Exchange Of Contracts Flashcards
What is a facility letter
Roughly the commercial equivalent of a mortgage offer
What is a certificate of title
document in which a solicitor certifies that the title to the property is satisfactory for lending purposes.
What is the formate of the industry standard (city of London law society) certificate of title
A series of statements that would be given if the property was in perfect order - the solicitor completing gives disclosures after the statement if any are incorrect
When is the certificate of title usually sent
Just before completion, but the lender would have seen a draft before then
Who prepares the draft property contract
The sellers solicitor
What requirements must a contract for land satisfy
Be in writing
Incorporate all the terms which parties have expressly agreed
Be signed by, or on behalf of, each party to the contract
Why use a property contract?
• fix a completion date, so that all parties know when they will need to have money and make practical arrangements (eg, booking removal vans)
• tie related transactions, eg, if using the money from the sale to buy another property
• set out related obligations, such as buying furniture and other contents
• include conditions, such as obtaining specific planning permission
When would a property contract be unnecessary
a gift of property between family members
land of low value, such as when one neighbour agrees to sell the other a couple of feet at the end of the garden
When would the standard conditions of sale be obligatory
If the parties are adopting the Law Society Conveyancing Protocol
How can the standard conditions of sale be amended, excluded or supplemented
With special conditions
If the seller’s solicitor is following the Law Society Conveyancing Protocol, when may they add other special conditions
Only if they are absolutely necessary for the purpose of the transaction
What are latent incumbrances
rights burdening the property that are not apparent on inspection - seller must disclose these
What are defects in title
issues that cast doubt on the seller’s ownership of the property or the rights that affect it; for example, if a deed containing covenants has been lost.
What icumbrances is a property sold subject to under the scs
those specified in the contract
those discoverable by inspection of the property before the date of this contract
those the seller does not and could not reasonably know about
those, other than mortgages, which the buyer knows about
entries made before the date of the contract in an public register except those maintained by the Land Registry or the Land Charges Department or by Companies House
public requirements
What incumbrances are property sold subject to under the SCPC
those specified in the contract
those discoverable by inspection of the property before the date of this contract
those the seller does not and could not reasonably know about
matters, other than mortgages, disclosed or which would have been disclosed by searches and enquiries which a prudent buyer would have made before entering into the contract
public requirements
What is the difference between SCS and SCPC in relation to specified incumbrances
SCS The seller needs to disclose any incumbrances registered at the Land Registry, the Land Charges Registry (for unregistered land) and at Companies House. If they do not, then the seller is in breach of SCS 3.1.2 (d) and (e).
SCPC The buyer is deemed to buy the property subject to any incumbrances which would be revealed by a prudent buyer’s searches and enquiries. This places the onus on the buyer to carry out all relevant searches and enquiries.
What is full title guarantee
The property is free of all incumbrances other than those disclosed in the contract, and those which it didn’t and couldn’t reasonably have known about - default in SCS and SCPC and should be offered unless there is good reason not to
What is limited title guarantee
Given by sellers with little knowledge of the property, such as executors of a deceased estate - this means no incumbrances have been created over the property during the sellers period of ownership
Who may offer no title guarantee
An administrator or liquidator selling property - buyer has no remedy against the seller if a title issue arises after completion
If parties do not fix a completion date, then what is the default position in the SCS and SCPC
20 working days after the date of the contract
What is the time for completion under both SCS and SCPC
2pm - For the buyer’s solicitor, this means that the money must be received by the seller’s solicitor before 2 pm.
Do both SCS and SCPC state that ‘time is not of the essence until a notice to complete is served’
Yes
What does time is not of the essence until a notice to complete is served mean
This means that if a party fails to complete (the ‘defaulting party’) by the specified completion date and time, the other (the ‘non-defaulting party’) can claim damages for the breach, but cannot yet walk away from the transaction
When does time become of the essence
When the party who is ready to complete serves a notice to complete
What is contract rate
sets the interest that is payable by the defaulting party for the delayed completion
What is a reasonable contract rate and what are the conseqences if it is set much higher
reasonable to be set between 2% - 5%. If much higher e.g. 10% could risk being seen as a penalty and therefore voidable
What is a reasonable contract rate and what are the conseqences if it is set much higher
reasonable to be set between 2% - 5%. If much higher e.g. 10% could risk being seen as a penalty and therefore voidable
What is the required deposit under both the SCS and SCPC - can this be varied
buyer to pay a 10% deposit on exchange of contracts, but this can be varied by special condition (say 5%).
If the parties agree a lower deposit, but the buyer doesn’t complete on time and the seller serves notice to complete - what are the consqences
The buyer must immediatley pay the balance of the 10% deposit
Under the SCS how can a deposit be paid
By cheque from the buyer’s solicitor’s client account (not a cheque from the buyer) or electronically.
Under the SCPC how must the deposit be payed
Electronically
What does it mean if the sellers solicitor holds the deposit has stakeholder
seller’s solicitor must keep the deposit safe and not pay it to the seller until completion. Think of putting a stake in the ground - it stays where it is!
What does it mean if the sellers solicitor holds the deposit as agent
the seller may demand the deposit immediately after exchange. Mostly buyers will not accept this, as there is a risk of loss to the deposit if the seller is unable to complete (particularly if insolvent).
How do both the SCS and SCPC provide for the deposit to be held
As stakeholder
Is residential property subject to VAT
No. It is still zero rated when new build meaning no vat is payable by the buyer
What is the default posiiton in relation to VAT under the SCPC
that the property is a standard rated supply, meaning that VAT is payable at the normal rate (currently 20%) on top of the purchase price.
What are the exceptions to VAT on commercial properties
if the property is over three years old, and the seller has not made an option to tax, then there will be no VAT to pay.
If a property is damaged between exchange and completion must the buyer still complete
Yes - once contracts are exchanged, risk passes to the buyer under both SCS and SCPC.
If chain of indeminty covenants is unbroken what is the made an obligation in the property contarct udner SCS and SCPC
Buyer to give an indmenity covenant and continue the chain
under the standard conditions is the property sold with vacant possession
yes - If the property is sold subject to leases and tenancies, these are detailed in the space beneath special condition 4.
when can a party rely on a reperesentation made by the other
only when made in writing by the other or his conveyancer
who is standard conditon 7 occupeirs consent concerend with
This special condition is concerned with adults (ie, over 18) who live in the property other than the seller - they undertake to vacate the property on or before the completion date
can parties specify which contents of the property are incldued in the sale udner the SCS
Yes under special condition 3
what do The pre-written standard conditions deal with
some of the more common amendments that the parties may want to make to the Standard Conditions of Sale and the Standard Commercial Property Conditions
what is input tax
VAT payed for goods and services
what is output tax
VAT charged to buyer
what are the advantages of registering for VAT with HM Revenue & Customs
business will be able to offset the input tax it has paid to suppliers against the output tax it charges its customers
what are the consquences of opting to tax in reagrds to commercial property
if the seller opts to tax property that is over 3 years old, then a subsequent sale of that property is standrad rated. any tenants of the property would also have to pay VAT on their rent
what standard enquiry asks the seller whether an option to tax has been made
enquiry 28.3 of commercial property standard enquiries (CPSE)
what standard condition in th SCPC provides the default position that the property is standard rated
condition 2
which Tickbox special condition must be ticked for properties that are exempt from VAT
A1
Which tickbox needs to be ticked for transactions that are treated as a transfer of going concern
A2 (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 buyers checklist before exchange
check have received all search results and replies to enquiries, and followed up any issues arising from them as needed
check that buyer has received survey and is satisfied with it advise buyer that insurance must be in place from exchange of contracts
check 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 title
ensure that have reported fully to the buyer on title and advised on any issues of concernsend contract to the buyer for signature
obtain instructions on proposed completion date
obtain 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 a sellers checklist before exchnage
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
why is exchange significant
Exchange of contracts is the point at which the parties enter into a binding contract.
prior to this would only be liabel for cost already incured
what do solicitors carry out exchange according to, what is this?
Law Society Formula B, a prescribed set of steps and obligations
what will the Law Society Formula B – the telephone call exchange involve
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 do solicitors need before exchanging
they need to have received their respective client’s signed contract.
what undertakings are imposed on the solicitors under Law Society Formula B
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 undertakings are imposed on the solicitors under Law Society Formula B
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)
when might Law Society Formula A be used for exchange
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.
how are related property exchanges dealt with
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.
Example: your client is selling a flat to buy a house. You telephone the buyer’s solicitor on the flat, and agree to exchange with a release until 3 pm. At 2 pm, you telephone the seller’s solicitor on the house and exchange. You can then go back to the buyer’s solicitor on the flat and confirm the exchange – as long as this happens before 3 pm, the buyer’s solicitor cannot refuse to exchange.
what should each parties solicitor do after exchange
prepare a memorandum of exchange with the key contract terms for the file
as risk passes to the buyer on exchange what should the buyer have in place
insurance
when would a buyer protect their equitable interest by notice on the register or on the land charge for unregistered land
if there is going to be a long time until completion (eg, a contract where completion is dependent upon the property being built).
