Property: Exchange

Question 1

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

Answer 1

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

Question 2

What about commercial transactions?

Answer 2

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.

Question 3

What is a mortgage offer?

Answer 3

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

Question 4

What is a facility letter?

Answer 4

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

Question 5

What is a certificate of title?

Answer 5

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

Question 6

What is a legal charge?

Answer 6

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.

Question 7

What is a CCLS (Commercial Certificate of Title)?

Answer 7

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

Question 8

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

Answer 8

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

Question 9

Why use a land contract?

Answer 9

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!!!

Question 10

What is a standard form land contract?

Answer 10

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.

Question 11

What is a tailor-made land contract?

Answer 11

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.

Question 12

What are special conditions in a standard form contract?

Answer 12

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.

Question 13

What are specified encumbrances under standard conditions?

Answer 13

• 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.

Question 14

What is a full title guarantee?

Answer 14

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.

Question 15

What is a limited title guarantee?

Answer 15

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.

Question 16

What is no title guarantee?

Answer 16

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.

Question 17

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

Answer 17

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

Question 18

What are the rules regarding completion dates under standard conditions?

Whats the default?

Answer 18

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.

Question 19

What is the standard deposit under SCS and SCPC?

Answer 19

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.

Question 20

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.

Answer 20

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

Question 21

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

Answer 21

• 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.

Question 22

Is VAT payable on residential property?

Answer 22

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

Question 23

What is the VAT treatment for commercial property?

Answer 23

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.

Question 24

What are the risk and insurance obligations after exchange?

Answer 24

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.

Question 25

What is an indemnity covenant in land contracts?

Answer 25

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.

Question 26

What are the VAT principles for property transactions?

Answer 26

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).

Question 27

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

Answer 27

Taxable turnover of more than £85,000 each year

Question 28

What are exempt supplies for VAT purposes?

Answer 28

No VAT is payable on…

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

Question 29

What are zero-rated supplies for VAT purposes?

Answer 29

Newly constructed residential properties are zero-rated.

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

Question 30

What are standard-rated supplies for VAT purposes?

Answer 30

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.

Question 31

What is the option to tax for VAT purposes?

Answer 31

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.

Question 32

What does SCPC Standard Condition 2 state about VAT?

Commercial Only Remember (SCPC)

Answer 32

• 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.

Question 33

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

Answer 33

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

Question 34

What happens at exchange of contracts?

Answer 34

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

Question 35

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

Answer 35

• 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.

Question 36

What are the post-exchange undertakings?

Answer 36

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

Question 37

When are other formula used?

Answer 37

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

Formula C: used in chain transactions

Question 38

What is the release method for related property exchange?

Answer 38

• 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!