Freehold Transactions

Question 1

Why does a client need a property solicitor?

Answer 1

It all comes down to value. Lands and buildings are often the most valuable assets an individual or company will buy.

Risks of losing money:

• Conveyancing process of transferring property and paying money must be tightly controlled
• Problems with the property: legal issues can affect the buyer’s use of the property and its open market value

Question 2

What will you need to think about for the client?

Answer 2

The client will want to know how long it is going to take and how much it is going to cost.

A lawyer should think about:
- any issue which may restrict your client’s ability to do what it wants with the property
- any issue which passes liability (ie potential expense) on to your client for something the seller has done

Question 3

Aims when acting for the buyer

Answer 3

Ensure that:
- the seller has the right to sell the property
- the physical condition of the lands and buildings is adequate for the buyer’s needs and the property is worth the money being paid for
- you identify all the rights that the property enjoys
- you identify any third party rights affecting the property
- the property is free from any security interest (mortgage) or will be on completion
- the contract reflects the terms agreed between the parties
- there are sufficient funds to finance the purchase

Question 4

Lender’s role in a property transaction

Answer 4

Unless the buyer has enough cash to cover the purchase, they will borrow money from a lender.
The lender will take a security interest over the buyer’s (borrower’s) property. If the buyer does not repay the mortgage, the lender knows that it can sell the property to cover its losses.

Question 5

Lender’s aims in a freehold transaction

Answer 5

The lender’s aims, although similar to the buyer’s are slightly different. The lender will not worry so much how long it takes or even if the transaction does not proceed at all.
The lender will want to know:
- the property is marketable
- that the property’s value is sufficient to cover any losses if the buyer does not repay the mortgage

Question 6

Aim’s when acting for the lender

Answer 6

Ensure that:
- adequate for the lender’s needs and the property is worth enough to cover any losses if the buyer fails to repay the mortgage
- no discrepancies in the lender’s understanding of the transaction and the borrower’s circumstances
- the security document (mortgage) is valid and enforceable

Question 7

Seller’s aims in a freehold transaction

Answer 7

• sell the property and receive the money as quickly as possible
• may be more complicated if there is a related purchase

Question 8

Aims when acting for the seller

Answer 8

Ensure that:
- the contract reflects the terms agreed between the parties
- provide the buyer’s solicitor with what they need to proceed with the purchase
- tie the timing of the sale to any related purchase
- transfer legal ownership (and responsibility) of the property to the buyer
- collect money from the sale, repay the mortgage and account to the seller for the balance

Question 9

Three stages of the conveyancing process

Answer 9

1. Pre-contract to exchange
2. Pre-completion to completion
3. Post completion

Question 10

What does the seller’s solicitor do in the period before exchange?

Answer 10

The seller:
- deduces title
- answer pre contract enquiries
- prepare draft contract

Question 11

What does the buyer’s solicitor do in the period before exchange?

Answer 11

The buyer:
- investigates title
- pre-contract searches
- pre-contract enquiries
- report on title
- the buyer’s mortgage
- approve draft contracts

Question 12

What does the seller’s solicitor do in between pre-completion and completion?

Answer 12

Seller:
- draft/approve transfer deed (TR1)
- reply to completion information
- prepare for completion

Question 13

What does the buyer’s solicitor do in between pre-completion and completion?

Answer 13

• Draft/approve transfer deed (tr1)
• request completion information
• pre-completion searches
• prepare for completion

Question 14

What does the seller’s solicitor do post-completion?

Answer 14

Sends the completed TR1 and any discharged mortgage to the buyer

Question 15

What does the buyer’s solicitor do post completion?

Answer 15

• SDLT/LTT
• Companies house application to register mortgage (if buyer is a company)
• Land registry application

Question 16

What is caveat emptor?

Answer 16

“Let the buyer beware”

Refers to the principle that the buyer takes the property as they find it.

Can withdraw at any point up to exchange of contracts. After exchange, they cannot withdraw because they subsequently find a problem with the property.

The seller is under no obligation to give the buyer all the relevant information that the buyer may require. It is the buyer’s solicitor’s job to investigate as thoroughly as possible and report to the buyer.

Question 17

How to find out info about the property

Answer 17

1. Title to the property: land registry official copies (if registered) or the deeds (if not)
2. The seller’s replies to enquiries: standard or specific
3. Searches: requests from local authorities, Land registry, statutory undertakers
4. A survey of the property: surveyor will inspect the property and report on value, structural defects and necessary repairs. May also flag issues for further investigation by the solicitor

Question 18

Hardy v Griffiths

Answer 18

No onus on the seller to disclose any physical defects. It was for the buyer to discover them.

Question 19

Something wrong with the property before exchange

Answer 19

• Up until exchange the buyers can walk away at any time from the deal without legal liability.
• No legal right to recover any costs from the other party
• The buyer could require the seller take steps to remedy the problem before completion –> this could become a condition of the sale contract.

Question 20

Energy performance certificate

Answer 20

• seller must commission an EPC before marketing the property and make it available to a prospective buyer free of charge
• EPC prepared by an accredited energy efficiency rating of the property and recommendations on how it could be improved
• EPC is valid for 10 years and available on public online register
• seller and buyer’s solicitors should check the EPC has been provided when accepting instructions

Question 21

Time scale

Answer 21

Depends on any issues arising etc.

Average residential sale: six to eight weeks form the sale being agreed to completion

Commercial matters: sometimes on a tight timescale and may require exchange in two weeks and completion in four

Question 22

Costs

Answer 22

May be fixed or on a time basis.

Time-basis: likely need to provide an estimate (possibly a range)

Question 23

Legal ownership

Answer 23

Legal owners are registered at the land registry.

Maximum of four legal owners.

Sole or joint tenancy.

Legal owners hold the property on trust for the benefit of the beneficial owners.

Question 24

Beneficial ownership

Answer 24

May or may not be the same as the legal owners.

They are not registered at the Land Registry (unless as legal owners) .

No maximum number of beneficial owners, can be any age.

Can be sole owners, joint tenancy or tenancy in common.

Question 25

Who is a joint tenancy for?

Answer 25

Suitable for: married couple, civil partner, cohabitees in a stable relationship

Not suitable for: co-owner who wants to pass a share of the property in their will. Not usually a good idea for business relationships.

Co-owners collectively own the whole of the beneficial estate with each other - they are seen as a single entity.

Right of survivorship applies.

Question 26

Instructions for co-ownership arrangements

Answer 26

Important to get clear instructions from your client on co-ownership and carry them out. Failing to do so is a common area of professional negligence.

Question 26

Who are tenancies in common for?

Answer 26

Suitable for: co-owners who wish to have an interest to leave in their will, or have contributed unequal proportions to the purchase price or where it is a business relationship.

Purchasers own their own undivided share in the property and can share the property in whatever proportions they choose (documented in a trust deed)

Right of survivorship does not apply.

Question 27

How are co-ownership arrangements recorded?

Answer 27

LPA 1925: a declaration of trust of land must be in writing and signed by the declarant(s).

Standard Land Registry form transfer deed (TR1) provides a panel to include a declaration of trust.

Question 28

Advice on surveys

Answer 28

A buyer should always be advised to instruct a surveyor to undertake a physical survey of the property in order to identify if there are any physical defects with the property.

Physical defects with the property can be expensive to put right, affecting the value of the property. Identifying these defects gives the buyer the opportunity to renegotiate the price, require a contribution from the seller or failing that, withdraw before exchange.

If the physical defects are potentially serious, the lender may refuse to lend until they are put right, meaning that the buyer cannot proceed even if they want to.

Question 29

Survey: basic valuation

Answer 29

If a mortgage is being obtained, then the lender will insist on at least a basic valuation.

This is the cheapest option, and the surveyor will give a valuation and identify any major obvious defects.

It is intended to ensure that the lender will be able to recover any losses by selling the property, and is not detailed.

A buyer should be advised to obtain a fuller survey.

Question 30

Homebuyer report

Answer 30

Much more detailed than a basic valuation, and will be suitable for most properties in reasonable condition aged less than 150 years.

Question 31

Full structural survey

Answer 31

Suitable for any property, but should especially be considered where the property is listed, has had extensive renovations, or where extensive alterations are planned.

Most expensive option.

Question 32

Tax considerations in a property transaction

Answer 32

In property transactions you need to be aware of three different taxes that could be payable. These are:
- SDLT/LTT
- Capital Gains Tax
- VAT

Question 33

SDLT

Answer 33

• Buyer must pay SDLT if it buys property or land over a certain price in England and Northern Ireland (LTT in Wales)
• If the property does not exceed the threshold figures, no SDLT is payable
• The threshold figures and rates of SDLT payable are different depending on whether the property is residential or commercial

Question 34

CGT

Answer 34

• Tax on the profit when you sell certain assets (including land and buildings) that have increased in value
• It is the gain you make that’s taxed, not the amount of money you receive.
• For most sales, if the client is selling there own home, CGT is not payable if they can use the Private Residence Relief (PRR)

Question 35

VAT

Answer 35

Tax that is added to the price of certain goods and services. Applicable to certain types of property transactions.

Not usually applicable to existing residential properties which are VAT exempt.

However for some transactions, the buyer must pay VAT on the sale price to the seller.

Question 35

Costs of purchasing a property

Answer 35

• Cash to pay the deposit on exchange
• Balance of the price on completion
• Agreed price for any extras, such as contents that come with the property
• Tax
• Solicitor’s fees which will be subject to VAT
• Solicitor’s disbursements - such as search fees and Land registry fees

Question 36

Funding the purchase (commercial)

Answer 36

In commercial context, the funding options are more varied and complex.

A public company may raise finance for a purchase by equity finance (selling shares on the stock market to raise capital)

A lender may fund a development whereby the lender will provide the money to the buyer not only to buy the land but to develop buildings on it. The lender will require the power to step in to complete the development if the buyer fails to carry it out.

For high value properties, money may be raised from a group of lenders (syndicate) to raise they money and limit their risk exposure.

Question 37

Where does the funding for residential purchases come from?

Answer 37

• Client’s own resources
• Proceeds of a related sale
• Mortgage loan