Preparation for and exchange of contracts

Question 1

What are the three main components of a contract for the sale of land?

Answer 1

● Particulars of sale (information about the parties, the property, and the financial terms)
● Standard conditions of sale (terms governing the transaction unless specifically varied)
● Special conditions of sale (specifically drafted to meet the particular requirements of the transaction)

Question 2

What are the two sets of standard conditions commonly used in contracts for the sale of property?

Answer 2

● The Standard Conditions of Sale (used for all residential transactions and some simple commercial transactions)
● The Standard Commercial Property Conditions (more suitable for high-value commercial properties)

Question 3

What is the purpose of special conditions in a contract for the sale of land?

Answer 3

Special conditions are used to vary or supplement the standard conditions or deal with matters specific to the transaction, such as:
● Appointment of a second trustee
● Restrictive covenant insurance
● Disclosure of a defect in title
● The seller selling with limited or no title guarantee
● Arrangements for the deposit
● Payment of VAT
● Removal of fixtures by the seller
● Inclusion of an indemnity covenant

Question 4

What is an indemnity covenant and when is it required?

Answer 4

An indemnity covenant is a promise by the buyer to protect the seller from future liability related to covenants on the property. It is necessary when the seller has ongoing liability for covenants even after selling the property.

Question 5

What is the usual amount of the deposit in a property transaction, and to whom is it paid

Answer 5

The deposit is typically 10% of the purchase price and is paid to the seller’s solicitor as stakeholder.

Question 6

What does it mean for a deposit to be held as “stakeholder”?

Answer 6

When a deposit is held as stakeholder, the seller’s solicitor cannot hand it over to the seller until completion.

Question 7

What are the alternative arrangements for dealing with the deposit, and what are the risks associated with them?

Answer 7

● Reduced deposit: The seller may accept a lower deposit (e.g., 5%), but this carries the risk of a smaller fund to forfeit if the buyer breaches the contract.
● Deposit held as agent: The deposit may be held by the seller’s solicitor as “agent,” allowing the seller to use it immediately after the exchange. However, this poses a risk to the buyer if the seller cannot return the deposit (e.g., due to insolvency).

Question 8

When does the risk of damage to the property typically pass to the buyer?

Answer 8

The risk usually passes to the buyer upon the exchange of contracts.

Question 9

Why is it essential for the buyer to have insurance in place immediately on exchange?

Answer 9

Since the risk passes to the buyer on exchange, they are responsible for any loss or damage to the property from that point onward. Having insurance ensures they are protected.

Question 10

What should the buyer and lender consider regarding insurance?

Answer 10

They need to be satisfied that the insurance is adequate in terms of:
● The property’s value
● Estimated reinstatement cost
● Types of risks covered

Question 11

Is VAT typically chargeable on residential property transactions?

Answer 11

No, VAT is not usually charged on residential transactions.

Question 12

When is VAT payable in a commercial property transaction?

Answer 12

VAT is payable when the property is:
● Less than three years old
● Subject to the seller’s option to tax

Question 13

What are the three main ways to address VAT in a commercial property contract?

Answer 13

● Purchase price exclusive of VAT: VAT is added on top of the price.
● Purchase price inclusive of VAT: VAT cannot be added.
● Purchase price exclusive of VAT, but the seller cannot opt to tax: VAT can only be added if the law changes.

Question 14

In which scenario is it generally not advisable for the seller to agree to a VAT-inclusive purchase price?

Answer 14

It’s generally not recommended when:
● The property is a new building
● The seller wants to opt to tax to recover VAT paid on refurbishment
● There’s a possibility of the law changing the VAT status of the sale

Question 15

What is the significance of ensuring that the seller’s mortgage is not listed as a “Specified Incumbrance”?

Answer 15

The seller’s mortgage should be discharged after completion, so it should not be listed as a burden that the buyer will take on.

Question 16

What is a mortgage deed, and what key features does it usually include?

Answer 16

A mortgage deed is a legal document that creates a mortgage on a property. It typically includes:
● Details of the loan amount, interest rate, term, and repayments
● An express power of sale for the lender
● Incorporation of the lender’s standard terms and conditions (if applicable)
● Building Society Rules (if the lender is a Building Society)

Question 17

What are the responsibilities of the borrower’s solicitor regarding the mortgage deed?

Answer 17

The solicitor must:
● Explain the borrower’s obligations under the deed
● Advise on the consequences of defaulting on mortgage payments
● Explain the lender’s powers in the event of default

Question 18

What information does the buyer’s solicitor typically include in a pre-contract report to the buyer?

Answer 18

The report summarizes the results of:
● Title investigation
● Searches and inquiries
● Terms of the contract
● Mortgage offer

Question 19

What is the purpose of a certificate of title, and what does it confirm to the lender?

Answer 19

The certificate of title assures the lender that:
● The property has “good and marketable” title
● The lender can safely lend against it
● It identifies who will own the property after completion
● It confirms the completion date when funds are needed

Question 20

What are the three ways to exchange contracts?

Answer 20

● In person: One solicitor visits the other’s office to hand over the contract.
● By post: Each solicitor sends their client’s signed contract to the other.
● By telephone: Solicitors agree over the phone that contracts are exchanged, following established procedures to ensure proper exchange and deposit payment.

Question 21

What are the Law Society Formulae for telephone exchange, and what is their purpose?

Answer 21

The Law Society has developed three protocols: Formulae A, B, and C. They provide a framework for telephone exchange, including undertakings from solicitors to ensure the secure exchange of contracts and deposit funds. These formulae help to:
● Ensure certainty and reliability
● Provide a mechanism for accountability
● Offer protection for both parties

Question 22

Which Law Society Formula is most commonly used for exchanging contracts?

Answer 22

Formula B, where each solicitor holds their client’s signed contract and exchanges them through agreed procedures, is the most common.

Question 23

What are the key consequences of exchanging contracts?

Answer 23

After exchange:
● A legally binding contract exists, and neither party can withdraw without penalty.
● The seller retains the legal title until completion but holds the beneficial interest for the buyer.
● The buyer assumes the risk of loss or damage to the property.
● Both parties are committed to completing the transaction on the agreed terms.

Question 24

What steps should solicitors take to ensure their clients understand the implications of the exchange?

Answer 24

Solicitors must:
● Clearly explain the consequences of the exchange to their clients
● Obtain their clients’ authority to exchange in writing
● Ensure that their clients understand they cannot withdraw from the contract after exchange.