Exchange of Contracts Flashcards
What is the certificate of title?
- The certificate of title for commercial property is similar to a report on title, but unlike a report that can follow any format, the certificate of title is prescriptive.
- The industry standard is the City of London Law Society (CLLS) Certificate of Title, which is freely available on CLLS’s website.
- The format of the certificate is a series of statements that would be given if the property title is in perfect order.
- The solicitor completing the certificate must give a disclosure after a statement if any of these statements is incorrect.
- Example: Paragraph 3.2 of Schedule 3 states that the land abuts publicly adopted highway. If right of way is across private land, then a disclosure to this effect would need to appear beneath that statement.
- The lender will rely on the solicitor’s certificate, and will be able to sue if there are any material errors or omissions.
When does the buyer’s solicitor usually NOT act for the lender?
In commercial transactions
What are the two different types of property contract?
Standard form
- Residential transactions almost always use a standard form residential contract
- The standard form residential contract refers to the Standard Conditions of Sale
- There is a similar contract for commercial transactions
- The commercial standard contract incorporates the Standard Commercial Property Conditions
Tailor made
- Commercial transactions commonly use precedents from the firm’s own precedent bank or from sources such as Practical Law or the Encyclopaedia of Forms & Precedents
- These contracts tend to run to more pages
- They usually incorporate the Standard Commercial Property Conditions and amend them as required
- They may be weighted in favour of the seller in the expectation that the buyer’s solicitor will negotiate the terms
What is the difference between the SCS and the SCPC?
Standard Conditions of Sale
- The Standard Conditions of Sale (SCS) are incorporated into residential contracts
- If the parties are adopting the Law Society Conveyancing Protocol, then the Standard Conditions of Sale are obligatory
- They may also be used for simple or low value commercial transactions
Standard Commercial Property Conditions
- Standard Commercial Property Conditions (SCPC) are incorporated into most commercial property transactions
- They cover more detail on areas of relevance to commercial property, such as taxation and occupational leases
- Both sets of standard conditions are updated from time to time to take account of changes in law. The SCS are currently in their fifth edition, and the SCPC are in their third edition.
When is VAT charged in a property transaction?
VAT is charged on any taxable supply, namely the supply of certain goods or services by a taxable person in the course of business.
- A taxable person is a VAT registered business. When it supplies certain goods or services, it must charge VAT on the sale price.
- Every three months, the VAT registered business pays the VAT collected to HM Revenue & Customs.
- The business therefore functions as a tax collector on behalf of HM Revenue & Customs.
How does VAT treat different types of property?
Exempt supplies:
Residential property, except for newly constructed property.
Commercial property over 3 years old, and the owner has not opted to tax.
Zero-rated supplies:
Newly constructed residential property is a zero-rated supply.
The buyer doesn’t pay VAT, but because the output is taxable, the seller can recover its input tax from HM Revenue & Customs.
Standard-rated supplies (20%):
Newly constructed commercial property (less than 3 years old) is standard rated.
Older commercial property is standard rated if the seller has opted to tax.
What is the option to tax?
- As shown on the last slide, with many types of property, their tax treatment will not be in doubt.
- However, with older commercial buildings (+3 years), whether the property is exempt or standard rated depends upon the option to tax.
- Enquiry 28.3 of Commercial Property Standard Enquiries (CPSE) 1 asks the seller whether an option to tax has been made, and if so, to provide a copy of the option and any related correspondence with HM Revenue & Customs.
- Whether VAT is payable on the property could be a particular concern if the buyer is not able to recover the VAT (for example, a bank or building society which provides exempt supplies). For such a buyer, the VAT is a 20% increase in the price.
- The option to tax is personal, so that the buyer cannot rely on the seller’s option.
How does VAT related to the SCPC?
- For commercial transactions, the seller’s solicitor needs to consider the VAT treatment when drafting the contract, which is made easier by the SCPC. For this section, you may wish to have the standard commercial contract to hand (available at https://www.lawsociety.org.uk/en/topics/property/freehold-forms).
- Condition 2 provides by default that the property is standard-rated.
- Special condition 9 provides tick boxes that bring in sets of conditions in Part 2 of the contract
- Tickbox A1 brings in conditions that override condition 2, and are relevant for properties that are exempt from VAT
- Tickbox A2 brings in conditions that override condition 2, and are relevant for transactions that are treated as a Transfer Of a Going Concern (TOGC).
Definition: a Transfer Of a Going Concern is 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.
What is the buyer’s checklist before exchange?
issues arising from them as neededcheck that buyer has received survey and is satisfied with it advise buyer that insurance must be in place from exchange of contractscheck that have cleared funds from the buyer for the deposit (usually 10%)for a commercial transaction, ensure that the lender’s solicitor has approved the draft certificate of titleensure that have reported fully to the buyer on title and advised on any issues of concernsend contract to the buyer for signatureobtain instructions on proposed completion dateobtain 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
What is the seller’s checklist before exchange?
· obtain a redemption figure (ie, the 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 the signed contract as authority), and if necessary check again immediately before exchange
How does exchange work?
Exchange of contracts is the point at which the parties enter into a binding contract.
Whilst traditionally, this involved the parties meeting and exchanging paper copies of the contract, contracts are now almost always exchanged by telephone.
The solicitors carry out the exchange according to Law Society Formula B, a prescribed set of steps and obligations.
Law Society Formula B – the telephone call
The buyer’s solicitor 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.
The exchange conversation will involve the 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.
What undertakings do solicitors have after exchange?
After exchange, Law Society Formula B imposes the following undertakings on the solicitors:
- to hold the signed contract to the other solicitor’s order – this means that the buyer’s signed part belongs to the seller and vice versa
- to post the signed contract to the other solicitor that day by first class post or DX (the document exchange used by solicitors and certain other professionals) or by hand delivery
- in the case of the buyer’s solicitor, to send the deposit in the form of payment specified by the contract (eg, solicitors’ client account cheque in the first class post, or same day electronic transfer)
What are the difference law society formulae?
Although it is not part of Law Society Formula B, don’t forget to tell your client!
Law Society Formula B is used for the vast majority of transactions, but Law Society Formula A is used sometimes, and Formula C rarely.
Formula A
Law Society Formula A is used when the same solicitor holds contracts signed by both seller and buyer.
It might be appropriate, for example, where a solicitor knows that they will be abroad at the time of exchange.
The 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.
Formula C
Law Society Formula C is for chain transactions, meaning that the money from one property is used to buy the next. A chain may involve two or more properties.
Although chain transactions are common, Law Society Formula C is not, as it is complex.
Instead, the parties use Formula B, but care must be taken to tie the transactions together.
How do you exchange related properties?
- Related sales and purchases must be tied together. Never exchange on one, hoping that you can exchange on the other, as there is a risk that the second exchange will fall through.
- A solicitor will ‘release’ the contract to the solicitor who is dealing with a related transaction. This means that if the solicitor manages to exchange on the related transaction by an agreed time, the first contract is treated as exchanged, but if not, the exchange is cancelled.
- This method comes from Formula C, but as Formula C is complex, the solicitors usually just adopt the release method and apply it to Formula B.
What should parties do after exchange but before completion?
Each of the parties’ solicitors should prepare a memorandum of exchange with the key contract terms for the file.
It is also wise to keep a copy of the signed contract in case the original is lost in the post to the other solicitor.
Risk passes to the buyer on exchange, so the buyer should have in place insurance in case the property is damaged or destroyed.
The parties will start to make arrangements for completion, such as submitting the certificate of title to the lender, and requesting the mortgage funds in time for the completion date.
In residential transactions, the seller and buyer may also book removal vans to physically move house on the completion date.
The buyer also holds an equitable interest in the property which may be protected by a notice on the register or, for unregistered land, a class c(iv) land charge.
This is only necessary if there is going to be a long time until completion (eg, a contract where completion is dependent upon the property being built).
