Exchange of contracts Flashcards
What is the purpose of the contract?
The contract provides both parties with certainty as to the nature and extent of the property, the financial terms, the timetable for completion and it prevents either party withdrawing from the transaction without being liable to the other for breach of contract
Who drafts the contract?
Seller’s solicitor
Standard conditions
2 sets of standard conditions:
1) The standard conditions of sale - used for all residential transactions and some simple commercial transactions
2) The standard commercial property conditions - used for high value commercial properties
Key conditions - Specified incumbrances
It is necessary to specify all the burdens on the property against the heading ‘specified incumbrances’. If they are not specified the seller could be in breach of the condition that the seller sells free of all incumbrances. Seller’s mortgage should not be included because it will be discharged on completion
Key conditions - Full title guarantee
A seller should sell with full title guarantee if they own the entire legal and equitable title to the property. Full title guarantee means that there is an implied covenant that the land is disposed of free from incumbrances other than those the seller does not know about and could not reasonably know about
Key conditions - Limited title guarantee
Limited title guarantee means that there is an implied covenant that the seller has not incumbered the title to the property and the seller is not aware that anyone else has done so since the last disposition for value. Usually where the Seller is an attorney, executor or PR.
Key conditions - No title guarantee
Where seller is administrator or liquidator
Key conditions - Contract rate
This is the rate of interest that will be charged if a party is late in completing. This is charged on the purchase price - usually 4%.
Key conditions - Deposit
Pre-payment of part of the purchase price made by the buyer to the seller - usually 10%
What are special conditions
Relate to individual characteristics of the property and particular circumstances of the transaction
Special condition 3
Whether the sale includes any contents or excludes any fixtures
Special condition 4
Whether the property is to be sold with vacant possession or subject to leases
Special condition 5
Only relevant where the time for completion has been altered by agreement
Special condition 6
Should be left in as it makes it clear to the parties that they should not rely on any representations that have not been made in writing
Special condition 7
Non-owning adult occupier of the property
New special conditions - What to include?
- The appointment of a second trustee
- Arranging for the seller to obtain or pay for a restrictive covenant insurance policy
- Disclosing a defect in title
- The seller selling with limited or no title guarantee
- A deposit of less than 10% and/or for the deposit to be held as agent rather than stakeholder
- The payment of VAT
- The removal of fixtures by the seller
- The inclusion of an indemnity covenant
Risk - General rule
Risk of damage to the property passes to the buyer on exchange of contracts. This means that the buyer must complete the purchase even if the property is damaged or destroyed between exchange and completion. The buyer will need prior warning so that insurance arrangement can be put into place at the moment of exchange
Insurance under SC and SCPC
Seller maintains their policy until completion
VAT in a contract - Residential
No VAT is payable. So the seller’s solicitor will usually choose to incorporate the SC which provide that the purchase price and the contents price are inclusive of any VAT
VAT in a contract - commercial property
These contracts should deal with whether the buyer will have to pay VAT in addition to the purchase price. VAT is payable when the property is less than 3 years old. There are 2 options:
1) Purchase price is exclusive so VAT will be added on top - if building is less than 3 years old or seller decided to opt to tax
2) Purchase price is inclusive so no VAT is added on top - don’t need to pay VAT
Pre-contract report
Buyer’s solicitor will send a report summing up the results of the pre-contract searches and the investigation of title
Preparation for exchange of contracts
1) Report to client
2) Report to lender
3) Ensure deposit funds are available
4) Check the mortgage offer is in place and that the client has sufficient funds to complete
5) Ensure arrangements are in place for insurance
6) Contract signed
7) A completion date
Authority to exchange
Before exchanging contracts, both solicitors must obtain their client’s authority to exchange. Authority should be obtained in writing and a note made on the file
How to exchange contracts
Can be done in one of 3 ways:
1) In person - by one solicitor attending the other’s office and handing the contract over
2) By post - with each solicitor sending their client’s part of the contract by post to the other solicitor’s office
3) Over the telephone
Law society formula A
This is used where one solicitor holds both parts of the contract duly signed.
Law society formula B
This is used where each solicitor holds their own client’s signed part of the contract.
Acting for an insurance company
If a solicitor is acting for a buyer which is an insurance company then the contract should express that the purchase price is expressed to be inclusive of VAT
SCPC - delayed completion
If completion is delayed due to a buyer default compensation is payable
What if the buyer fails to complete the purchase
Under both SP OR SPCP the seller can rescind the contract and forfeit and keep the deposit
