Property (Freehold) - Exchange of Contracts (7) Flashcards
What is exchange of contract?
Exchange of Contracts: On exchange, both parties execute the contract and are tied to its terms until completion.
(1) Contractual Rights: The contract does not convey ownership, as this requires a deed, but provides a means to discourage and compensate for delayed, improperly altered or collapsed deals (through breach of contract).
(2) Estate Contract: The contract constitutes its own equitable land interest, and can be registered against the property to give notice of the arrangement to other parties.
What is the role of the solicitors in exchange of contract?
Preparing to Exchange: Both parties must adhere to a number of steps in the lead up to exchange.
Buyer’s Solicitor
Buyer’s Solicitor: The buyer’s solicitor must:
(1) Pre-Contract Report: Provide a written Pre-Contract Report to the buyer summarising the investigation of title, mortgage terms, draft contract terms, searches and enquiries, and any disclaimers on value and structure.
>This may further necessitate alterations of the draft contract.
(2) Report to Lender: Confirm ‘good and marketable’ property title to the lender by Certificate of Title (if funding by mortgage).
(3) Funds and Policies: Ensure that the deposit, mortgage contract, and insurance policy are cleared and ready.
Both Solicitors
Both Solicitors: Both solicitors must:
(1) Signatures: Obtain the client’s signatures for their half of the contract in wet ink or electronically.
>Solicitors may sign on a client’s behalf with their consent.
(2) Completion Date: Agree on the date of completion (see draft contract).
(3) Authorisation: Obtain and retain on file written authorisation to exchange from a fully informed client. Proceeding without consent can lead to claims in negligence.
>Clients must be told that the exchange will lock them into the transaction.
How is exchange effected?
Exchange: Exchange must occur using the correct legal formalities in order to bind the parties.
(1) Method of Exchange: There are three methods of exchange (below).
(2) Record of Exchange: The method and details of exchange must be recorded by Memorandum, and clients should be informed as soon as exchange and any relevant undertakings have been completed.
>The record should include date and time of exchange, formula used and exact wording of any variation, completion date, deposit paid, and identities of solicitors.
In Person Exchange
In Person Exchange: One solicitor attends the other’s office, and they exchange in person. This is costly and time-consuming.
Postal Exchange
Postal Exchange: Each solicitor sends their copy to the other by post. This is cheap, but notoriously unreliable.
Telephone Exchange
Telephone Exchange: Both solicitors agree that exchange has occurred over the phone, having sent their copies in advance, and paying deposits after. This is the most common method. There are three formulas, set out by the Law Society.
(1) Formula A: One solicitor holds both copies, confirms exchange, inserts the date and agreed completion, and undertakes to send their client’s half to the other solicitor by first-class post, DocX, or personal delivery that day.
(2) Formula B: Each solicitor holds their own client’s copy, confirms exchange, inserts the date and agreed completion date, and undertakes to send it to the other solicitor by the means listed above. This is most common.
>Avoids need to send one copy to another solicitor prior to exchange. All administration comes after.
(3) Formula C: This is a complex method used for chains of residential purchases, and is uncommon.
(4) Undertaking: The seller’s solicitor will undertake to pay the costs of this process. Solicitors act for both buyers and sellers in their work, so will benefit when next acting for a buyer.
(5) Deposit: The buyer’s solicitor will also undertake to send the deposit by cheque or banker’s draft that day.
SCPC: The undertaking must be altered for SCPC transactions, as the standard commercial property conditions require deposits to be made electronically. It may also be altered for SCs if this is the desired method of transfer.
What are the consequences of exchange?
Consequences of Exchange: On exchange, parties are tied to the terms of the contract and obliged to complete it.
(1) Legal Title: Legal title remains with the seller, but buyer gains a beneficial interest.
(2) Occupation: The buyer does not have the right to occupy, unless granted a licence to occupy.
(3) Outgoings: The seller continues to pay outgoings until completion, such as business rates.
(4) Risk: The buyer adopts risk, unless altered by special condition, which a seller is unlikely to agree to (below).
>Buyers should therefore seek to limit the length of time between exchange and completion.
Risk
Risk: On exchange, the buyer adopts risk of damage, meaning they remain bound to complete the transaction even if the property is damaged or destroyed prior to completion. They should therefore take insurance out over the property.
(1) Buyer’s Insurance: The buyer should take out insurance to begin on exchange, or their mortgage lender may do so on their behalf.
(2) Seller’s Insurance: The seller is not obliged to insure after exchange, but they may do so subject to their mortgage policy, or for their own reasons.
>The seller also remains under a duty to take reasonable care of the property.
(3) Joint Insurance: If both parties take insurance, the buyer is likely to receive a lower payout for damage or destruction. If this is the case, the purchase price should be reduced accordingly.
(4) Exception: This can be altered by special condition, meaning risk will pass on completion. Sellers will tend to avoid this, though (it is more common if the building is still under construction, as more risk is involved).
