Finance and Exchange of Contracts

Question 1

Why is the exchange of contracts such a significant stage?

Answer 1

It is the point at which the parties become bound by the terms of the contract.

It is important to ensure each party will be in a position to discharge its obligations.

Seller must sell what it has contracted to sell and the buyer must complete the purchase once contracts are exchanged.

Question 2

What are the procedural steps for the buyer’s solicitor to take prior to completion?

Answer 2

1) Searches and documentation
2) Survey
3) Financial arrangements
4) Completion money from the buyer

Question 3

What does the buyer’s solicitor need to ensure with respect to searches pre exchange stage?

Answer 3

He must check and cross check all documents received and results of searches.

He must raise any additional questions or observations on any issues and check they have all been satisfactorily dealt with.

Question 4

What does the buyer’s solicitor need to check in terms of the survey before completion?

Answer 4

He just needs to check whether the survey has been carried out and whether it is satisfactory.

Question 5

What does the buyer’s solicitor need to do in terms of the financial arrangements pre exchange stage?

Answer 5

The buyer’s solicitor first needs to agree with the seller’s solicitor on the deposit whether there is enough money in the buyer’s account to clear this deposit.

If there has been a reduction in the purchase price, this needs to be communicated to the lender and reflected in the contract.

Finally the buyer’s solicitor must make sure that mortgage documents have been received and that he gets confirmation from the lender that the mortgage will be forth coming. To do this he will need to provide the lender with a CLLS form.

Question 6

What is a CLLS form?

Answer 6

A CLLs form is a certificate of title which is necessary in requesting a mortgage from the lender. This is important for commercial property transactions.

Question 7

What must the buyer’s solicitor do in terms of the completion money prior to completion?

Answer 7

The buyer’s solicitor must receive the necessary funds from the buyer in the form of a draft financial statement to check that the client has sufficient funds to complete.

Question 8

What must the seller’s solicitor do prior to completion?

Answer 8

The seller’s solicitor must:

1) Ensure that the existing mortgage is redeemed
2) Respond to enquiries from the buyer’s solicitor regarding the contracts and any amendments

Question 9

In terms of ensuring that the existing mortgage is redeemed, what must the seller’s solicitor do?

What happens if the proceeds are not enough to discharge the mortgage?

Answer 9

The seller’s solicitor must obtain a redemption figure from the existing lender to ensure that the proceeds from the sale of the house will be enough to pay off the mortgage. If the house is in negative equity, then seller’s solicitor needs to make sure that the seller will have enough money to pay off the house.

If the sale is only part of the house and the proceeds are not enough to discharge the mortgage over the whole property, then the seller’s solicitor will need to get consent from existing lender so that the buyer takes free from that mortgage first.

Question 10

What is the procedure for exchanging by telephone with respect to the pre exchange stage?

Answer 10

1. The buyer’s solicitor must first ensure that the lender is satisfied with the CLLS certificate of title.
2. The buyer’s solicitor must double check that the client still wants to exchange.
3. Then buyer’s solicitor must transfer the money to the seller’s solicitor
   4) the Buyer’s solicitor must then give an undertaking to send the deposit money that same day.

Question 11

What is the procedure for exchanging by telephone with respect to the pre exchange stage?

Answer 11

1. The solicitors must check that the buyer’s and seller’s contract match.
2. They must then agree on a completion date.
3. They must then say the exchange words.

Question 12

What is the procedure for exchanging by telephone with respect to the stage after contracts have been exchanged?

Answer 12

1. A memorandum of exchange must be drafted. This will include:
2. Buyer’s solicitor’s name
3. Seller’s solicitor’s name
4. Time of day
5. Formulae used
6. Any variation to undertakings
7. Buyer’s solicitor must then send the contract and deposit
   the cheque to the seller’s solicitor. Tis will be an undertaking.

Question 13

What are the pre completion steps

Answer 13

1) Do an OS search (if registered land) or a CLC search (if unregistered land) to
check if any changes in the official copies and obtain a priority period, plus any
other necessary pre-completion searches

2) Submit requisitions on title to the seller’s solicitor - these are essentially practical questions to the seller, including undertaking re seller’s mortgage

• Draft the purchase deed (a TR1 form)

• Check finances in place (receive completion statement from seller’s solicitor and
send financial statement to buyer)

Question 14

What is an undertaking?

What are the consequences of failure to comply with an undertaking?

Answer 14

An undertaking is defined in Chapter 11 of the Code

An undertaking is a statement which can reasonably relied on.

The undertaking can be either oral or written, and need not state the word ‘undertaking’

Can be given by anyone working for a law firm

O(11.2) - perform within an agreed timescale or within a reasonable time

Note that a failure to comply with an undertaking = serious disciplinary offence

Question 15

Who bears the risk between exchange and completion?

Where is this reflected in the SCS and SCPC?

Answer 15

The common law position is that the risk for the property passes to the buyer on exchange of contracts.

Both the SCS 5.1 and the SCPC is silent on the issue so the common law position prevails.

Question 16

Is the seller under an obligation to insure the property before completion?

Answer 16

The seller is not under an obligation to insure the property before completion unless contract specifically provides for this. SCS 5.1.3 and SCPC 7.1.2 sets out sensible guidelines that may be followed in such circumstances where the seller agrees to insure.

Question 17

What do you do if you are a solicitor acting for both the borrower and lender of a mortgagee and the borrower wants to keep some key information from the mortgagor?

Answer 17

Identify outcomes and IB’s:

1) O(3.5) - you cannot act if client conflict exists or there is a significant risk of one

There is a conflict because:

On the one hand, you owe borrowers a duty of confidentiality - O(4.1)

On the other hand, you owe lender a duty of disclosure - O(4.2)

Also note Principle 4 - act in the best interests of both clients

2) IB(3.7) - you can act for lender and borrower(s) where certain conditions apply

Unless the borrowers permit disclosure, you cannot continue to act for the lender and borrowers

But in this situation: If borrowers do not permit disclosure:

The duty of confidentiality overrides the duty of disclosure - O(4.3)

You must therefore stop acting for the lender, but you cannot reveal why

If the lender appoints a new solicitor, you must act with integrity - Principle 2

If borrowers still refuse to permit disclosure, stop acting for the borrowers

Question 18

What is a contract race?

And what are your obligations as a solicitor when a contract race occurs?

Answer 18

A contract race occurs when a seller intends to (or does) deal with more than one prospective buyer (Other than in case of sale by auction or tender).

O(11.3) - if you act for seller of land, you must inform all buyers immediately of the
seller’s intention to deal with more than one buyer

You shouldn’t wait until contracts are sent out to more than one buyer, and you don’t
need to have been formally instructed to act for the seller in relation to the other buyers

Seller client must give you permission to tell prospective buyers, but if he refuses, then
the solicitor will have a conflict of duties between informing the buyers and
maintaining duty of confidentiality to the seller

Seller would need to think carefully about whether he could continue to act for the
seller.

Question 19

What are the requirements for registration of a mortgage when the borrower is an individual?

Answer 19

Two entries are made on the Charges Register of the property at the land Registry, confirming the date of the charge and then one confirming the proprietor of the charge.

Although not a requirement, there may be a request that a ‘Restriction’ is placed in the proprietorship register prohibiting dealings by the property owner without the written consent of the lender.

Question 20

What are the requirements for registration of a mortgage when the borrower is a company?

Answer 20

When the borrower is a company, it must register the charge at:

1) the land registry
2) at companies house within a 21 day period beginning with the day after the day on which the charge was created ss 859 A(2) and (4).

In practice the lender may want to carry out the registration because of the consequences of non registration of the charge.

Question 21

What happens if there are two mortgages registered on one property?

Answer 21

Section 48(1) LRA 2002 provides that whichever charge is shown registered first will have priority.

Question 22

What is the difference between SCPC 9.1 and common law with respect to proof of misrepresentation?

Answer 22

Under SCPC 9.1 there is no need to prove that the buyer was induced to enter into a contract by relying on the misrepresentation. He only needs to prove that the seller provided in accurate information or misleading information.

Under common law, the buyer would need to prove that he relied on the misrepresentation which induced him to enter into a contract.

Question 23

On what basis can a contract be rescinded with respect to misrepresentation?

Answer 23

First the misrepresentation must be the result from frad or recklessness.

Secondly there must be a substantial difference in quality, quantity or tenure between the actual property and that represented by the seller. (SCPC 9.1.2)

Reccision is an equitable and discretionary remedy which will not be awarded where damages are adequate.