Exchange of Contracts

Question 1

When is it possible to act for both the buyer and lender?

Answer 1

In a residential transaction, it is usual to act for both the buyer and lender. Particularly if the mortgage is on standard terms, a conflict should not arise. However, in commercial transactions, this will not usually be possible.

Question 2

What is a certficate of title?

Answer 2

A certificate of title is a certificate obtained by the lender’s solicitor which confirms that the title is satisfactory for lending purposes. Contains a series of statements that would be given if the property was in perfect order and the buyer’s solicitor must disclose against this.

The lender relies on this and can sue for material errors or omissions.

Question 3

What are the requirements for a valid land contract?

Answer 3

• In writing
• Signed by both parties
• Including all express terms

Question 4

What are the standard incorporated conditions in a land contract?

Answer 4

• Residential transactions (Standard Conditions of Sale)
• Commercial Transactions (Standard Commercial Property Conditions)

Question 5

What do the SCS say about specified incumbrances?

Answer 5

The incumbrances subject to which the property are sold (and which the seller therefore need not disclose) are:
* those which are specified in the contract
* those which could be identified on reasonable inspection of land before contract;
* those which the seller does not and could not reasonably have known about
* those, other than mortgages, which the buyer knows about;
* entries made before the date of the contract in any public register EXCEPT Land Reg and Land Charges Reg and CH
* Public requirements.

Question 6

What does the SCPC say about specified incumbrances?

Answer 6

The incumbrances which the property is sold subject to (and which the seller’s solicitor need not disclose) are:
(a) those specified in contract
(b) those discoverable on inspection of the property before the contract date
(c) those which the seller does not and could not reasonably know about
(d) Matters, other than mortgages, disclosed or which would have been disclosed by searches and enquiries which a prudent buyer would have made before entering the contract
(e) public requirements

Question 7

What do both the SCS and SCPCs say about title guarantee? What is title guarantee?

Answer 7

Title guarantee is different from class of title and is a contractual guarantee. If possible, the seller should always give full title guarantee.

Full: the seller has the right to sell the property and there are no incumbrances except those disclosed.

Limited: might be given by executor or seller who does not know much about property. Guarantees that no specified incumbrances were created over the property during that seller’s period of ownership.

None: might be given by liquidator or administrator. Cannot guarantee the seller’s right to sell and buyer will have no remedy if an issue arises after completion.

Question 8

What do the SCS and SCPC say about completion?

Answer 8

Default position that completion takes place at 2pm 20 working days after exchange of contracts. This means funds must be received and complete by 2pm.

Time is not of the essence in relation to completion but can be made of the essence by service of notice to complete.

Question 9

What does the SCS say about the deposit?

Answer 9

10% deposit is usual
* May be paid by cheque either from the buyer’s solicitor’s client account or electronically
* Held as stakeholder (i.e buyer’s solicitor keeps it safe and does not pay it to the seller’s solicitor until completion).

Question 10

What does the SCPC say about the deposit?

Answer 10

10% deposit but can be varied by special condition.
Can only be paid electronically
Default to be held as stakeholder.

Question 11

What does the SCS say about VAT?

Answer 11

No VAT is payable on residential transaction, will either be exempt or 0-rated supply. Price is VAT inclusive.

Question 12

What does the SCPC say about VAT?

Answer 12

Paid at standard rate (20%) on top of the purchase price. However, if property is over 3 years old and seller has not made option to tax, no VAT is payable. Can include a special condition to this effect.

Question 13

What do both the SCS and SCPC say about risk and insurance?

Answer 13

Risk passes to the buyer on exchange, so it is advisable that they have an insurance policy in place or include a special condition to this effect (i.e seller’s policy to continue until completion). If property damaged or destroyed before completion, buyer must still complete.

Question 14

What do both the SCS and SCPC say about indemnity covenants?

Answer 14

If there is an indemnity covenant given by the seller, then the buyer must also provide one and continue the chain. However, if the seller did not, then obligation does not apply.

Question 15

What is the purpose of the special conditions and when can they be used?

Answer 15

Special conditions can be used to exclude, amend or supplement the standard conditions in the SCS and SCPC. The SCS have 7 pre-written conditions and the SCPC have 9.

The special conditions for residential purchases should only be added where absolutely necessary.

Question 16

What are the 7 pre-written special conditions of the SCS?

Answer 16

1. Incorporation
2. Title guarantee
3. Contents
4. Vacant possession
5. Completion Time
6. Representations
7. Occupiers Consent

Question 17

What is VAT?

Answer 17

A tax charged on a taxable supply of goods or services by a taxable person in the course of business. Must charge VAT on sale price when supplying goods or services.

Taxable person = business with taxable turnover of £85,000 or more per year MUST register for VAT.
If below this, can voluntarily register.

A taxable person can offset their output tax against the input tax they have paid elsewhere when completing their tax return to HMRC every 3 mths.

Question 18

Where does 20% VAT apply?

Answer 18

• Commercial properties under 3 years old
• Commercial properties over 3 years old if seller opted to tax.

Question 19

Which properties are VAT exempt (0%)?

Answer 19

• Residential property, except for newly developed property
• Commercial property over 3 years ol where owner has not opted to tax.

Since these are not taxable, the seller cannot recover input tax against this and input tax becomes an extra cost.

Question 20

Which types of property are zero-rated for VAT?

Answer 20

Newly constructed property. Buyer does not pay VAT but because the output is taxable, seller can recover its input tax from HMRC.

Question 21

Which SCPC special conditions can be included in relation to VAT?

Answer 21

Condition 2: confirms 20% VAT rate and that buyer will pay VAT in return for VAT invoice from seller.

A1 = exempt supply: seller confirms condition 2 does not apply and that no VAT is payable on the property. Seller agrees not to exercise option to tax.

A2 = transfer of a going concern: where seller used property for the business of letting to produce rental income and the buyer will do the same, the property is not subject to tax. Seller warrants that it is using property for this reason and that condition 2 does not apply.

Question 22

What is the effect of exchanging contracts?

Answer 22

• Risk of destruction or damage passes to the buyer;
• Buyer gets an equitable interest in the property
• Cannot back out of completion without having to pay damages for breach of contract.

Question 23

What is the process for exchange?

Answer 23

• Seller’s solicitor drafts the contract and transfer deed (TR1), reviews it with seller and responds to TAs / CPSEs
• Buyer’s solicitor should check the contract against the heads of terms and suggest any amendments (e.g to take account of things found in searches and enquiries).
• To prepare for exchange, seller’s solicitor should obtain seller’s engrossment of contract, obtain a redemption figure from the lender, reply to outstanding enquiries and obtain authority from seller to exchange.
• Buyer’s solicitor should obtain clear funds for deposit, obtain buyer’s signature for contract, check insurance is in place, check lender has approved draft certificate of title and obtain instructions for completion date.

Question 24

What is the procedure for exchange?

Answer 24

Law Society Formula B is used.
Each party’s solicitor gets on the phone and fills in the blanks, agrees a date of completion and any special conditions. Once they are identical, they agree the date and time of exchange and give each other their names to write on contract = exchange.

Question 25

What are the undertakings given under Formula B?

Answer 25

• Solicitors hold the contracts to each other’s order (e.g signed parts belong to each other) and post the contract that day by 1st class post or DX
• Buyer’s solicitor will send deposit in form of agreed payment

Breach of undertaking can lead to disciplinary action.

Question 26

What are Formulas A and C used for?

Answer 26

Formula A: where one of the party’s solicitors holds the signed contracts (for example because the other is abroad). Undertaking to send their client’s signed contract to the other solicitor.

Formula C: tied transaction but more likely to use Formula B and release. Means that tied transaction will not go ahead and exchange cancelled if exchange of first contract fails.

Question 27

What steps should be taken post-exchange?

Answer 27

Memorandum of exchange with key contract terms prepared by both sides
Keep copy of signed contract
Make arrangements for completion.