Exchange of Contracts Flashcards
What is the purpose of the contract for sale?
Once contracts are exchanged, the parties commit to transferring the property at the agreed price, on the agreed date and neither party can change terms without co-operation of the other
Contract doesn’t transfer the land, because this must be done by deed
Contract is an agreement to transfer the land at a later stage
The contract prevents parties from changing the price or backing out without being liable for breach of contract
Who drafts the contract for sale?
The seller’s solicitor will draft the contract, which will then need to be reviewed by and agreed with the buyer’s solicitor
What are the two sets of Standard Conditions that are used in contracts for sale of property?
- Standard Conditions of Sale (SC) – used for all residential transactions and simple commercial transactions
- Standard Commercial Property Conditions (SCPC) – suitable for high value commercial properties
What are the three parts of a contract for sale?
1) front page – description of property and terms of sale (these are unique to the property)
- Seller information should be checked against proprietorship register (registered property) or title deeds (unregistered property)
2) middle – contains standard conditions
3) back page – special conditions, specifically drafted to meet the particular transactions of this transaction
What are specified incumbrances and how do they feature in the Standard Conditions?
1) Contract must specify all the burdens against the property under this heading
- Third party rights which will survive the property transfer
2) SC 3.1.2 and SCPC 4.1.2 both list the following as incumbrances subject to which the property is sold:
- those specified in the contract
- those discoverable by inspection before the date of the contract
- those the seller does not and could not reasonably know about
- public requirements.
3) SC 3.1.2 also includes in its list:
- those, other than mortgages, which the buyer knows about
- entries made before the date of the contract in any public register, except for those maintained by the Land Registry, the Land Charges Department and Companies House.
4) SCPC 4.1.2 expresses the same concept slightly differently and includes in its list:
- matters, other than mortgages, disclosed or which would have been disclosed by the searches and enquiries which a prudent buyer would have made before entering into the contract.
5) Any specified incumbrances must be listed in the contract if they aren’t covered in the above lists
- Buyer’s solicitor should ensure mortgage is not listed, as it should be discharged shortly after completion
Give an example of how specified incumbrances might be detailed on the contract
‘All those matters contained mentioned or referred to in the Registers of the above mentioned title except for financial charges registered against the Property’
What is full title guarantee?
1) Seller should sell with full title guarantee if they own the entire legal and equitable title to the property (where owner/occupier is seller)
2) Full and limited title guarantee impliedly covenant in the transfer of the property that:
- They have the right to dispose of the land
- They will do all they reasonably can to transfer the title
- In the case of leasehold land, the lease is subsisting at the time of disposal and there is no breach of covenant making the lease liable to forfeiture
3) With full title guarantee:
- Seller also impliedly covenants that land is disposed free from incumbrances other than those they don’t and couldn’t reasonably know about
- Both sets of standard conditions provide that seller will sell with full title guarantee, so if they don’t wish to, a special condition will be needed
What is limited title guarantee?
1) Limited title guarantee is given where seller has limited knowledge of the property (they are executor/trustee maybe)
2) Full and limited title guarantee impliedly covenant in the transfer of the property that:
- They have the right to dispose of the land
- They will do all they reasonably can to transfer the title
- In the case of leasehold land, the lease is subsisting at the time of disposal and there is no breach of covenant making the lease liable to forfeiture
3) With limited title guarantee:
- Seller impliedly covenants that they have not incumbered the property and they aren’t aware that anyone else has done so since they acquired the property
- Common when acting as an executor
What is the contract rate and how is it commonly expressed in the contract for sale?
This is the rate of interest charged if a party is late in completing
Charged on purchase price and is commonly 4% above the base lending rate of Barclays Bank plc
‘The Law Society’s interest rate from time to time in force’ - applies automatically in SCs if left blank
What is the deposit and how can it be held by seller’s solicitor, once paid?
1) Pre-payment of part of the purchase price made by buyer to seller – signifies buyer’s commitment to buy and if buyer fails to complete, seller may keep deposit
2) Usually 10%, payable on exchange of contracts to seller’s solicitor as stakeholder, so cannot be passed to seller until completion
3) Under the SC, a seller can use the deposit as a deposit on a related purchase of a house for the seller
4) Parties can agree a reduced deposit
5) Buyer may agree that seller’s solicitor can act as ‘agent,’ meaning deposit can be released to seller immediately after exchange, allowing them to use it for any purpose
What are special conditions? Give some common examples
1) These relate to the individual characteristics of the property and the particular circumstances of the transaction
2) Some pre-printed special conditions
- Whether the sale includes any contents/excludes any fixtures
- Whether property sold with vacant possession or subject to leases
- Informing parties they shouldn’t rely on unwritten representations from the other parties
- Clause for non-owning adult occupiers to confirm they agree to sale and will give vacant possession on completion
3) Some can also be added, like inclusion of an indemnity covenant in relation to a positive covenant or a smaller deposit, appointing a second trustee for the purposes of the transfer and removal of fixtures by the seller
4) Defective title insurance would be noted in special conditions, if seller were to buy this at their expense
If the purchase property is damaged after exchange, who has the burden of this and what can they do about it?
1) Under both sets of standard conditions, the risk of damage to the property passes to the buyer on exchange of contracts
- Means buyer must complete the purchase, even if the property is damaged or destroyed between exchange and completion
2) Buyer and lender will need to agree insurance and ensure it is adequate in terms of the property’s value, the estimated cost of reinstatement and the type of risks covered
- If B buys a house with a mortgage, buyer’s solicitor may request that the property is insured by the lender
3) Seller under no obligation to insure a freehold property unless required by special condition
Give a brief overview of what VAT is
- Output tax – VAT is what you charged clients for the service you provide (on law firm bills)
- Input tax – VAT you pay out on goods/services
- Output tax minus input tax = balance to send to HMRC
What is the standard position around VAT in residential property transactions?
Standard conditions provide purchase price is inclusive of VAT (expectation that none will be charged)
What should a solicitor never advise their seller client in respect of VAT for a commercial property transaction?
They should never advise their own client to make the purchase price **inclusive of VAT **
- This is because if the supply is standard-rated (as with a new building), or it wants to opt to tax in order to recover VAT paid on refurbishment (as with an old building), or the law changes the VAT status of the sale between exchange and completion, the seller will be unable to add the VAT to the agreed price
- The sale proceeds will be reduced by the amount of VAT payable to HM Revenue and Customs.
What are the three options with regards to VAT for commercial property transactions?
1) Purchase price is exclusive of VAT and VAT will be added on top
- Most appropriate for ‘new’ buildings, where they must charge VAT
- Also appropriate for ‘old’ buildings where seller opts to tax to recover VAT paid on refurbishment and buyer is not VAT-sensitive
- Covered by SCPC Part 1 Condition 2. This condition sets out that VAT is chargeable on the sale and VAT will be added to the price
2) Purchase price is inclusive of VAT so VAT, if any, cannot be added on top
- Appropriate where ‘old’ building has not had refurbishment
- Popular with VAT sensitive buyers who cannot VAT paid on purchase price
3) Purchase price is exclusive of VAT, so VAT can be added on top if the law changes between exchange of contracts and completion to make an exempt supply chargeable at the standard rate, but the seller is contractually obliged not to opt to tax
- Appropriate for sale of old commercial building where seller does not have input tax to recover, but doesn’t want to take the risk of the tax regime changing + buyer is VAT sensitive, as there will be a cash-flow delay in recovering VAT on purchase price
- Covered by SCPC Part 2 Condition A1
What are common examples of VAT sensitive buyers?
Finance (bank/lenders) + insurers are VAT sensitive so they cannot get VAT back that they spend
Can a solicitor act for both a lender and a borrower?
1) Solicitor can act for lender and borrower if not significant risk or actual COI or there is substantially common interest
- For residential conveyances, mortgage is likely on standard terms, so it is **common for solicitor to act for both **
- Less likely for commercial mortgages to be on standard terms; where there is negotiation, **likely COI **
Who prepares a certificate of title and what is its purpose?
1) Certificate of title prepared by buyer’s solicitor discloses any problems with the property to the lender
2) Certificate of title confirms to the lender:
- there are no legal problems with the property (it has a ‘good and marketable title’) so the lender can safely lend against it
- who will own the property once the sale is completed
- the completion date when the funds are needed.
3) The certificate is a report about the property, summary of investigated information in title investigation and pre-contract searches, in a series of statements
4) If the information in the certificate is wrong, lender can sue the firm which gave it
5) Certificate given immediately prior to completion of the loan
- Buyer’s solicitor won’t exchange contracts until they know the lender is satisfied with the certificate and any disclosures
What certificate of title will be used for lenders in commercial property transactions?
City of London Society Certificate of Title is used for commercial property transactions, due to increased detail
Following the title investigation and pre-contract searches, what practical steps need to be taken before exchange of contracts can occur?
a) 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.
(b) Report to lender (with certificate of title)
- 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’.
(c) Ensure deposit funds are available
- The deposit funds should be available to the buyer’s solicitor in cleared funds, ready to send to the seller’s solicitor at exchange of contracts
(d) Check the mortgage offer is in place and that the client has sufficient funds to
complete
- The buyer needs to have the mortgage offer in place (and accepted it) and to have complied with any conditions attached to the mortgage offer (or be in a position to do so). The buyer’s solicitor should also check that the buyer has the funds to proceed with the purchase at completion.
(e) Ensure arrangements are in place for insurance immediately following exchange
- In most cases the contractual position is that risk passes to the buyer on exchange and therefore the buyer needs to have insurance in place from exchange. These arrangements need to have be made in advance of actual exchange so the insurance takes effect immediately.
(f) Contract signed
- Both solicitors need to ensure that their client has signed their copy of the contract. Either ‘wet ink’ or electronic signature will suffice. A solicitor can sign the contract on their client’s behalf if they have the client’s express authority to do so.
(g) Completion date
- Both solicitors will need to discuss this with their client and the other side in advance of exchange of contracts.
What authority do solicitors need before they exchange contracts?
Before exchange, both solicitors need the client’s authority to exchange
- Should be obtained in writing and a note added to the case file
- Make clients aware of consequences of exchange (they cannot withdraw)
What are the requirements to create a binding contract for sale of land?
Contract must be in writing
Must incorporate all agreed terms
Must be contained in one document or in each copy of the contract
Contract must be signed by the parties
Exchange commonly occurs via telephone, using one of three Law Society Formulae (A, B or C). Which is most common and what does it involve?
1) They all involve undertakings, which, if breached can result in disciplinary action against the offending party
2) Most common is B, where each solicitor holds their own client’s signed part of the contract
- Each solicitor undertakes to send the signed part of the contract to the other on the same day by first class post
- Buyer’s solicitor will also send the agreed deposit the same day
- Note that the SCPC assume that the deposit will be sent by electronic means, but an amended formula will need to be used to reflect this
What do Formulae A + C involve?
1) Formula A is used where one solicitor holds both parts of the contract, signed by the buyer and seller.
- Following the telephone call effecting exchange, the solicitor holding both documents dates both parts of the contract, inserts the completion date (if not already inserted) and sends the part signed by their own client to the other solicitor.
2) Formula C is typically used for chains of related transactions. Each solicitor holds their own client’s signed parts of the contract and agrees to release the contracts for exchange for a specific period.
- This allows all parties to be ready to exchange so that as soon as the party at the end of the chain is ready, all contracts can be exchanged almost simultaneously.
When exchange of contracts has taken place via telephone, how should this be recorded + confirmed?
1) Exchange should be recorded – often time of exchange (phone call) and the formula used are written in the top corner of the first page of the contracts being exchanged
2) File note also made recording the fact of exchange with:
- Date and time of exchange
- Formula used
- Completion date
- Deposit to be paid
- Identities of the solicitors involved in the exchange
What are the consequences of exchange, for both buyer and seller?
1) Binding contract created which neither party can withdrawn from without liability for breach of contract
2) Seller retains legal title until completion, but the beneficial interest passes to the buyer
- Seller can remain in physical possession in this time
3) Buyer bears risk of any loss or damage to the property between exchange and completion, so insurance should be in place and effective from moment of exchange
4) Immediately after exchange, solicitors should inform clients and the estate agent that exchange has taken place
