🏡 Property: Contract Flashcards
Who drafts the contract?
Sellers solicitor, then sent to buyers solicitor as part as initial pre contract package
What is the contract and what is its purpose?
- Is an agreement to transfer land at later stage (normally bc buyers financing arrangements/practical aspects not finalised)
- Provides parties with certainty as to:
-Nature/extent of prop
-Financial terms
-Timetable for completion
- Either party cant pull out
Types of contract
a. Draft in firms style
b. Pre printed
Sections of pre printed contract?
- Front page
□ info on parties, prop and terms of sale
□ Registered-title number and class of title for
□ Unregistered-insert root of title - Middle-standard conditions (to govern transaction unless contrary agreed)
- Back page-special conditions (specifically drafted for this transaction)
What are the 2 types of standard conditions?
○ Standard Conditions of sale (SC)-all residential/some simple commercial
○ Standard Commercial Property Conditions(SCPC)-high value commercial
What are the 2 parts of the SCPC
Part 1 always applies
Part 2-applies if have special condition incorporating them
SC/SCPC on specified encumbrances
SC
Prop sold free of encumbrances other than those:
-Specified in contract
□ Discoverable by inspection before date of contact
□ Seller doesn’t/couldn’t reasonably know abt
□ Public requirements
□ Mortgages buyer knows about
□ Entries made before date of contract in any public register EXCEPT at Land Registry, Land Charges Department, Companies House
SCPC:
matters, other than mortgages, disclosed or which would have been disclosed by the searches and enquiries which a prudent buyer would have made before entering into the contract
Effect of non disclosure incumbrance in contract?
might result in the buyer having a right to rescind the contract and/or claim damages.
What should the buyers sol check regarding specified encumbrances in the contract?
Ensure sellers mortgage not inc in list of incumbrances
SC/SCPC on title guarantee
seller sells with full title
What should you do if the seller isnt selling with full title guarantee
Amend SC/SCPC with special condition
Types of title guarantee
FULL: If own entire legal and equitable title, pass prop free of all incumbrances other than ones don’t know/couldn’t reasonably have known about (Best to have 1 seller with full)
LIMITED: Selling land and I havent incumbered or /anyone else incumbered since I owned, but cant promise about before. (Where seller has limited knowledge of property ie. Executor/trustee/banks selling through repossession)
NO TITLE GUARANTEE: Eg. Where seller is person appointed following insolvency of owner
What is the seller impliedly covenanting in the transfer if they sell with full/limited title guarantee?
- They have the right to dispose of the land
- They will do all they reasonably can to transfer title
- For leasehold-the lease is subsisting at time of disposal and theres no breach of covenant making lease liable to forfeiture
ALSO for FULL: - Land is disposed free from incumbrances other tha those the seller doesn’t know/couldn’t reasonably know about
EXCLUDING - Matters to which the disposition is expressly made subject
2.. Matters the buyer knows about at time of disposition - Matters which at time of disposal were entered on registers of title
What is the contract rate and what is it charged on?
Rate of interest charged if party late in completing
Charged on purchase price (LESS deposit if it’s the buyer in default)
SC/SCPC on contract rate
Law Soc interest rate=currently 4% above base lending rate of Barclays (5%)
SC/SCPC on how much the deposit is
10% of purchase price
SC/SCPC on how the deposit is held
Stakeholder=sellers sol cant hand over until completion but in SC seller can use as deposit on related purchase of house for seller
SC/SCPC on how the deposit is paid
SC- electronically/by cheque drawn on conveyancers client acc
SCPC-can be paid electronically only
Both-must come from acc in name of a conveyancers at a clearing bank
SC/SCPC on what happens with the deposit if the buyer fails to complete
seller may forfeit and keep deposit
Ways for a deposit to be held
- Stakeholder=sellers sol cant release until completion but in SC seller can use as deposit on related purchase of house for seller
- Agent=deposit can be released to seller after exchange and can be used for any purpose
What may you need special conditions dealing with?
□ App of 2nd trustee
□ Seller to obtain/pay for restrictive cov insurance
□ Disclosing a defect in title
□ Selling with limited/no title guarantee
□ Deposit of less than 10%/to be held as agent not stakeholder
□ Payment of VAT
□ Removal of fixtures
□ Inc. of indemnity cov to protect seller once lost physical possession (where seller original covenantor/has given indemnity cov)
When does risk of damage to the property pass to the buyer and the effect of this?
Passes on exchange
So must complete even if prop damaged/destroyed before completion
So buyer should get insurance from exchange
SC/SCPC on insurance
seller under no obligation to insure freehold prop UNLESS required by special condition
What happens where theres 2 insurance policies in place on the same property?
Theres a danger buyers insurer will reduce proceeds bc another policy exists, if this happens, SC/SCPC provide purchase price reduced accordingly
VAT in contract for residential properties
Not normally paid
SC: purchase price are INCLUSIVE of VAT
VAT in contract for commercial property generally
□ Payable if property less than 3yo or seller exercised option to tax
Contract should say if purchase price inclusive/exclusive of VAT
3 options for VAT in the contract (within the SC/SCPC)
- Purchase price EXCLUSIVE of VAT and VAT will be added on top (SCPC 2)
- Purchase price is INCLUSIVE of VAT so VAT, cant be added on top (SC/special condition in SCPC contract)
- purchase price exclusive of VAT, so VAT can be added on top in the unlikely event that the law changes to make an exempt supply chargeable at the standard rate, but the seller is contractually obliged not to opt to tax.(SCPC optional condition A1 in part 2 (which dissaplied SCPC 2) OR draft own condition)
When will it be appropriate for the purchase price to be exclusive of VAT?
□ New (within 3y) standard rated supply of a commercial building (where seller MUST charge VAT)
□ Old commercial prop where seller needs to opted to tax to recover VAT and buyer not VAT sensitive
When will it be appropriate for the purchase price to be inclusive of VAT?
□ old commercial building where seller doesn’t have input VAT
□ VAT sensitive buyers
Negatives of purchase price being inclusive of VAT?
□ If supply standard rated, supplier has to account to HMRC for VAT out of purchase price
□ Risk for seller as law may change and exempt land may become standard rated
Likely to be resisted by seller
When will it be appropriate for the purchase price to be exclusive of VAT but with the option to charge it if the law changes?
□ old commercial building where seller doesn’t have input VAT so doesn’t opt to tax BUT not willing to risk change in tax law
□ And buyer VAT sensitive
Why may cash rich buyers of commercial property still wish to choose a mortgage?
because the interest payable on the loan is a deductible expense for tax purposes and may be better than investing cash
What are the steps for the lender in a giving a mortgage
- Be satisfied prop is good security for loan and the buyer is creditworthy
- Issue mortgage offer/commitment letter once satisfied
- Instruct solicitor on its behalf (acting for lender)
What is a mortgage offer/commitment letter?
Doc to buyer setting out terms on which lender prepared to make loan
When is it called a mortgage offer and when is it called a commitment letter?
Mortgage offer-residential/simple commercial loans
Commitment letter-for more complex and has term sheet and facility agreement (details of lending agreement) attached
What does a mortgage offer/commitment letter give details of?
□ Loan amount
□ Interest rate
□ Term
□ Initial repayments
□ Other conditions
For the mortgage, what must the buyers/borrowers solicitor do for the buyer/borrower?
Buyers sol: ensure buyer has received, understood and accepted mortgage prior to exchange
Borrowers sol: explain obligations, advice on consequences of defaulting and the powers lender has in event of default
Why will a lender instruct a solicitor on its behalf?
Bc lender needs to know borrower has good title to prop so it can sell to enforce security
What will the lender and buyers solicitor do for the lender re. mortgage?
Buyers sol will be asked to prep certif of title for lender then lenders sol can help lender decide action to be taken
OR lenders sol will obtain copies of title/searches from borrowers sol and report to lender direct (borrower will pay costs)
What must be met before a conveyancer can request release (draw down) of mortgage funds?
The lenders requirements (irrespective of if buyer wishes to proceed to complete)
What is a certificate of title/what is it for?
Is a report about prop, a summary of info which has been ascertained by a sol in the title investigation and the pre- contract searches and enquiries
Purpose: Proves to lender that prop has ‘good marketable title’
Is a certificate of title informative or advisory?
Informative-just a report on whats discovered
When is a certificate of title given?
immediately prior to completion of loan (drafts sent in earlier stages)
What form does a lender normally require a certificate of title is in for residential v commercial?
Res: Form approved by Law Soc and UK Finance (aims to reduce risk of conflict if sol acting for lender/borrower)
Commercial: Form produced by City of London Law Society (more detailed)
What does a certificate of title confirm to the lender?
□ No legal problems with prop
□ Who will own prop once sale completed
□ Completion dates
What happens if the information contained in a certificate of title is wrong?
Lender can sue FIRM who produced as there are warranties as to correctness of info in it
7 steps to prepare for exchange for buyers solicitor
- Report to client in writing w/ results of title investigation, terms of contract, mortgage offer
- Report to lender to prove good and marketable title
- Ensure deposit funds available (to buyers sol in cleared funds)
- Check mortgage offer in place and client has sufficient funds to complete
- Ensure arrangements in place for insurance immediately following exchange
- Contract signed by both
- Completion
How can the contract be signed>
In wet ink
OR electronic IF:
□ person signing intends to authenticate it
□ Execution formalities satisfied
OR sol can sign if have clients express authority to do so
Requirements for a binding contract for the sale of land?
In writing
Inc. all agreed terms
In one doc (or where exchanged, in each copy of contract)
Signed by parties
What should both solicitors do before exchange?
Obtain clients authority to exchange in writing
Note authority on file and that client made aware of consequences of exchange
3 ways to exchange and pros of each one
- In person by one sol attending others office (advantage of certainty)
- By post (sols post to others office) (saves money/time)
- Telephone (quickest/most effective)
3 protocols for exchange via telephone
Formula A: 1 sol holds both parts of contract duly signed
Formula B: Each sol holds their own clients signed part of contract
Formula C: where chain transaction (mainly residential) aims to synchronise so one ends up owning 2 or no properties
Advantages of using formula for exchange via phone
They include undertakings
Undertakings for formula A for exchange via phone
i) That sol holding both signed parts will, that same day, send their clients signed part to other side by 1st class post, doc exchange or by hand
ii) Buyers sol-will also send a bankers draft/client account cheque for agreed deposit with clients signed part of contract that day (if buyers sol holds both)
Undertakings for formula B for exchange via phone
i) Each sol holds own clients signed part of contract
ii) Each sol will, the same day, send signed part of contract to other side by 1st class post/doc exchange/by hand, duly dated
iii) Buyers sol=will also send a bankers draft/client account cheque for agreed deposit that day
Where to note formula used for exchange
Note details of time/formula put in top front corner of contract
What should you make a file note of after exchange?
□ date and time of exchange;
□ formula used and the exact wording of any agreed variation to the formula;
□ completion date;
□ deposit to be paid; and
□ the identities of the solicitors involved in the exchange.
What are the consequences of exchange for both parties ?
Binding contract-cant withdraw without incurring liability for breach
What are the consequences of exchange for the seller?
Retains legal title until completion but holds beneficial interest on behalf of buyer
Entitled to remain in physical possession BUT can agree for buyer to occupy as licensee
Must pay outgoings until completion
What are the consequences of exchange for the buyer?
Bears risk of loss/damage
Can occupy as licensee
Seller holds equitable title for them
What must the solicitors do after exchange?
Inform clients
Inform estate agent
If exchanged over phone, perform undertakings
When can a deposit held a stakeholder be used on a related purchase?
When the contract contains the SC only (NOT the SCPC)
SCPC-if buyer consents
Who will a certificate of title be addressed to?
often buyer and lender
sometimes just the lender
When is the certificate of title provided?
Draft=before exchange
Final=before completion
Will the buyers solicitor report to the lender on the results of a title investigation?
Yes, even if lender separately represented
What incumbrances should be mentioned in the contact?
Just the ones the property is being sold subject to
