PLP - Core knowledge areas of freehold real estate law and practice Flashcards
Key elements and structure of freehold property transactions
1) Pre-contract stage
2) Exchange of contracts
3) Pre-completion stage
4) Completion
5) Post-completion stage
What is the principle of Caveat Emptor
Caveat Emptor ‘let the buyer beware’:
Caveat emptor means that the seller is not obliged to disclose information about the property, other than about limited matters of title, and would not be liable for any defects in the property which later come to light. So, the onus is on the buyer to discover as much about the property as possible before exchanging contracts and committing to the purchase.
Pre-contract stage for freehold conveyancing (Seller and Buyer’s solicitor)
Seller’s solicitor
- Take instructions from the client
- Investigate title and produce evidence of title (deduce title) to the buyer
- Reply to buyer’s pre- contract enquiries
*Draft the contract
Buyer’s solicitor
- Take instructions from the buyer client
- Investigate title
- Raise pre- contract searches and enquiries (and check buyer client has commissioned survey
*Approve draft contract - Prepare pre- exchange report to client(s)
- Pay deposit upon exchange
Pre-completion stage for freehold conveyancing (Seller and Buyer’s solicitor)
Seller’s solicitor
- Approve the draft transfer deed
- Reply to buyer’s pre- completion enquiries, including giving an undertaking to discharge seller’s mortgage
Buyer’s solicitor
- Draft the transfer deed
- [Draft the mortgage deed if acting for the lender and] obtain client execution of mortgage deed
- Raise pre- completion searches and enquiries (updating and, if acting for the lender, checking buyer’s solvency)
- Submit report on title/ certificate of title to lender and request mortgage advance (if appropriate)
Post-completion stage for freehold conveyancing (Seller and Buyer’s solicitor)
Seller’s solicitor
- Post- completion matters (including discharging existing
mortgage if necessary)
Buyer’s solicitor
- Post- completion matters (including paying Stamp Duty Land Tax/ Land Transaction Tax and registering the transfer of title with Land Registry)
How is title investigated in registered freeholds
In order to investigate a registered title, the seller’s solicitor needs to obtain:
1) Official copies
2) Title plan
What do the official copies show
Official copies show entries in 3 registers
(a) the Property register
(b) the Proprietorship register
(c) the Charges register
What does the Property register show
- Description of land
- Whether it is freehold or leasehold
- Rights benefiting the property (eg benefit of easements)
What does the Proprietorship register show
1) Class of Title
(i) Absolute title: the most common and best class, the registered proprietor has vested in them the legal estate subject only to the entries on the register, overriding interests and where the proprietor is a trustee, minor interests of which they have notice, such as the interests of the beneficiaries under the trust.
(ii) Possessory title: granted where the proprietor is in possession of the property but has lost the title deeds or is claiming through adverse possession, this means that the proprietor is also subject to all adverse interests existing at the date of first registration.
(iii) Qualified title: granted where there is a specific identified defect which the Registrar feels cannot be overlooked or ‘cured’ by the grant of absolute title.
2) Restrictions affecting the ability to deal with the property (eg No disposition by…)
3) Identify the current owners and their address
What does the Charges register show
1) Incumbrances
(i) covenants affecting the property, which can be restrictive or positive
(ii) easements affecting the land, such as a right of way over the property
(iii) charges over the land, most commonly mortgages
(iv) leases granted over the whole or part of the property
2) Notices of any registered third-party rights that burden the title
How is title investigated in unregistered freeholds
By reviewing title deeds (see if anything triggered first registration) and epitome of title.
Sale of whole: Seller hands over original title deeds to the buyer
Sale of part: Seller hands over certified copies of title deeds to the buyer on completion.
What is an epitome of title
Bundle of deeds and documents of an unregistered property
Process of analysing an epitome of title and deducing ownership
To deduce title to unregistered land, the epitome of title must show a good root of title more than 15 years old, and an unbroken chain of ownership to the current seller
What is a good root of title
A document which must;
- Deal with the whole legal and equitable interest in the property.
- Contain an adequate description of the property.
- Be at least 15 years old at the date of the contract.
- Do nothing to cast doubt on the title.
Examples: A good root will usually be a conveyance by deed. Assents do not provide such security.
Who Makes the Searches and Raise Enquiries
Searches are carried out by the buyer’s solicitor.
What is a requisition on title
The buyer’s solicitor has found a potential defect in title and has raised an enquiry with the seller’s solicitor.
Pre-contract searches and enquiries relevant to every property
(a) Survey and personal inspection
(b) The local search
i) Local Land Charges Search: financial land charges imposed by local authorities. ii) Standard Enquiries: Planning entries, building regulations consents, Article 4 direction, tree preservation orders iii) Optional Enquiries: environmental and pollution notices and rights over common land
(c) Water and drainage search
(d) Pre- contract enquiries of the seller
(e) Environmental searches: contaminated land
(f) Flood search: the property is close to a river or the coast
Searches and enquiries for particular properties and transactions
a) Chancel repairs search: cost of repairing the of church)
(b) Mining searches
(c) Canal & River Trust search: Property is adjacent to a river or a canal
(d) Commons search: Properties on green- field sites or adjoining an open space such as a village green may be affected by common rights
(e) Railways: A buyer of land adjoining a railway line
(f) Highways: the roads adjoining the property
(g) Unregistered land searches
i) An Index Map Search (‘SIM’): unregistered land or where there is a mines and minerals reservation in the title. ii) Land Charges Department search
(h) Company search
Where the seller is a company, the buyer’s solicitor should carry out a company search at Companies House.
(i) Bankruptcy/ insolvency search
Types of mortgages
General Prohibition of the Financial Services and Market Act 2000: a solicitor can give only generic advice as to mortgages
Repayment mortgage: requires the borrower to pay interest and repay some capital each month. At the end of the mortgage term, the entire loan is paid off.
Interest only mortgage: Requires the borrower to pay interest for the term of the loan and repay the capital sum at the end of the term
Endowment mortgage: requires the borrower to pay monthly premiums for the life assurance policy with the intention that the policy will have sufficient funds to pay off the loan at the end of its term
Pension mortgage: requires the borrower to pay monthly premiums linked to a personal pension with the intention that the pension will have sufficient funds to pay off the loan at the end of its term
Purpose, form and timing of a Certificate of Title
Purpose:
- Before a lender will release mortgage funds, the buyer’s solicitor must submit a clear COT
- COT is a document confirming that the title is good and marketable and acts as a request for the release of the mortgage advance.
- Not required if there is no mortgage
Form:
Residential: Law Society and UK Finance
Commercial: City of London Law Society
Timing: Usually 5 or 7 working days but check the lender’s requirements
Preparation for and exchange of contracts
(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
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.
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 the completion date with their client and the other side in advance of exchange of contracts.
The purpose of a sale contract
A contract is not needed for every property transaction. The contract cannot transfer the land because a deed is needed to do that. A contract is merely an agreement to transfer the land at a later stage.
- Provides both parties with certainty as to the nature and extent of the property, the financial terms, the timetable for completion
- Prevents either party withdrawing from the transaction without being liable to the other for breach of contract.
Key conditions contained in the: Standard Conditions of Sale
Title Guarantee: Full title guarantee (subject to amendment)
Contract Rate: Law Society’s interest rate from time to time in force’ which is 4% above the base lending rate of Barclays Bank plc
Deposit:
i) 10% (subject to amendment)
ii) held as a stakeholder but seller can use the deposit as a
deposit on a related purchase of a house for the seller.
iii) can be paid by electronic means or by cheque drawn on the conveyancer’s client account.
Insurance: seller is under no obligation to insure a freehold property unless required to do so by a special condition in the contract.
Risk: the risk of damage to the property passes to the
buyer on exchange of contracts. Buyer must complete the purchase even if the property is damaged or destroyed between exchange and
completion.
VAT: Purchase price and the contents are INCLUSIVE of VAT ( subject to amendment)
Key conditions contained in the: Standard Commercial Property Conditions
Title Guarantee: Full title guarantee (subject to amendment)
Contract Rate: Law Society’s interest rate from time to time in force’ which is 4% above the base lending rate of Barclays Bank plc
Deposit:
i) 10% (subject to amendment)
ii) held as a stakeholder
iii) payment by electronic means only
Insurance: seller is under no obligation to insure a freehold property unless required to do so by a special condition in the contract.
Risk: the risk of damage to the property passes to the buyer on exchange of contracts. Buyer must complete the purchase even if the property is damaged or destroyed between exchange and completion.
VAT: Purchase price and the contents are EXCLUSIVE of VAT and can be added on top.
What are the Title Guarantees
Full title:
- Given if seller owns the entire legal and equitable title to the property.
- the seller impliedly covenants that the land is disposed free from incumbrances other than those the seller does not know about and could not reasonably know about.
Limited title:
- Given where the seller has limited knowledge of the property, eg where the seller is an executor or trustee.
- the seller has not incumbered the title to the property and the seller is not aware that anyone else has done so since the last disposition for value.
Specified Incumbrances
- It is necessary to specify in the contract all the burdens on the property against the heading ‘Specified incumbrances’.
- Incumbrances are third party rights which will survive the transfer of the property to the buyer, such as restrictive covenants, easements and obligations to contribute to shared facilities.
- If these are not specified, the seller could be in breach of SC 3.1.1, which says that the seller sells free of all incumbrances other than those specified in the contract or of a type listed in SC 3.1.2.
- The seller’s solicitor must list as Specified incumbrances in the contract everything not covered by SC 3.1.2 or SCPC 4.1.2.
Purpose of, and matters covered by special conditions
Purpose: Special conditions relate to the individual characteristics of the property and the particular circumstances of the transaction
Matters covered may include:
- the appointment of a second trustee for the purposes of the transfer
- arranging for the seller to obtain or pay for a restrictive covenant insurance policy
- disclosing a defect in title
- the seller selling with limited or no title guarantee
- a deposit of less than 10% and/ or for the deposit to be held as agent rather than stakeholder
- the payment of VAT
- the removal of fixtures by the seller
- the inclusion of an indemnity covenant in the transfer to protect the seller from liability once they have lost physical possession of the property
Basics of VAT in a contract
- VAT is payable when the property is less than three years old, or because the seller has exercised the option to tax.
(a) The purchase price is exclusive of VAT and VAT will be added on top (SCPC)
Appropriate for:
1) the standard rated supply of a commercial building within three years of construction where seller has no choice but to charge VAT.
2) sale of an old commercial property where the seller needs to opt to tax to recover VAT paid on refurbishment and/ or professional costs and the buyer is not VAT- sensitive
(b) The purchase price is inclusive of VAT so that VAT, if any, cannot be added on top (SC)
1) If the supply is standard rated, the supplier will have to account to HMRC for the VAT out of the purchase price.
2) Not appropriate for the sale of a new building or one where the seller has exercised the option to tax.
Methods of holding a deposit:
Stakeholder: Held by the seller’s solicitor and will be paid to the seller only on completion.
Agent: Held by the seller’s solicitor and may be paid over to the seller immediately after exchange has taken place.
the practice and authority to exchange
Authority: Before exchanging contracts, both solicitors must obtain their client’s authority to exchange in writing and a note should be made on the file.
Memorandum of Exchange
The memorandum of exchange is a central part of the requirements of the formulae and is designed to ensure that both solicitors have a contemporaneous and accurate written record of the conversation which effected exchange. It should include:
* Date and time of exchange
* Formula used
* Completion date
* Names of the solicitors involved
Law Society Formulas
Formula A:
* Where one solicitor (usually the seller’s) holds both signed parts of the contract, the buyer’s solicitor having sent a signed contract and the deposit cheque in advance.
- The seller’s solicitor will confirm both contracts are the same over the telephone, insert the exchange date in both, and send the part signed by the seller to the buyer’s solicitor.
- Formula A is used when the solicitors think it is prudent for one solicitor to hold both contracts on exchange.
Formula B (most common)
* Where each solicitor holds their own client’s signed part of the contract.
- The solicitors will confirm in a call that the versions are the same, and each will send their signed part to the other.
- The buyer’s solicitor will also send the deposit funds to the seller’s solicitor to hold as stakeholder pursuant to the unamended Standard Conditions of Sale
Formula C:
* Where there is a chain of transactions and deposit monies are to be sent directly to another firm further up the chain.
- Two calls are made: The first to confirm the solicitors are ready and the second to confirm actual exchange.
Methods to exchange
- Phone- most common (go through contracts, insert completion date and date of convo)
- Post
- Person
Consequences of exchange of contracts
- The matter becomes legally binding on the seller and buyer.
- Up to the point of exchange, either party can withdraw without penalty.
- Exchange of contracts and completion of the transaction can take place on the same day.
- If the parties wish to vary their contract after it has been signed, they should re-execute new contracts with the new terms reflected in it
Form of transfer deed and formalities for execution
Section 52 of the Law of Property Act 1925 states that the transfer of a legal estate in land must be by deed.
Registered Land
- Transfer the whole of registered freehold title: TR1
- Transfers of part: TP1
Unregistered land
It will be subject to compulsory first registration so the solicitors will often choose to use a Land Registry transfer form, although it is possible to use a conveyance.
Pre-completion searches (registered property)
- Land Registry search should be made against the title number.
- Form OS1 is used if the whole property is being sold, or an OS2 if the sale is of part only.
- The search result will reveal any new entry made since the ‘search from’ date and confer on the applicant a ‘priority period’ of 30 working days from the date of the search result.
Pre-completion searches (unregistered property)
- The buyer’s solicitor will carry out a full land charges search against the full names of the current estate owner/ seller for the full period of their ownership.
- Using form K15
- This confers a priority period of 15 working days to complete the transaction.
Pre-completion steps
- Preparation of the transfer deed
- Pre- completion searches
- Making practical arrangements for completion
- Ensuring the finances are in order for completion
Methods and effect of completion
Completion is the day when the buyer’s solicitor sends the balance of the purchase money due to the seller’s solicitor to complete the matter, and the seller moves out and the buyer moves in.
- If the land is registered, the title passes when the buyer becomes registered at HMLR.
- If the land is unregistered title passes on completion.
Methods: In person, post
Law Society Code for Completion by Post
- seller’s solicitor acts as the agent for the buyer’s solicitor- they will date and execute the transfer for the buyer’s solicitor
- buyer’s solicitor to send completion monies by a bank transfer and seller’s solicitor to notify immediately upon become aware that funds have been received
- seller’s solicitor complete transfer documents
- seller’s solicitor to confirm to the buyer’s solicitor by telephone, fax, or email the time at which completion takes place, and a duty to notify the keyholder to release the keys to the buyer
o the latest time the seller’s solicitor may send written confirmation to the buyer’s solicitor that completion has taken place is by the end of working day following the day of completion
Post-completion steps.
- If the seller’s solicitor has undertaken to redeem a mortgage after completion, the solicitor must discharge the mortgage.
- If the buyer is a company, the seller’s solicitor must register any charge against the property at Companies House within 21 days
- Buyer solicitor has a duty to pay HMRC any SDLT within 14 days of completion
o Even where no tax is due, must still complete and submit SDLT1 to HMRC
- Buyer’s solicitor must register title within 30 working days of the date of the official search with priority if registered
- Register a mortgage which triggers first registration within 2 months of completion of the mortgage
Remedies for delayed completion and completion date
Completion Date:
- The exchanged contract will usually contain the date for completion that the parties agreed. If it does not, SC 6.1.1 and SCPC 9.1.1 provide that the completion date is 20 working days after the date of the contract.
- Completion must occur no later than 2pm on the set day for completion and any delay entitles the innocent part to damages and interest.
Remedies
1) Notice to complete
2) Common law damages
3) Contractual Compensation
4) Rescission
Remedies for delayed completion - Notice to complete
Innocent party can cancel the contract for delay in completion only if they serve a notice to complete
- a party must be ready, able and willing to complete when serving a notice of complete
- gives the defaulting party 10 working days to complete
- if the buyer is in default and paid less than 10% deposit, on receiving the notice, the buyer must pay the seller the difference between what they paid and 10% of the purchase price
If the buyer is the defaulting party and fails to complete within days:
* rescind the contract
* retain the deposit and accrued interest
* resell the property
* claim damages
If the seller is the defaulting party and fails to complete within 10 days:
* rescind the contract
* reclaim their deposit monies with interest at the contract date
* claim damages
Remedies for delayed completion - Common law damages
- Possible to claim damages for breach of contract in addition to the compensation.
- This will depend upon whether the party sustains any loss as a result of the delay.
Seller: The measure of damages is the difference in value between the contract price and the resale price, so the seller may be better off keeping the deposit instead
Buyer: Buyer entitled to damages to put them back in the position they would have been in if the property was described
Remedies for delayed completion - Contractual Compensation
- : In the SCs both the buyer and the seller can be asked to pay this compensation (SC 7.2), whereas under the SCPCs only the buyer can be required to pay compensation (SCPC 10.3).
- The compensation is calculated at the Contract rate specified in the contract (see 4.4.3) on the balance of the purchase price, less any deposit paid. This produces an annual rate of compensation of which is turned into a daily rate by dividing it by 365. Once the daily rate is established, it can be multiplied by the number of days in default.
Remedies for delayed completion - Rescission
- Contracts incorporating the SC and the SCPC provide for rescission in specified circumstances.
Circumstances:
- Failure to comply with a notice to complete.
- Misrepresentation by the seller.
- If the buyer took the property it would be substantially different in quality, quantity or tenure from the property they expected to take.
