Exchange of contracts

Question 1

What is the purpose of the contract?

Answer 1

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

Question 2

Standard conditions

Answer 2

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

Question 3

Key conditions - Specified incumbrances

Answer 3

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 other than those specified in the contract or of a type listed in SC 3.1.2

Question 4

Key conditions - Full title guarantee

Answer 4

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

Question 5

Key conditions - Limited title guarantee

Answer 5

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.

Question 6

Key conditions - Contract rate

Answer 6

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%.

Question 7

Key conditions - Deposit

Answer 7

Pre-payment of part of the purchase price made by the buyer to the seller

Question 8

Special conditions - Special condition 6 (relying on representations)

Answer 8

This is a standard clause that 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

Question 9

Special conditions - What to include?

Answer 9

• The appointment of a second trustee for the purposes of the transfer
• 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 in the transfer to protect the seller from liability once they have lost physical possession of the property

Question 10

Risk - General rule

Answer 10

Under both sets of standard conditions the 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

Question 11

VAT in a contract

Answer 11

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

Question 12

VAT in a contract - Contracts for the sale and purchase of commercial property

Answer 12

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
2) Purchase price is inclusive so no VAT is added on top

Question 13

Preparation for exchange of contracts

Answer 13

Following steps should be taken in preparation for exchange of contracts:
- Report to client - The buyer’s solicitor should report to the buyer in writing, explaining the results of title investigation, searches and enquiries and the terms of the contract and the mortgage offer
- Report to lender - The buyer’s solicitor should report to the lender, who will need to know the property is good security for the loan and has ‘good and marketable title’
- Ensure deposit funds are available
- Check the mortgage offer is in place and that the client has sufficient funds to complete
- Ensure arrangements are in place for insurance
- Contract signed
- A completion date

Question 14

Methods of holding a deposit

Answer 14

Stakeholder - money cannot generally be handed to either party without the other’s consent. Seller can use the deposit on a related purchase of a house for their residence

Question 15

Authority to exchange

Answer 15

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

Question 16

Requirements to create a binding contract

Answer 16

The contract must be in writing, it must incorporate all the agreed terms, must be contained in one document and it must be signed by both parties

Question 17

How to exchange contracts

Answer 17

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 (this is the best)

Question 18

Law society formula A

Answer 18

This is used where one solicitor holds both parts of the contract duly signed. In Formula A, the undertakings are that the solicitor holding both signed parts of the contract will, that same day, send their client’s signed part of the contract to the other side by first class post, through a document exchange, or by hand. The buyer’s solicitor also undertakes, that day, to send to the other side a banker’s draft or client account cheque for the agreed deposit, with their client’s signed part of the contract if it is the buyer’s solicitor who holds both parts

Question 19

Law society formula B

Answer 19

This is used where each solicitor holds their own client’s signed part of the contract. The undertakings in a Formula B exchange are that each solicitor holds their own client’s signed part of the contract; that each solicitor will, that same day, send the signed part of the contract that they are holding to the other side by first class post, through a document exchange, or by hand duly dated; and that the buyer’s solicitor, together with the signed part of the contract, will that day also send to the other side a banker’s draft or client account cheque for the agreed deposit

Question 20

Exchange by telephone

Answer 20

Formula B

Question 21

What is a notice to complete

Answer 21

This can be served after 2pm on the date for completion by a party who is ready, able and willing to complete

Question 22

The standard commercial property conditions and time is of the essence

Answer 22

Time is not if the essence unless a notice to complete has been served

Question 23

Acting for an insurance company

Answer 23

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

Question 24

Holding the deposit as a stakeholder - can you release the deposit before completion

Answer 24

No

Question 25

SCPC - delayed completion

Answer 25

If completion is delayed due to a buyer default compensation is payable

Question 26

What if something happens like a flood?

Answer 26

If something happens like a flood the risk passes from the seller to the buyer on exchange of contracts and so the buyer will have to complete the purchase the buyer can claim on insurance that they should have taken out on exchange

Question 27

What if the buyer fails to complete the purchase

Answer 27

Under both SP OR SPCP the seller can rescind the contract and forfeit and keep the deposit

Question 28

SPCP and landlords consent

Answer 28

The SPCP provides for completion to be postponed until 5 working days after the seller notified the buyer of the landlords consent or if a court declares the consent has been unreasonably withheld

Question 29

Standard conditions of sale and deduction of title

Answer 29

Standard condition of sale means that the tenant is entitled to deduction of the freehold title by the landlord

Question 30

If it is the executor of a deceased person what title guarantee should they give?

Answer 30

Limited title guarantee