Pre-exchange & Exchange of Contracts

Question 1

What is a contract in a property transaction?

Answer 1

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

Question 2

What are the 3 parts of a contract for sale?

Answer 2

1. Particulars of sale
2. Standard conditions
3. Special conditions

Question 3

What are the two sets of standard conditions which may be incorporated into a contract?

Answer 3

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

Question 4

Under the SC & SCPC, which incumbrances does the seller not sell free of?

Answer 4

• 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

Question 5

What is the difference between full & limited title guarantee?

Answer 5

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)

Question 6

What is the contract rate?

Answer 6

The rate of interest payable by a party late in completing

Question 7

What is the default contract rate under the SC & SCPC?

Answer 7

‘The Law Society’s interest rate’ on the purchase price

(published weekly in the Gazette, currently 4% above base lending rate of Barclays)

Question 8

What is the default deposit under the SC & SCPC?

Answer 8

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

Question 9

What is the difference between the seller’s solicitor holding the deposit as a stakeholder & as an agent?

Answer 9

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

Question 10

How is the deposit held by the seller’s solicitor under the Standard Conditions of Sale?

Answer 10

10% deposit held by seller’s solicitor as a stakeholder

Seller can use deposit as a deposit on a related purchase (SC only)

Question 11

How is the deposit held by the seller’s solicitor under the Standard Commercial Property Conditions?

Answer 11

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)

Question 12

Can the parties accept a deposit lower than 10%?

Answer 12

Yes - so long as have agreed to vary & it is clearly stated on front of contract

Question 13

On exchange of contracts, can the seller’s solicitor hold the deposit as an agent?

Answer 13

Yes, so long as parties have agreed to vary

Default under SC & SCPC is stakeholder

Question 14

Under the Standard Conditions for Sale, how can the deposit be paid on exchange of contracts?

Answer 14

By electronic means or by cheque drawn on the conveyancer’s client account

Question 15

Under the Standard Commercial Property Conditions, how should the deposit be paid on exchange of contracts?

Answer 15

By electronic means only

(Only SC allows payment by cheque)

Question 16

What are the Special Conditions in the contract?

Answer 16

On the back page - includes some pre-printed special conditions but also space to incorporate anything else specific to the property & transaction

Question 17

Does the burden of risk change on exchange of contracts?

Answer 17

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

Question 18

Who does the risk of damage to the property pass to on exchange of contracts?

Answer 18

To the buyer (must have insurance arrangement in place)

Unless altered by agreement of the parties

Question 19

Does the seller have to insure their property after exchange?

Answer 19

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)

Question 20

If the parties agree that the risk should remain with the seller until completion, is the seller obliged to insure?

Answer 20

Yes - & must maintain the policy until completion

Question 21

Where the parties have agreed that the risk remains with the seller until completion, what happens if the property is damaged pre-completion?

Answer 21

The seller must give the insurance proceeds to the buyer or assign the buyer the seller’s rights under the policy

Question 22

What is the default position regarding VAT in the Standard Conditions for Sale?

Answer 22

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

Question 23

What is the default position regarding VAT in the Standard Commercial Property Conditions? (SCPC 2)

Answer 23

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)

Question 24

What is the optional position on VAT set out in the Standard Commercial Property Conditions? (SCPC Part 2, Condition A1)

Answer 24

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

Question 25

Why does the lender need to know that the borrower will have ‘good & marketable’ title in the property?

Answer 25

Enables lender to sell property in future if it needs to enforce the security

→ Buyer’s solicitor prepares certificate of title for lender

Question 26

What form does the certificate of title take in residential transactions?

Answer 26

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

Question 27

When is the certificate of title issued to the lender?

Answer 27

Immediately prior to completion of the loan - buyer will not exchange contracts until know that lender is satisfied with the certificate

Question 28

How does a solicitor obtain their client’s authority to exchange?

Answer 28

In writing + note on file + consequences of exchange explained

Question 29

What are the 3 methods of exchange?

Answer 29

1. In person
2. By post
3. By telephone (quickest & cheapest) –> must follow Law Soc protocls

Question 30

When completing over telephone, which Law Society formula should be used where 1 solicitor holds both parts of the signed contract?

Answer 30

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

Question 31

When completing over telephone, which Law Society formula should be used where each solicitor holds their own client’s signed part?

Answer 31

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

Question 32

What happens to legal title after exchange?

Answer 32

The seller retains legal title until completion (but holds beneficial interest on behalf of buyer)

Question 33

Who pays the outgoing on the property after exchange?

Answer 33

The seller (who is entitled to remain in physical possession of property until completion)