Preparation for and Exchange of Contracts

Question 1

Why is the exchange of contracts considered a crucial moment in property transactions?

Answer 1

1. Key Changes at Exchange:
   • Agreement becomes legally binding for both parties.
   • Neither party can withdraw without liability for breach of contract.
2. Responsibilities:
   
   • Solicitors ensure the contract reflects agreed terms and anticipate issues before completion.
   • Buyers confirm all details, including price and property condition, before exchange.
3. Example:
   
   • A seller finds another buyer offering a higher price but cannot withdraw after exchange without significant penalties.

Question 2

What purpose does a contract serve in property transactions, and when is it essential?

Answer 2

1. Purpose:
   
   • Agreement to transfer property at a future date.
   • Fixes terms and provides certainty for both parties.
   • Prevents withdrawal without liability.
2. When Needed:
   
   • Delay in Completion: Buyer’s financing or logistical arrangements (e.g., moving dates).
   • Additional Obligations: Seller agrees to perform work on the property before completion.
3. Example: A buyer agrees to purchase a home pending their mortgage approval. A contract ensures the seller cannot sell to someone else.

Question 3

What are the differences between SC and SCPC, and in which scenarios are they used?

Answer 3

1. SC:
   
   • Used for residential transactions and simple commercial deals (e.g., empty properties).
   • Simpler terms, suitable for straightforward sales.
     2. SCPC:
   • For high-value commercial properties.
   • Includes detailed provisions for managing leases and complex property interests.
     3. Structure:
   • Both include particulars of sale, standard conditions, and special conditions.
     4. Example:
   • SC: Selling a small house with no complications.
   • SCPC: Selling a shopping mall with tenant leases.

Question 4

What are specified incumbrances, and why must they be disclosed in the contract?

Answer 4

1. Definition: Third-party rights or burdens affecting the property (e.g., restrictive covenants, easements).
   
   2. Importance:
      * Non-disclosure can lead to the buyer rescinding the contract or claiming damages.
      * SC 3.1.1 or SCPC 4.1.1 require the seller to sell free of incumbrances unless specified.
   3. Examples:
      * A restrictive covenant prevents building extensions; this must be disclosed in the contract.
      * A right of way for a neighboring property over the driveway.
   4. Solicitor’s Action:
      * List all burdens in the contract.
      * Ensure the seller’s mortgage is excluded (it will be discharged upon completion).

Question 5

What are the differences between full and limited title guarantees?

Answer 5

1. Full Title Guarantee:
   
   • Seller covenants:
   • They have the right to dispose of the property.
   • The property is free from incumbrances, except those disclosed.
   • Implies wider protections for the buyer.
   • Example: A homeowner selling their property outright.
     2. Limited Title Guarantee:
   • Seller covenants:
   • They have not created incumbrances.
   • They are not aware of any created since the last transaction.
   • Used when the seller has limited knowledge (e.g., executors, trustees).
   • Example: Sale of property from an estate of a deceased owner.

Question 6

What is the contract rate, and why is it included in property contracts?

Answer 6

1. Definition: The interest rate charged on the purchase price (less deposit) if a party is late in completing.
   
   2. Purpose:
      * Discourages delays by imposing financial penalties.
   3. Standard Rate:
      * Typically 4% above Barclays’ base rate (as per SC/SCPC).
      * Alternative rates can be negotiated (e.g., 3% above another bank’s rate).
   4. Example: A buyer delays completion by two weeks. Interest on the outstanding amount is calculated at the contract rate.

Question 7

What is the difference between holding a deposit as a stakeholder and as an agent?

Answer 7

1. Stakeholder:
   
   • Seller’s solicitor holds the deposit until completion.
   • Protects both parties in case of non-completion.
   • Example: Under SCPC 3.3.2, deposits are held as stakeholders.
     2. Agent:
   • Seller’s solicitor releases the deposit to the seller immediately.
   • Higher risk for the buyer (e.g., seller insolvency).
   • Example: Under SC 2.2.5, a seller may use the deposit to fund a related purchase.
     3. Buyer-Seller Agreements:
   • Reduced deposit (e.g., 5%) or special conditions for use of deposit must be explicitly stated.

Question 8

In Lui Chen’s case, can she use the deposit from the Blakes to fund her new purchase?

Answer 8

1. SC 2.2.5:
   * Allows the seller to use part of the deposit for a related purchase if the seller is buying another property in England as their residence.

• Any unused portion must remain held as stakeholder.

2. SCPC 3.3.2:
   * Requires the deposit to be held as stakeholder, preventing any use.
   * Special conditions are needed to override this.
3. Outcome:
   * If SC applies, Lui can use the deposit for her flat purchase.

• If SCPC applies, she cannot without modification.

Question 9

What are special conditions in a property transaction contract, and why are they included?

Answer 9

• Definition: Tailored clauses that address unique characteristics of the property or specific circumstances of the transaction.
• Purpose:

1. Provide legal clarity on transaction-specific issues.
2. Address matters not adequately covered by the standard or pre-printed conditions.
3. Anticipate potential disputes or complications and mitigate risks.
   * Location: Typically found on the back page of pre-printed contracts incorporating SC or SCPC.

Question 10

What pre-printed special conditions are commonly found in property contracts?

Answer 10

1. Vacant Possession (SC Condition 4): Specifies whether the property will be sold without occupants or subject to leases or tenancies.
2. Fixtures and Contents (SC Condition 3):

• Includes or excludes specific items from the sale.
• Provides clarity on what the buyer is entitled to receive.

3. Representations (SC Condition 6): Prevents reliance on oral representations unless written by the seller or their conveyancer.
4. Occupier’s Consent (SC Condition 7):
   * Requires non-owning adult occupiers to agree to vacate the property and release any rights.

• Ensures vacant possession upon completion.

Question 11

When should new special conditions be drafted, and what are common examples?

Answer 11

1. When to Draft:
   
   • When unique aspects of the property or transaction are not addressed by pre-printed conditions.
   • Examples include seller obligations, defect disclosures, or indemnities.
2. Common Scenarios:
   
   • Seller’s obligation to repair the property before completion.
   • Restrictive covenant insurance arranged by the seller.
   • Disclosure of title defects to the buyer.
   • Indemnity covenants for the seller’s ongoing liability related to positive covenants.

Question 12

What are indemnity covenants, and why are they important in property contracts?

Answer 12

1. Definition: A promise by the buyer to indemnify the seller against liability for breaches of covenants post-sale.
2. Importance:
   * Protects sellers from ongoing liability when they no longer own or control the property.

• Particularly critical for positive covenants, as their burden does not automatically pass to successors.

3. Examples:
   * Covered by SC 4.6.4 or SCPC 7.6.5.
   * “The buyer agrees to indemnify the seller for all costs and claims arising from non-compliance with covenants listed in the Charges register.”

Question 13

How do special conditions manage insurance and risk during a property transaction?

Answer 13

1. Risk Transfer:
   * Standard: Risk passes to the buyer upon exchange (SC 5.1.1, SCPC 8.1).

• Special Conditions: Can allocate risk to the seller, especially for new builds or under-construction properties.

2. Seller’s Insurance Obligation:
   • Must maintain coverage until completion (SC 5.1.3, SCPC 8.1.2).
   • Assigns insurance proceeds or rights to the buyer in case of damage.
3. Dual Insurance:
   * Addresses situations where both buyer and seller have policies.

• Ensures the buyer receives full proceeds despite overlapping coverage (SC 5.1.5, SCPC 8.2.4(b)).

Question 14

A bronze statue cemented to the floor is excluded from the sale. What special condition should address this?

Answer 14

1. Issue: The statue is a fixture and would otherwise pass to the buyer with the property.
2. Required Special Condition:
   * Excludes the statue from the sale.
   * Grants the seller the right to remove the fixture.

• Includes responsibility for any damage caused during removal.

3. Example Clause:
   * “The seller shall remove the bronze statue from the entrance hall before completion and undertake to repair any damage caused during its removal. The statue is excluded from the sale price.”

Question 15

Kerrier Property Investments PLC is buying Shaftesbury House for £3,000,000. The property, built in 2014, is sold with vacant possession. Cranbourne Properties Limited has not opted to tax. What special condition is required?

Answer 15

1. VAT Status:
   
   • The property is “old” (construction completed more than 3 years ago).
   • Sale is exempt from VAT unless Cranbourne opts to tax.
     2. Contract Terms:
   • Purchase price exclusive of VAT.
   • SCPC A1: VAT may only be charged if the law changes to require it before completion.
     3. Special Condition Example:
   • “The seller shall not opt to tax the property. VAT will not be chargeable unless required by law before completion.”

Question 16

How do lenders influence special conditions in property contracts?

Answer 16

1. Standard Requirements:
   
   • Certificate of title confirming the property has “good and marketable” title.
   • Compliance with UK Finance Mortgage Lenders’ Handbook instructions.
     2. Special Condition Examples:
   • Additional searches or insurance required by the lender.
   • Conditions for releasing mortgage funds.
     3. Conflict Resolution:
   • Solicitor must resolve conflicts between borrower and lender instructions before using funds.

Question 17

What is a certificate of title, and why is it essential for lenders?

Answer 17

1. Definition: A report confirming the property’s title and summarizing search results.
   
   2. Purpose:
      * Ensures the property is good security for the loan.
      * Confirms ownership and readiness for completion.
   3. Residential vs. Commercial:
      * Residential: Standard form from Law Society and UK Finance.
      * Commercial: Detailed certificate (e.g., City of London Law Society).
   4. Timing:
      * Issued before loan completion, with drafts reviewed during the transaction.

Question 18

What are the key steps a buyer’s solicitor must take in preparation for exchange of contracts?

Answer 18

1. Report to client: Explain title, search results, contract terms, and mortgage offer.
2. Report to lender: Confirm the property has “good and marketable title” for the loan.
3. Ensure deposit funds are available: Deposit must be cleared and ready for exchange.
4. Check mortgage offer: Confirm it is in place, accepted, and conditions are met.
5. Ensure insurance arrangements: Risk passes to the buyer on exchange, so insurance must be effective immediately.
6. Contract signed: Ensure the client has signed the contract (wet ink or electronic).
7. Completion date: Confirm an agreed completion date with both parties.

Question 19

What are the requirements for a binding property sale contract under s. 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989?

Answer 19

1. The contract must be in writing.
2. It must incorporate all agreed terms in one document (or in exchanged copies).
3. It must be signed by the parties.

Question 20

What are the three methods of exchanging contracts, and which is most common?

Answer 20

1. In-person exchange:
   
   • One solicitor delivers their signed copy to the other solicitor.
   • Provides certainty but is time-consuming and rarely used.
     2. Postal exchange:
   • Signed copies of the contract are sent via post.
   • More practical than in-person exchange but subject to postal delays.
     3. Telephone exchange:
   • Contracts are exchanged via an agreed telephone protocol.
   • Most common method, using Law Society Formula B.

Question 21

Describe Law Society Formula A for exchanging contracts.

Answer 21

When one solicitor holds both signed parts of the contract.
* Process:
1. The solicitor holding both contracts undertakes to send the signed copy to the other solicitor on the same day by post, document exchange, or hand delivery.
2. If the buyer’s solicitor holds both parts, they must also send the deposit with the signed contract.

Question 22

What is Law Society Formula B, and why is it the most commonly used method?

Answer 22

When each solicitor holds their client’s signed part of the contract.
* Process:
1. Each solicitor undertakes to send their client’s signed contract to the other solicitor on the same day by post, document exchange, or hand delivery.
2. The buyer’s solicitor sends the deposit alongside the signed contract.
* Reason for Popularity:
* Does not require pre-exchange transfer of contracts.
* Faster and simpler than Formula A.

Question 23

What is Law Society Formula C, and when is it used?

Answer 23

Use Case: In chain transactions where multiple exchanges must occur simultaneously.
* Process:
* Synchronizes exchanges across all parties in the chain.
* Ensures no party is left owning two properties or none at all.
* Complexity:
* Rarely used due to its intricate nature.

Question 24

What information should a solicitor record during an exchange of contracts?

Answer 24

1. Date and time of exchange.
   
   2. The Law Society Formula used (A, B, or C) and any agreed variations.
   3. The completion date.
   4. The deposit amount.
   5. Names of the solicitors involved in the exchange.

Question 25

What are the consequences of exchanging contracts in a property transaction?

Answer 25

1. A binding contract is created.
   
   • Neither party can withdraw without liability for breach.
     2. Seller’s position:
   • Retains legal title and physical possession until completion.
   • Holds the beneficial interest on behalf of the buyer.
     3. Buyer’s responsibilities:
   • Risk of property damage or loss passes to the buyer.
   • Buyer must insure the property immediately after exchange.
     4. Outgoings:
   • Seller remains liable for outgoings (e.g., rates and charges) until completion.

Question 26

Why is it essential to arrange insurance immediately following the exchange of contracts?

Answer 26

• At the moment of exchange, the risk of property damage or loss passes to the buyer.
• Without insurance in place, the buyer is liable for damages, even before taking possession.

Question 27

Provide an example of how a telephone exchange of contracts works using Law Society Formula B.

Answer 27

• Scenario:
  Solicitor A holds the seller’s signed part, and Solicitor B holds the buyer’s signed part.
  
  • Steps:
    1. Both solicitors agree over the phone that contracts are exchanged.
    2. Solicitor B undertakes to send the deposit and buyer’s signed contract to Solicitor A on the same day.
    3. Each solicitor mails the signed contracts to the other, duly dated, to finalize the exchange.

This detailed example reflects real-world application, ensuring understanding of Formula B’s steps

Question 28

What are the three types of title guarantees a seller can provide in a property transaction?

Answer 28

1. Full Title Guarantee:
   
   • Seller owns the entire legal and equitable title.
   • Offers the highest level of assurance.
   • Seller covenants to transfer the property free from incumbrances, except for:
   • Those they don’t or couldn’t reasonably know about.
   • Matters the buyer knows of or are in public records.
     2. Limited Title Guarantee:
   • Used when the seller has limited knowledge of the property (e.g., executor, trustee).
   • Seller covenants only that:
   • They haven’t incumbered the property since acquiring it.
   • To their knowledge, no one else has incumbered it since the last sale for value.
     3. No Title Guarantee:
   • Rare; used when the seller has no knowledge of the property’s history (e.g., insolvency practitioner).
   • Offers no assurances to the buyer.

Question 29

What covenants are implied for both full and limited title guarantees?

Answer 29

1. Right to Dispose: The seller has the legal right to transfer the property.
2. Reasonable Transfer Efforts: The seller will take all reasonable steps to ensure title transfer.
3. For Leasehold Properties:
   * The lease is valid and subsisting at the time of sale.
   * There are no breaches of lease covenants that could result in forfeiture.

Question 30

What additional covenant is implied with a full title guarantee?

Answer 30

• The seller covenants to transfer the property free from incumbrances, except for:
• Those they don’t or couldn’t reasonably know about.
• Matters expressly agreed to in the contract.
• Matters the buyer knows of at the time of transfer.
• Registered entries in public records (e.g., HM Land Registry).

Question 31

Does the type of title guarantee affect the registration class of the property?

Answer 31

No, the title guarantee relates to the seller’s assurances about the property’s history, while the class of title (e.g., Absolute Title) relates to the property’s registration status.

Question 32

Why should a seller’s solicitor avoid advising the seller to make the purchase price VAT-inclusive?

Answer 32

• If the supply is standard-rated (e.g., new building) or the seller wants to opt to tax, VAT-inclusive pricing could:
  
  • Reduce the seller’s net proceeds, as VAT must be paid to HMRC.
  • Leave the seller unable to add VAT to the agreed price if the law changes.
  • VAT-inclusive pricing should only be agreed as part of commercial terms, and the seller must be made aware of the potential financial consequences.

Question 33

What situations might require a seller to agree to a VAT-inclusive purchase price?

Answer 33

1. When negotiating commercial terms with a VAT-sensitive buyer.
   
   2. When the property is old, and the buyer prefers a fixed price without additional VAT.
   3. To remain competitive in transactions where the buyer cannot recover VAT, such as residential or non-VAT-registered entities.

Question 34

What additional risks does VAT-inclusive pricing pose for the seller in property transactions?

Answer 34

1. The seller cannot recover VAT paid on refurbishment or other costs if opting to tax.
2. If VAT law changes between exchange and completion, the seller bears the cost.
3. The sale proceeds are reduced by the VAT amount owed to HMRC.

Question 35

What does the response “not as far as the seller is aware” imply in the context of the CPSE.1 form?

Answer 35

The response “not as far as the seller is aware” implies that the seller has made all reasonable investigations before giving their reply, as considered in case law.

Question 36

What does Special Condition 6 in the contract document state about representations?

Answer 36

Special Condition 6 relates to representations, allowing either party to rely on written representations made by the other, except in cases of fraud or recklessness.

Question 37

Under SC 2.2.5 and SC 2.2.6, how can the buyer’s deposit be used upon the exchange of contracts, and what are the restrictions or requirements for holding the deposit?

Answer 37

• SC 2.2.5: The buyer’s deposit can be used upon the exchange of contracts, but only for the specific purpose outlined in this condition, such as enabling the buyer’s commitment to the purchase. It explicitly cannot be used to repay the seller’s mortgage before the completion of the sale.
• SC 2.2.6: For any purposes not specified in SC 2.2.5, the deposit must be held as a stakeholder. This means it is held in a neutral capacity, safeguarding the interests of both parties until the conditions of the contract are fulfilled, preventing misuse or premature allocation.