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FLK2 - Property Practice > Stage 3: Drafting the Contract > Flashcards

Stage 3: Drafting the Contract Flashcards

1
Q

who typically prepares the contract and how may they do this?

A
  • Prepared by the seller’s solicitor. They may use a pre-printed contract from a law stationer or draft in accordance with their firm’s style.
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2
Q

what is important to remember about the contract?

A

NB: the contract itself does not transfer the land. This is done by deed.
o Therefore, there may not be a contract i.e. when granting a lease

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3
Q

is a contract necessary?

A
  • There is no requirement to have a contract, but it is desirable if there will be a delay between checks and completion or building work prior to completion
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4
Q

what are the elements to the contract?

A
  1. particulars of sale
  2. standard conditions
  3. special conditions
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5
Q

what is included in the particulars of sale?

A

date,
buyer/seller details, freehold/leasehold (if lease is registered),
title number (if registered)/root of title (if unregistered i.e. ‘the Conveyance’),
specified incumbrances,
title guarantee,
completion date,
contract rate,
purchase price, deposit,
balance

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6
Q

what are the title guarantees the seller can give?

A

o Full title guarantee
o Limited title guarantee
o No title guarantee

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7
Q

explain full guarantee

A

seller owns entire legal and equitable title and so has the right to sell the property

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8
Q

explain limited guarantee

A

seller has limited knowledge of the property and is unable to guarantee if there are any rights over the property i.e. seller is an executor or trustee

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9
Q

explain no guarantee

A

seller has no (almost no) knowledge of the property i.e. a liquidator is selling the property

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10
Q

what are the implied covenants with both full and limited guarantee?

A

o They have the right to dispose of the land;
o They will do all they reasonably can to transfer the title;
o Leaseholds  that the lease is subsisting at the time of disposal and there is no breach of covenant making the lease liable to forfeiture

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11
Q

what is the implied covenant in relation to full guarantee only?

A

the property is disposed of free from incumbrances, other than incumbrances:
o The seller does not know about or could not reasonably have known about;
o Expressly referred to in the transfer;
o Matters the buyer is already aware of;
o Registered incumbrances at the time of the disposal
o (the bottom three are added in by s6 LPMPA)

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12
Q

what is the implied covenant in relation to limited guarantee only?

A

the seller has not created any incumbrances and they are not aware of anyone else creating incumbrances since the last disposition of value (i.e. a gift would not count)

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13
Q

generally, what are the standard conditions?

A
  • Must be present in all contracts. These are what governs the contract.
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14
Q

what are the open contract rules? give an example

A
  • ‘open contract rules’ have derived from common law and statute. These apply to contracts in the absence of specific terms i.e. if there is no date for completion, it should take place within a reasonable time
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15
Q

what standard terms may be used?

A
  • Practitioners have developed these standard terms. They are not mandatory, but are used in nearly every conveyance:
    o Standard Conditions of Sale (SC)
    o Standard Commercial Property Conditions (SCPC)
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16
Q

when are the standard conditions of sale used?

A

used in residential and straightforward commercial transactions (i.e. vacant and low value)

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17
Q

when are the standard commercial property conditions used?

A

2 parts. Part 1 always applies unless specifically excluded; Part 2 only applies if specifically included.

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18
Q

are the SC/SCPC mandatory?

A

no, but they are used in nearly every conveyance

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19
Q

what is important to note about the standard conditions in these flashcards?

A

These are key terms of SC/SCPC. Even if SC/SCPC is not being used, the standard conditions should address these points.

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20
Q

re: SC/SCPC

what are specified incumbrances?

A

third party rights which survive with the property transfer

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21
Q

re: SC/SCPC

what is the position regarding incumbrances?

A

Under SC/SCPC, the seller agrees to sell the property free of all incumbrances other than those specified in the contract or listed in the under the conditions.

in other words, if the incumbrance is not specified in the contract or does not fall under one of the above categories, this could amount to a non-disclosure and breach of contract, giving the buyer the right to rescind and/or damages

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22
Q

re: SC/SCPC

what are the encumbrances listed under the conditions?

A

The incumbrances under the SC/SCPC conditions are:
o Those discoverable by inspection before the date of contract (i.e. the buyer would have noticed on inspection of the property)
o Those the seller could not reasonably have known about;
o Public requirements (i.e. imposed by law e.g. planning regulations)

o SC only  incumbrances the buyer knows about or on a public register (not inc. LR, Land Charges Department or Companies House)

o SCPC only  incumbrances disclosed or would have been disclosed by searches a reasonably prudent buyer would have made

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23
Q

re: SC/SCPC

what could happen if the solicitor fails to disclose an incumbrance? How is this avoided?

A
  • In other words, if the incumbrance is not specified in the contract or does not fall under one of the above categories, this could amount to a non-disclosure and breach of contract, giving the buyer the right to rescind and/or damages

o Therefore, sellers tend to list all incumbrances (inc. positive covenants even though there is no need to as they do not run with the land)

24
Q

re: SC/SCPC

what should the buyer’s solicitor ensure is not listed as a specified incumbrance?

A
  • The buyer’s solicitor should make sure the seller’s mortgage is not listed
25
Q

re: SC/SCPC

what is the contract rate?

A
  • i.e. the rate of interest that will be charged if parties are late completing
  • Interest is paid on the purchase price (less any deposit paid if it is the buyer)
  • SC & SCPC interest is the LS’s ‘interest rate from time to time in force’. There is no need to amend this section on the particulars if this is agreed
26
Q

re: SC/SCPC

how much is the deposit?

A
  • Buyer is to pay 10% of purchase price on exchange of contract.
27
Q

re: SC/SCPC

how is the deposit held?

A
  • This is paid to the seller’s solicitor as ‘stakeholder’. This means they cannot give it to the seller until completion
28
Q

re: SC/SCPC

is the seller allowed the deposit before completion?

A

o SCs allow the deposit to be paid to the seller if they are using it to purchase a new property in England for themselves

o Any money not used must be held by the stakeholder

29
Q

re: SC/SCPC

what happens to the deposit if the buyer fails to complete?

A
  • If the buyer fails to complete, the seller can forfeit and keep the deposit
30
Q

re: SC

how can the deposit be paid?

A

can be paid electronically or cheque to conveyancer’s client account

31
Q

re: SCPC

how can the deposit be paid?

A

electronically only

32
Q

re: SC/SCPC

what must parties do if they want to set aside / change any of the SC/SCPC?

A

make a special condition

33
Q

re: SC/SCPC

what special conditions are common in terms of deposits?

A

o Seller may agreeing to accept lesser deposit;
o Buyer agrees the seller’s solicitor holding the money as an agent, meaning the seller can get the deposit immediately after exchange

34
Q

re: SC/SCPC

what is the position regarding positive covenants?

A
  • If the seller has an ongoing liability, the buyer must give a personal IC
35
Q

re: SC/SCPC

explain the risk of damage

A
  • The risk of property damage passes to the buyer on exchange (i.e. the buyer must complete, even if the property becomes damaged post-exchange)
36
Q

re: SC/SCPC

what are the seller’s obligation in relation to insurance?

A
  • The seller is under no obligation to insure a FH property unless they are required to do so by a special condition (might be appropriate to do so if the property is a new build under construction)
37
Q

re: SC/SCPC

if a special condition is agreed regarding insurance, what do the SC/SCPC say?

A

If there is such a special condition, SC/SCPC require the seller to maintain the policy until completion and if the property suffers damage to either:
o Give the insurance proceeds to the buyer; or
o Assign all of their policy rights to the buyer

38
Q

what advice should be given to the client regarding insurance?

A

if there is not a special condition, the solicitor should advise the buyer to take out insurance

39
Q

re: SC/SCPC

what happens if damage is suffered and the buyer and seller have an active insurance policy?

A
  • If the buyer and seller both have an active insurance policy on the property and need to make a claim and the buyer is unable to recover the full amount of the insurance proceeds, the purchase price is reduced
40
Q

re: VAT

what is the difference between ‘exempt’ and ‘zero-rated’ supplies?

A

o Exempt = no VAT charged and VAT cannot be reclaimed
o Zero-rated = VAT charges at 0% and VAT can be reclaimed.

41
Q

re: VAT

what is the position on VAT in residential transactions?

A

VAT not normally paid

42
Q

re: VAT

what is the position on VAT in commercial transactions?

A

standard rate 20% VAT is only payable when:
o It is a ‘new’ property (i.e. less than 3 years old); or
o It is an ‘old’ property and the seller has exercised the option to tax.

In other words, old properties are exempt from VAT unless the seller exercises the option to tax

43
Q

re: VAT

what is the option to tax?

A

i.e. the seller can choose whether to charge VAT in addition to PP

The seller must notify HMRC

44
Q

re: VAT

what might a seller opt to tax? explain this.

A

A seller will opt to tax if they want to reclaim VAT they have incurred on costs related to the property i.e. improvements, maintenance:
o Input tax is VAT paid by the business (i.e. VAT paid to a tradesman). If the seller opts to tax, they would deduct the input tax paid from the VAT it charges on the sale (i.e. the output tax). The seller then pays the balance (i.e. output tax – input tax) to HMRC. The effect is that they are in a VAT neutral position, they have recovered the input tax they previously spent
o If they do not opt to tax, any input tax spent cannot be recovered and they bear the cost of this.

45
Q

re: VAT

what is the effect if the seller opts to tax?

A
  • If the seller opts to tax, the buyer will usually be able to recover the VAT the seller has charged, unless they are a VAT-sensitive buyer
46
Q

re: VAT

what is a VAT-sensitive buyer?

A

makes exempt supplies only (i.e. insurance or financial supplies) and so cannot recover VAT

47
Q

re: VAT

what might happen if the seller opts to tax and the buyer is VAT sensitive?

A
  • If the seller opts to tax and the buyer is VAT-sensitive, they will resist this is seek a reduction to the PP as compensation
48
Q

re: SC/SCPC

what is the position on VAT in residential transactions?

A
  • Purchase price (PP) and contents price are inclusive of VAT
49
Q

re: SC/SCPC

what is the position on VAT in commercial transactions?

A
  1. PP is exclusive of VAT and so VAT will be added on top (SCPC 2)
  2. PP is inclusive of VAT and so VAT is not added on top
  3. PP is exclusive of VAT but VAT can be added on top in the unlikely event the law changes to make an exempt supply chargeable, but the seller is contractually obliged not to opt to tax (SCPC Pt 2 Condition A1)
50
Q

re: SC/SCPC

explain ‘1. PP is exclusive of VAT and so VAT will be added on top (SCPC 2)’ and when this would be used

A

o Used when the property is less than 3 years old or the seller has exercised the option to tax

51
Q

re: SC/SCPC

explain ‘2. PP is inclusive of VAT and so VAT is not added on top’ and when this would be used

A

o Used on the sale of building 3y+ & seller has decided not to opt to tax
o Solicitor should not advise their seller client to take this option (they won’t be able to recover income tax and if the law changes between exchange and completion and it becomes a chargeable transfer, the seller will need to pay VAT from the PP). Conversely, solicitor for VAT-sensitive buyer should advise this option (because otherwise they would need to VAT they can’t recover).
o This would need to be included as a special condition

52
Q

re: SC/SCPC

explain ‘3. PP is exclusive of VAT but VAT can be added on top in the unlikely event the law changes to make an exempt supply chargeable, but the seller is contractually obliged not to opt to tax (SCPC Pt 2 Condition A1)’ and when this would be used

A

o i.e. the seller is not prepared to take the risk attached to option 2, so reserves the right to add VAT if the law changes but won’t opt to tax pre-completion
o This would need to be incorporated in as it is in Pt 2 (disapplying SCPC 2)

53
Q

re: SC/SCPC

what is the position regarding completion?

A
  • Completion is to take place 20 working days after the contract
  • Money due on completion must be paid before 2pm on the day if completion. If it is not, then it will be treated as the next working day as a result of the buyer’s default.
54
Q

re: SC/SCPC

what are ‘special conditions’?

A
  • Specifically included to meet particular requirements of the transaction
55
Q

re: SC/SCPC

what are common special conditions?

A

Pre-printed contracts include special clauses which can be struck through if not relevant and there is a blank space to add more. Examples:
o Appointment of 2nd trustee for overreaching
o Seller to arrange and pay for RC insurance policy
o Indemnity covenant re PCs
o Changes to SC/SCPC provisions re: deposit, VAT, time for completion
o Whether the sale includes/excludes any contents/fixtures
o Selling with vacant possession or subject to leases/tenancies
o The seller will obtain occupier’s consent to vacate and release rights
o Disclosing a defect in title or limited / no title guarantee

FLK2 - Property Practice (16 decks)

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