Pre-exchange & Exchange of Contracts Flashcards
What is a contract in a property transaction?
Agreement to transfer the land at a later stage ie. does not transfer land!
Prevents either party from withdrawing from the transaction without being liable for breach of contract
What are the 3 parts of a contract for sale?
- Particulars of sale
- Standard conditions
- Special conditions
What are the two sets of standard conditions which may be incorporated into a contract?
The Standard Conditions of Sale
- Used for all residential & some simple commercial property transactions
The Standard Commercial Property Conditions
- Better for high value commercial properties
Under the SC & SCPC, which incumbrances does the seller not sell free of?
- Those specified in the contract
- Those discoverable by inspection before date of contract
- Those seller does not & could not reasonably know about
- Public requirements
- Matters, other than mortgages, which would have been disclosed by the searches & enquiries of a prudent buyer
What is the difference between full & limited title guarantee?
Full: guaranteeing they own the entire legal & equitable title to the property
Limited: where seller has limited knowledge of the property (eg. they are an executor or a trustee)
What is the contract rate?
The rate of interest payable by a party late in completing
What is the default contract rate under the SC & SCPC?
‘The Law Society’s interest rate’ on the purchase price
(published weekly in the Gazette, currently 4% above base lending rate of Barclays)
What is the default deposit under the SC & SCPC?
10% of purchase price, payable on exchange of contracts to the seller’s solicitor as stakeholder
If buyer fails to complete, the seller may forfeit & keep the deposit
What is the difference between the seller’s solicitor holding the deposit as a stakeholder & as an agent?
Stakeholder: solicitor can’t hand it over to their client until completion
v.
Agent: can be released to seller immediately after exchange & used by the seller for any purpose
How is the deposit held by the seller’s solicitor under the Standard Conditions of Sale?
10% deposit held by seller’s solicitor as a stakeholder
Seller can use deposit as a deposit on a related purchase (SC only)
How is the deposit held by the seller’s solicitor under the Standard Commercial Property Conditions?
Deposit of 10% purchase price held by seller’s solicitor as stakeholder
(Unlike SC, seller cannot use deposit as a deposit on a related purchase)
Can the parties accept a deposit lower than 10%?
Yes - so long as have agreed to vary & it is clearly stated on front of contract
On exchange of contracts, can the seller’s solicitor hold the deposit as an agent?
Yes, so long as parties have agreed to vary
Default under SC & SCPC is stakeholder
Under the Standard Conditions for Sale, how can the deposit be paid on exchange of contracts?
By electronic means or by cheque drawn on the conveyancer’s client account
Under the Standard Commercial Property Conditions, how should the deposit be paid on exchange of contracts?
By electronic means only
(Only SC allows payment by cheque)
What are the Special Conditions in the contract?
On the back page - includes some pre-printed special conditions but also space to incorporate anything else specific to the property & transaction
Does the burden of risk change on exchange of contracts?
Yes - risk of damage to the property passes to the buyer on exchange of contracts
ie. buyer must complete even if property damaged/destroyed between exchange & completion
Who does the risk of damage to the property pass to on exchange of contracts?
To the buyer (must have insurance arrangement in place)
Unless altered by agreement of the parties
Does the seller have to insure their property after exchange?
No obligation to do so
unless required to do so by a special condition in the contract (where parties have agreed that risk remains with seller)
If the parties agree that the risk should remain with the seller until completion, is the seller obliged to insure?
Yes - & must maintain the policy until completion
Where the parties have agreed that the risk remains with the seller until completion, what happens if the property is damaged pre-completion?
The seller must give the insurance proceeds to the buyer or assign the buyer the seller’s rights under the policy
What is the default position regarding VAT in the Standard Conditions for Sale?
Purchase price is inclusive of VAT
- Residential: because expected no VAT will be charged/paid
- Non-residential: means that VAT cannot be added on top - used for sale of old commercial property where seller does not have input VAT to recover
What is the default position regarding VAT in the Standard Commercial Property Conditions? (SCPC 2)
The purchase price is exclusive of VAT & VAT will be added on top
Used for:
- Sale of new commercial building (because seller must charge VAT)
- Sale of old commercial property were seller must opt to tax to recover VAT paid on eg. refurb & buyer not VAT-sensitive
Nb. There is another way of doing VAT in the SCPC (Part 2 Condition A1)
What is the optional position on VAT set out in the Standard Commercial Property Conditions? (SCPC Part 2, Condition A1)
Purchase price is exclusive of VAT - VAT can be added on top if law changes (to make exempt supply chargeable) but seller is contractually obliged not to tax
Used for: sale of old commercial building where-
- Seller does not have input VAT to recover; and
- Seller not willing to risk change in tax rules between exchange & completion; and
- Buyer is VAT-sensitive or does not want to pay VAT
Why does the lender need to know that the borrower will have ‘good & marketable’ title in the property?
Enables lender to sell property in future if it needs to enforce the security
→ Buyer’s solicitor prepares certificate of title for lender
What form does the certificate of title take in residential transactions?
Uses Law Society approved form, which confirms
- No legal problems with the property & lender can safely lend against it
- Who will own the property once the sale is completed
- The completion date when funds are needed
Commercial transactions are more detailed
When is the certificate of title issued to the lender?
Immediately prior to completion of the loan - buyer will not exchange contracts until know that lender is satisfied with the certificate
How does a solicitor obtain their client’s authority to exchange?
In writing + note on file + consequences of exchange explained
What are the 3 methods of exchange?
- In person
- By post
- By telephone (quickest & cheapest) –> must follow Law Soc protocls
When completing over telephone, which Law Society formula should be used where 1 solicitor holds both parts of the signed contract?
Formula A
Solicitor with both parts undertakes that they will, that same day, send their client’s signed part of the contract to the other side by first-class post, DX or by hand
Buyer’s solicitor undertakes they will, that same day, send to the other side a banker’s draft or client account cheque for the agreed deposit
When completing over telephone, which Law Society formula should be used where each solicitor holds their own client’s signed part?
Formula B
Each solicitor undertakes they will, that same day, send the signed part of the contract they’re holding to the other side by first-class post, DX or by hand, duly dated
Buyer’s solicitor undertakes they will, that same day, send to the other side a banker’s draft or client account cheque for the agreed deposit
What happens to legal title after exchange?
The seller retains legal title until completion (but holds beneficial interest on behalf of buyer)
Who pays the outgoing on the property after exchange?
The seller (who is entitled to remain in physical possession of property until completion)
