Property: Exchange Flashcards

1
Q

Can you act for both borrower and lender in residential transactions?

A

Yes.

In residential transactions, the same solicitors usually act for both buyer and lender.

This is not a conflict of interest if the clients have a substantially common interest: (i) a clear common purpose; and (ii) a strong consensus on how to achieve it.

Usually, both buyer and lender want a property that is:
* Worth what the buyer has paid
* Suitable for its purposes
* Easy to sell if buyer wants to move
* Easy to sell if lender needs to repossess and sell

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2
Q

Do lenders in commercial transactions use the same solicitors as the borrower?

A

Lender’s solicitors in commercial transactions will instruct their own solicitors due to higher potential for conflict.

The lender’s solicitor specifies what enquiries and searches are needed, reviews them, and drafts the legal charge and security documents.

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3
Q

What is a mortgage offer?

A

A formal offer by the lender to lend, subject to the lender being satisfied with the transaction and security (e.g. the property).

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4
Q

What is a facility letter?

A

The commercial equivalent of a mortgage offer. Both mortgage offers and facility letters set out the terms and conditions of the loan.

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5
Q

What is a certificate of title?

A

A document in which a solicitor certifies that the title of the property is satisfactory for lending purposes.

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6
Q

What is a legal charge?

A

The deed that creates the security interest and is registered at the Land Registry. It gives the lender a right to repossess in case of default.

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7
Q

What is a CCLS (Commercial Certificate of Title)?

A

A certificate of title for commercial property.

It includes a series of statements confirming the property’s title status, with the solicitor disclosing any inaccuracies.

The lender can later sue if there are any material errors or omissions

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8
Q

What are the requirements of a land contract under s.2 Law of Property Act?

A
  • A contract for land must be in writing
  • Incorporate all the terms agreed
  • Be signed by each party or their representative.
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9
Q

Why use a land contract?

A

A land contract does not transfer land but can fix a completion date, tie related transactions, and set obligations or conditions.

Remember, it does not transfer the land!!!

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10
Q

What is a standard form land contract?

A

Residential transactions almost always use a standard form residential contract, referring to the Standard Conditions of Sale.

Commercial standard contracts incorporate the Standard Commercial Property Conditions.

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11
Q

What is a tailor-made land contract?

A

Used in commercial transactions, these contracts often amend the Standard Commercial Property Conditions and are weighted in favor of the seller, expecting negotiation by the buyer’s solicitor.

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12
Q

What are special conditions in a standard form contract?

A

The Standard Conditions may be excluded, amended, or supplemented with special conditions

For residential transactions under the Law Society Conveyancing Protocol, these should only be added if absolutely necessary.

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13
Q

What are specified encumbrances under standard conditions?

A
  • The seller must disclose latent encumbrances and defects in title
  • However, both sets of standard conditions amend this duty by listing encumbrances which the seller need not disclose.
  • An exception to caveat emptor it the title guarantee. The seller can offer three types as to the quality of the property.
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14
Q

What is a full title guarantee?

A

This is the default guarantee for both residential and commercial contracts,

Property is free from all encumbrances, other than those disclosed or those which the seller couldn’t have reasonably known about.

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15
Q

What is a limited title guarantee?

A

Given by sellers with little knowledge of the property, such as executors, meaning no encumbrances were created over the property during the seller’s ownership.

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16
Q

What is no title guarantee?

A

The seller does not guarantee their right to sell the property or that it is free of encumbrances. This often applies when administrators or liquidators sell property.

17
Q

What title guarantee should be given if buying from a sole surviving tenant in common?

A
  • Full Title Guarantee from the surviving tenant in common
  • Limited Title Guarantee from the appointed second trustee
18
Q

What are the rules regarding completion dates under standard conditions?

Whats the default?

A

If no date is fixed by the parties, the default is 20 working days after the contract date.

Completion time is usually set for 2pm, but time is not of the essence until notice is served.

19
Q

What is the standard deposit under SCS and SCPC?

A

Both require a **10% deposit **at exchange, which can be varied by special conditions.

If the buyer fails to complete on time and the seller serves notice to complete, the buyer would still be liable for the full 10% deposit, even if the parties had initially agreed to a lower deposit, such as 5%, at the time of exchange.

20
Q

The parties agree a 5% deposit

The buyer is late. Seller serves notice and time runs out.

How much deposit is immediately payable?

SCS or SCPC is in use.

A

10%

The buyer would still be liable for the full 10% deposit, even if the parties had initially agreed to a lower deposit, such as 5%, at the time of exchange under SCS and SCPC

21
Q

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

A
  • A stakeholder must keep the deposit safe and not pay it until completion
  • An agent can immediately release the deposit to the seller.

Both SCS and SCPC require the deposit to be held as stakeholder

However, in residendial transactions, part of the deposit can be used for a related transaction, but remaining held as stakeholder.

22
Q

Is VAT payable on residential property?

A

Residential property is usually an exempt or zero-rated supply, meaning no VAT is payable.

Under SCS, the purchase price is inclusive of VAT in any event - the buyer need not worry

23
Q

What is the VAT treatment for commercial property?

A

Under SCPC…

  • The default position is that** VAT is payable at 20%**
  • Exceptions may apply, such as when the property is over 3 years old, and the seller has not opted to tax, then exempt.
24
Q

What are the risk and insurance obligations after exchange?

A

Risk passes to the buyer upon exchange meaning the buyer must insure the property.

A special condition may be needed if the seller continues insurance coverage temporarily.

25
Q

What is an indemnity covenant in land contracts?

A

Both SCS and SCPC make it an obligation for the buyer to give an indemnity covenantand continue the chain of indemnity unless it was already broken by the seller.

26
Q

What are the VAT principles for property transactions?

A

VAT is charged on any taxable supply in the course of business.

Taxable businesses must…
* Charge VAT on property sales
* Recover input tax paid in connection with the property.

For example, a development company pays a construction company £1m + £200k VAT to build a warehouse. It sells it for £1.5m + £300,000 VAT.

The development company pays £100,000 VAT (£300,000 output - £200,000 input).

27
Q

What is the turnover threshold whereby a business must register for VAT?

A

Taxable turnover of more than £85,000 each year

28
Q

What are exempt supplies for VAT purposes?

A

No VAT is payable on…

  • Residential property (except newly constructed)
  • Commercial property over 3 years old if the owner hasn’t opted to tax.
29
Q

What are zero-rated supplies for VAT purposes?

A

Newly constructed residential properties are zero-rated.

The buyer doesn’t pay VAT, but the seller can recover input tax from HMRC.

30
Q

What are standard-rated supplies for VAT purposes?

A

Newly constructed commercial property is subject to 20% VAT

This is those constructed less that 3 years ago

Older commercial property may also be subject to VAT if the seller has opted to tax.

31
Q

What is the option to tax for VAT purposes?

A

For older commercial properties, whether VAT applies depends on the seller’s option to tax.

Enquiry 28.3 (CPSE) asks the seller whether an option to tax has been made.

32
Q

What does SCPC Standard Condition 2 state about VAT?

Commercial Only Remember (SCPC)

A
  • The seller warrants that the property is a standard-rated supply, and the buyer agrees to pay VAT over the purchase price.
  • Box A1 must be ticked if the seller warrants the property isn’t subject to VAT and won’t exercise their option to tax
  • Box A2 must be ticked if the seller is using the property for business of letting to produce rental income, and the transaction is of going concern (TOGC) and exempt from VAT.
33
Q

What is a transfer of a going concern (TOGC) in VAT terms?

A

A TOGC occurs when the property is used for letting and rental income. The transaction is exempt from VAT.

34
Q

What happens at exchange of contracts?

A

Exchange is the point at which the parties enter into a binding contract, usually by telephone, following the Law Society Formula B.

35
Q

What is the Law Society Formula B for exchange of contracts?

A
  • The solicitors let each other know when they are ready to exchange.
  • They identify any blanks within the contract, agreeing any handwritten amendments; and write the completion date in the appropriate space.
  • They agree to the date and time of exchange, and give each other names to write on the contract.
  • Parties are then legally obliged to complete.
36
Q

What are the post-exchange undertakings?

A

Formula B imposes three conditions:

  • Hold the signed contract to the other solicitor’s order (the buyer’s signed part belongs to the seller and vice versa)
  • Post the signed contract to the other solicitor that day by first class post or DX; or by hand delivery
  • In the case of the buyer’s solicitor, send the deposit in
37
Q

When are other formula used?

A

Formula A: same solicitor holds contracts signed by both seller and buyer

Formula C: used in chain transactions

38
Q

What is the release method for related property exchange?

A
  • The solicitor exchanges on the related transaction at an agreed time
  • The first contract is treated as exchange but if not, the exchange is cancelled.

NEVER exchange one, hoping to exchange the second later since one could fall through - use the release method!