Property (Freehold) - Draft Contract (6) Flashcards
What is an overview for the procedure of a draft contract?
Draft Contract: The seller’s solicitor will draft the contract of sale to be exchanged, but this may be informed by any relevant discoveries of or agreements with the buyer. It is executed on exchange, typically in two identical parts.
(1) Purpose: The contract will tie parties to the deal, giving time to finalise plans without fear of collapse.
(2) Obligation: Contracts are not compulsory, but are risk-averse. Less common for leases.
(3) Conditional Contract: Contracts bind parties, but may contain terms permitting withdrawal if a condition is not met pre-completion (such as a requirement of the seller to repair the property).
(4) Legal Requirements: A legal contract must be in writing, incorporating all expressly agreed terms, and signed by both parties in one or exchanged identical copies (s2 LP(MP)A 1989).
What will the contract contain?
Contents of Contract: Contracts will be in a standard form or a form bespoke to a firm, but both cover the same contents:
(1) Particulars of Sale: The front page contains the particulars. These are a description of the property, parties, payment, and title guarantee.
(2) Standard Conditions: The middle pages contain standard conditions, which apply to all conveyances of that type. These conditions may be altered in the special conditions.
Standard Conditions: The ‘Standard Conditions’ apply to residential and simple commercial transactions.
Standard Commercial Property Conditions: The ‘SCPCs’ apply to complex commercial transactions.
(3) Special Conditions: The back page contains special conditions unique to the transaction. The standard form provides pre-printed suggestions as well.
What are the particulars of sale?
Particulars of Sale: The Particulars of Sale detail the property, the transacting parties, and the agreed payment.
Title Investigation
Title Investigation: The seller’s title investigation will provide for the title, address, type of estate, incumbrances, and class of title (see investigation).
Specified Incumbrances
Specified Incumbrances: The contract must list all specified incumbrances attached to the land (i.e. not personal covenants).
(1) Standard: In all transactions, the seller must list all burdens other than those discoverable on inspection, those they do not and could not reasonably know of, nor those that are public requirements.
(2) SCs: Under the SCs, sellers are not required to disclose mortgages and interests on public registers (other than LR/LCD/CH).
(3) SCPCs: Under the SCPCs, sellers are not required to disclose mortgages or those a prudent buyer should discover in S+Es.
(4) Non-Disclosure: Failure to disclose a specified incumbrance may put the seller in breach of contract, which could lead to rescission or damages.
Title Guarantee
Title Guarantee: The title guarantee is the right of the seller to sell. This is important to lenders.
(1) Full Title: Seller owns legal and equitable title. This confirms their right to dispose of the land, guarantees they will transfer title, and will dispose incumbrances other than those specified/excluded at time of disposal (s6 LPMPA).
(2) Limited Title: Seller has right to sell land, but limited knowledge of the property. They promise to dispose of the land, and confirm that they have not encumbered the property or become aware of new incumbrances imposed since the last disposition for value. Common for personal representatives and second trustees.
(3) No Guarantee: Seller cannot provide a guarantee about the land. Common for liquidators.
Contract Rate
Contract Rate: Contract must specify the rate of interest to apply for delayed completion (see completion).
(1) Standard Rate: The standard rate is the Law Society’s interest rate from time to time in force, published weekly. The rate applied is the rate on exchange. It is currently 4% above the Barclays base rate (so is currently 9.25%).
>This rate applies under the standard conditions, but is often added to the particulars in any case.
(2) Application: On delay, the contract rate is applied to the purchase price less deposit paid, and accrues daily.
Payment Sums
Payment Sums: Contract specifies the purchase price, contents price and balance to pay.
(1) Purchase Price: The total sum of the property purchase (not including separate price paid for contents).
(2) Contents Price: The sum paid for contents if separate (usually done to reduce stamp duty).
(3) Balance: The total to pay on completion (Purchase Price-Deposit) + (Contents Price).
Deposit
Deposit: The deposit is the sum paid by the buyer on exchange, which provides security to the seller.
(1) Standard: 10% of purchase price by standard.
>Can be lowered, but must be topped up to 10% if the deal collapses.
(2) Stakeholder: Seller’s solicitor will hold as the deposit stakeholder by default. This means they cannot release the funds to the seller until completion.
Agent: A special condition can permit it to be held as agent, meaning it can be released to the seller.
Residential Purchase: However, solicitors can release funds directly towards a related purchase of residential property by the seller (SCs only - not SCPCs).
(3) Payment: Payment must be sent from an account in the name of the buyer’s solicitor to an account in the name of the seller’s solicitor.
Standard Conditions: This must be electro
What are standard conditions?
Standard Conditions: The Standard Conditions are the standard terms which apply to all transactions of that type. Certain terms can be altered by special condition.
(1) Standard Conditions: The ‘Standard Conditions’ are used for residential and simple commercial transactions (Standard Conditions of Sale (5th ed. 2018)).
(2) Standard Commercial Property Conditions: The ‘SCPCs’ are used for more complex commercial transactions (Standard Commercial Property Conditions (3rd ed. 2018)).
Part 1: Applies unless expressly excluded.
Part 2: Applies if expressly included.
What are special conditions?
Special Conditions: Special conditions alter standard conditions, if required by the parties. The standard form contract provides pre-printed suggestions, but there is space for bespoke conditions as well.
Pre-Printed Conditions
Pre-Printed Conditions: Pre-printed conditions must be strike-throughed if they are to alter the standard conditions.
(1) Fixtures/Chattels: Details whether the sale: a) includes any chattels; or b) excludes any fixtures.
(2) Vacant Possession: Details whether the property is: a) vacant; or b) subject to leases or tenancies.
(3) Completion Date: Completion is at 2pm and 20 working days from exchange. This can be altered by special condition.
(4) Misrepresentations: Details whether parties agree not to rely on non-written representations.
(5) Occupiers Consent: Details whether current non-owning adult occupiers consent to release their tenant rights on sale.
Bespoke Conditions
Bespoke Conditions: Bespoke conditions are virtually limitless. Common bespoke conditions may include:
(1) Trustee: Whether a second trustee will be appointed for completion (i.e. for overreaching).
(2) Insurance: Whether the seller will obtain or pay for restrictive covenant insurance, or retain risk on exchange.
(3) Defects in Title: Whether the seller is required to disclose any defects in title.
(4) Title: Whether the seller agrees to upgrade the title before completion (i.e. from possessory to absolute).
(5) Deposit: Whether the deposit is being altered (i.e. decreased or held as agent).
(6) VAT: Whether the option to tax is being exercised on old commercial property.
(7) Fixture Removal: Whether the seller agrees to remove a fixture before completion.
(8) Indemnity: Whether the buyer agrees to enter into an indemnity chain on completion (in respect of freehold covenants). This is required by standard, but included as good practice.
(9) Deduction of Title: Whether a landlord agrees to deduce freehold title to a potential tenant before completion. This is typical for an assignment of lease if the freehold is unregistered.
(10) Time of Essence: Making ‘time of the essence’ means parties can rescind for delayed completion immediately.
VAT
VAT: In commercial properties, it may be necessary to add or exclude VAT by special condition. There are three options:
(1) Exclusive of Purchase Price: This means VAT is not included in the purchase price, but can be added later. This is typical where VAT is being charged, i.e. new build and optionally for old builds. This is standard for SCPC (SCPC 2).
(2) Included in Purchase Price: This means the purchase price is final, and so no VAT will be added on top. This is typical for old builds that are not being optioned to tax, and residential properties. This is standard for SC (SC 1.4.1), and added by special condition for SCPC.
>If VAT is charged, it must be paid out of the stated purchase price - it cannot be added on top.
(3) Exclusive Subject to Change of Law: This means VAT is not included in the purchase price, but can only be added if the law makes the supply taxable between exchange and completion. This is used if the seller is risk averse, and must be added by special condition by activating SCPC Part 2 A1.
