land Tax (SDLT) in England and Land Transaction Tax in Wales (LTT).

Question 16

What tax relief applies when selling your main residence?

Answer 16

Private Residence Relief.

Question 17

What is the difference between repayment and interest-only mortgages?

Answer 17

Repayment mortgages include principal and interest, while interest-only mortgages only include interest payments.

Question 18

How is SDLT calculated for first-time buyers in England?

Answer 18

No tax on purchases up to £300,000 and 5% on the portion between £300,001 and £500,000.

Question 19

What must happen in the post-completion stage of a property transaction?

Answer 19

The seller’s solicitor clears outstanding mortgages, and the buyer’s solicitor registers the new ownership and pays any applicable taxes.

Question 20

What are the SDLT rates for residential freehold properties in England?

Answer 20

Up to £125,000 = 0%
£125,001 to £250,000 = 2%
£250,001 to £925,000 = 5%
£925,001 to £1,500,000 = 10%
Over £1,500,000 = 12%

Question 21

How does SDLT apply to non-residential or mixed-use freehold properties?

Answer 21

Up to £150,000 = 0%
£150,001 to £250,000 = 2%
Over £250,000 = 5%

Question 22

What is VAT and who is considered a taxable person?

Answer 22

VAT is a tax on taxable supplies provided by a taxable person in the course of business. A taxable person is someone whose turnover in the past 12 months exceeds the registration limit of £85,000.

Question 23

How is VAT collected and calculated by suppliers?

Answer 23

VAT is collected by HMRC at the end of each VAT period (usually every 3 months).

Suppliers submit a VAT return online, detailing output VAT charged to customers.

VAT due is calculated by deducting input VAT (paid) from output VAT (charged), and the net amount is sent to HMRC.

Question 24

What are the standard, reduced, and zero-rated VAT supplies?

Answer 24

Standard rate: 20% (applies to most goods and services).

Reduced rate: 5% (applies to items like domestic fuel supplies and some construction services).

Zero-rated: Still taxable but charged at 0%.

Exempt: Not VATable, but there is an option to tax.

Question 25

How does VAT apply to commercial properties?

Answer 25

Sale of a greenfield site is exempt but may be subject to the option to tax.

Supply of construction services and professional services are standard rated.

Sale of a new freehold building is standard rated, while the sale of an old freehold is exempt, subject to the option to tax.

Question 26

What is the difference between output VAT and input VAT?

Answer 26

Output VAT: The VAT charged by suppliers on goods or services.

Input VAT: The VAT paid by customers when purchasing goods or services.

To calculate VAT due to HMRC, suppliers deduct input VAT from output VAT.

Question 27

What documents does the seller’s solicitor need to investigate the title of freehold registered land?

Answer 27

The seller’s solicitor needs to obtain official copies of the register of title and the Land Registry plan, known as the title plan.

Question 28

What is the “deduction of title”?

Answer 28

It is the seller’s obligation to prove ownership of the property by providing documentary evidence of title, typically done before the exchange of contracts. For registered land, the seller must supply official copies less than 6 months old.

Question 29

What details are provided in official copies of the register of title?

Answer 29

Official copies show the title number, edition date (last update), the “search from date,” and entries in the register as of that date. They also include the Property Register, Proprietorship Register, and Charges Register.

Question 30

What is recorded in the Property Register?

Answer 30

It contains a description of the land, its address, whether the title is freehold or leasehold, any easements or rights benefiting the land, and details of excluded rights or obligations.

Question 31

What information does the Proprietorship Register provide?

Answer 31

It identifies the current owner, their address, and the class of title (absolute, possessory, or qualified). It also shows restrictions on the owner’s ability to sell, and may indicate the price paid and any indemnity covenants.

Question 32

What is listed in the Charges Register?

Answer 32

It lists encumbrances such as covenants, easements, mortgages, leases, and third-party notices.

Question 33

What are easements, and where are they recorded?

Answer 33

Easements are rights attached to the property, recorded in the Charges Register or Property Register. These may involve obligations like financial contributions to maintain the easement.

Question 34

How are mining and mineral rights handled in registered land?

Answer 34

These are noted in the Property Register and may indicate past mining activity. A mining search should be done to check for ground stability issues. Rights to mines may be vested in the Coal Authority under the Coal Industry Act 1994.

Question 35

What is the difference between joint tenancy and tenants in common?

Answer 35

Joint Tenancy: Equal shares, with the right of survivorship.

Tenants in Common: Unequal or equal shares, with no right of survivorship. Shares pass according to the will or intestacy.

Question 36

How are restrictive covenants dealt with in property transactions?

Answer 36

Negotiate with the beneficiary of the covenant for release.

Obtain restrictive covenant insurance.

Apply to the Upper Tribunal for modification or discharge if the covenant is obsolete.

Question 37

What is the difference between restrictive and positive covenants?

Answer 37

Restrictive Covenant: Restrains certain use of the land, and appears in the Charges Register.

Positive Covenant: Requires the landowner to perform actions, such as maintenance, and always binds the original covenantor but not successors unless there is an indemnity chain.

Question 38

How is a mortgage reflected in registered land?

Answer 38

It will appear as two entries in the Charges Register, and the lender may place restrictions on the sale or transfer of the property without their consent.

Question 39

How are leases dealt with in registered land?

Answer 39

Leases over 7 years should be registered with their own title number and appear in the Charges Register. May be overriding interests.

Shorter legal leases may be overriding interests and require actual occupation.

Question 40

What are home rights, and how can they affect property transactions?

Answer 40

Home rights, if protected by a notice in the Charges Register, bind a buyer. The seller must obtain a release from the non-owning occupier before completion.

Question 41

What is an Absolute Title in property law?

Answer 41

It is the most common and best class of title, where the registered proprietor holds the legal estate subject only to entries on the register, overriding interests, and minor interests of which they have notice.

Question 42

What is a Possessory Title?

Answer 42

It is granted when the proprietor is in possession of the property but has lost the title deeds or claims ownership through adverse possession. Proprietor is subject to all adverse interests existing at the date of first registration.

Question 43

What is a Qualified Title?

Answer 43

It is granted when there is a specific defect in the title that the Registrar deems significant enough to prevent the grant of an absolute title, and the defect cannot be cured.