EXCHANGE OF CONTRACTS (STAGE 3) Flashcards
INTRODUCTION
- Exchange of contracts is the point in the conveyancing transaction when the matter becomes legally binding on the seller and buyer.
- Up to the point of exchange there is no binding contract.
- Either party can withdraw without paying compensation to the other.
Do Transactions Need to Be Synchronised?
1.Before exchanging contracts, the solicitors should consider whether they need to synchronise contracts for related trans-actions (purchases or sales by parties somehow linked to the transaction).
2.Synchronisation is essential when the client has a related sale and purchase of a house. This means that the solicitor must ensure that both transactions:
*Exchange on the same day; and
*Have the same completion date
Parties Become Bound on Exchange
- Once the contracts are exchanged, the parties become bound on the terms included; terms orally agreed but not reflected in the contracts are generally not binding.
Exam Tip
Look out on the exam for a situation where the parties have agreed something (for example, the seller agrees to pay for an indemnity insurance policy or to leave specifed contents at the property on completion), but this agreement is not contained in the contract on ex-change. The provision is not binding. But note that the aggrieved party might have a claim against their solicitor if they can show that they instructed their solicitor to add the clause to the contract and the solicitor did not.
Exchange of
Contracts for New Lease
- If the conveyance is for a new lease, the contract will provide that the buyer agrees to take a lease in the form of the agreed draft, and the landlord agrees to grant the lease in the form of the agreed draft.
- Contracts are exchanged, and after this the form of lease cannot be changed except by mutual agreement of the parties, usually by executing a new lease agreement.
METHODS OF EXCHANGE
In person: The solicitors can meet and exchange the contracts in person. The matter becomes binding at the point they agree face-to-face that exchange has hap-pened. This has the advantage of certainty but is rare due to time and distance constraints.
By post: Each solicitor posts their client’s signed part of the contract to the other. Exchange takes place when the seller’s part is posted to the buyer’s solicitor. This method is never used in practice now due to the lack of certainty associated with it.
*By phone: The solicitors have a telephone conversation with each other, go through the contracts, insert the completion date and the date of the conversation (the exchange date) and exchange takes place at that point.
This is the most common method of exchange.
LAW SOCIETY’S FORMULAE FOR EXCHANGE OF CONTRACTS
- Since exchange is a key part of the conveyancing transaction, the Law Society has introduced formulae for exchange.
- What these do is set out a required list of steps that the solicitors must take during the exchange tele-phone conversation.
- It stipulates that the solicitors must keep** a memorandum** (file note) of the exchange conversation. This
is designed to bring some certainty to the process. There are three formulae, and the one used depends on who holds the signed contract and whether there is a chain of transactions.
Formula A
- Formula A is used when one solicitor holds both signed parts of the contract. Usually, this will be the seller’s solicitor and they will also hold the buyer’s deposit cheque.
- The buyer’s solicitor will have sent the buyer’s signed contract and de-posit cheque to seller’s solicitor in advance.
- The seller’s so-licitor will confrm that both parts of the contract** are the sam**e during the telephone call and agrees to insert the date of exchange and completion into both contracts.
- On exchange, the solicitor who holds both parts of the contract will send the contract signed by their client to the other solicitor.
Formula B
- Formula B is used when each solicitor holds their own client’s signed part of the contract, and the buyer’s solicitor has** cleared funds for deposit**.
- The solicitors will confrm that the versions of the contract are the same and once exchange has taken place, each will send their client’s signed part of the contract to the other and the buyer’s solicitor will send the agreed deposit to the seller’s solicitor, setting out the
same information as above.
Formula B is most common and is used either where there is no chain of transactions or for the transactions at each end of a chain where there is no related onward transaction.
Formula C
- Formula C is used when there** is a chain of transactions** and deposit monies are to be sent directly to another firm further up the chain.
- This formula relies heavily on undertakings. Ex-change happens in two stages and two phone calls. The first call confrms that the solicitors are ready to exchange and the second call confirms the actual exchange of contracts.
Formula C is used where the solicitors act for a buyer and a seller who have** a related sale and purchase **that is part of a chain of transactions. The point is that the first part of the conversation ‘locks in’ one transaction, leaving the solicitor free to exchange on the related transaction.
Memorandum of Exchange
After exchange both solicitors make a file memorandum
recording:
*Their names;
*The date and time of exchange;
*The exchange formula used (including any agreed varia-tions to the formula);
*The completion date; and
*The amount of any deposit paid.
PROTECTION OF CONTRACT BY REGISTRATION
- If there is likely to be more than a couple of weeks between exchange and completion, the buyer’s solicitor should consider protecting the buyer’s position by registering anestate contract.
- This puts the world** on notice that the seller has agreed to sell the property to the buyer.**
*If the title is registered – A unilateral notice will be placed on the seller’s charges register; and
*If the title is unregistered – A C(iv) land charge will be registered against the seller’s full name.
