The Contract

Question 1

Does the contract transfer the land?

Answer 1

No.

Only a deed can transfer land.

Question 2

Is a contract needed for every property transaction?

Answer 2

No.

Question 3

What is the contract’s general purpose in a property transaction?

Answer 3

It is merely an agreement to transfer the land at a later stage.

The contract however fixes the main terms of the transaction (eg price, obligations to complete remaining works etc).

Question 4

List some common reasons why the parties will want to have a contract in place.

Answer 4

• Parties are satisfied with the property’s title and info revealed by searches, but there is going to be a delay before completion (typically due to lenders);
• Other things need to be done to the property (for example carrying out building works) where a contract is needed to enforce this being done;

Question 5

Name the two types of standard conditions typically used (and what types of transactions they are used for).

Answer 5

1) The Standard Conditions of Sale (5th edition – 2018 Revision) (‘SC’) - used for all residential transactions and some simple commercial transactions;

2) The Standard Commercial Property Conditions (3rd edition – 2018 Revision) (‘SCPC’) - used for complex/ high value commercial property transactions (notably containing more provisions dealing with occupational leases).

Question 6

Do firms have to use standard conditions?

Answer 6

No.

However a lot of firms do.

If firms use their own, these will largely overlap with the pre-printed versions of the standard conditions anyway.

Question 7

Name the three general sections of the pre-printed versions of the standard conditions (SC and SCPC).

Answer 7

1) Front page ‘particulars of sale’ - description of the property and terms of sale. This will be unique to the property and particular transaction;

2) Middle section - standard conditions of either the SC or SCPC. Contains most of the detail governing transaction (unless something different is agreed between parties). for the SCPC there are two parts: part 1 will apply unless excluded (and is the longest), part 2 will only apply if expressly included. There is only one section for the SC;

3) Special conditions - specifically drafted to meet requirements of that transaction. Contains pre-printed suggestions of what to include and then a blank space for the parties to insert their own provisions as they see fit.

Question 8

For registered property, what does the front page of the contract need to include?

Answer 8

Title number and the class of title.

Question 9

For unregistered property, what does the front page of the contract need to include?

Answer 9

A definition of the property by reference to the root of title and reference to the encumbrances contained within the root of title which apply to the property.

Question 10

What is the effect of not detailing the incumbrances applying to the property?

Answer 10

Both sets of standard conditions specify the seller sells the property free of all encumbrances other than those specified in the contract (or the typed list contained within the SC’s).

Question 11

Both the SC and SCPC list incumbrances which the property sale is subject to. List these.

Answer 11

• those specified in the contract;
• those discoverable by inspection before the date of the contract;
• those the seller does not and could not reasonably know about;
• public requirements.
• mortgages the buyer knows about; and
• entries made before the date of contract in any public register, except those maintained by land registry, land charges department and companies house

Note the last two are contained in both its of conditions but worded slightly differently.

Question 12

What does the seller solicitor usually do with regards to incumbrances when drafting the contract?

Answer 12

Lists all incumbrances whether or not listed in the standard conditions.

This means they fall within the definition of contained in the contract and can therefore be certain they have all been included.

Question 13

What one incumbracne should the buyer solicitor check has not been included in the contract?

Answer 13

Reference to the seller’s mortgage (as this should be discharged immediately on/after completion and should obtain an undertaking confirming as such).

Question 14

What are the three types of title guarantee the seller can give on sale and explain the situations where each title guarantee will be given?

Answer 14

1) Full title guarantee (most common and given where the seller or sellers own full legal and equitable title to the property);

2) Limited title guarantee (given where the seller has limited knowledge of the property- eg they are an executor or trustee who is a close relative who either lived in the property, or visited it often - meaning they would have some but not extensive knowledge of the property and its encumbrances);

3) No title guarantee (rare and used mainly where seller is a person appointed following the insolvency of the legal owner, a solicitor acting as a trustee, or simply a trustee appointed just for the sale who is not a close relative and would not be expected to have any knowledge of the property whatsoever).

Question 15

List the three things the seller is impliedly covenanting when selling with full or limited title guarantee

Answer 15

1) That they have the right to dispose of the land;

2) They will do all they reasonably can to transfer the land;

3) In the case of leasehold land, the lease in subsisting at the time of disposal and there is no breach of covenant making the lease liable to forfeiture.

Question 16

Define the term contract rate.

Answer 16

The rate of interest charged if a party is late completing.

Question 17

What is the standard deposit rate and can this be varied?

Answer 17

The standard deposit is 10% of the purchase price. This can be varied by the parties if agreed but must be clearly stated on the front of the contract.

Question 18

What happens to the despot if the buyer fails to complete?

Answer 18

The seller will keep the despot (ie the buyer will forfeit the deposit).

Question 19

Explain who holds the deposit and when it can be accessed by the seller.

Answer 19

Deposit is paid to the seller solicitor as a stakeholder.

The deposit can only be released to the seller on completion.

However, where SC is used, the seller can use this deposit as a deposit on a property they are buying.

Where SCPC is used, the deposit must be held as a stakeholder and therefore cannot accessed by the seller until completion.

Question 20

What does it mean for the parties to agree the seller solicitor can hold the deposit as an agent?

Answer 20

This means that, following exchange, the solicitor can release the deposit to the seller for any use by the seller whatsoever.

Risky for the buyer as if the sale does not complete, the seller may not be in a position to return the deposit (eg if the seller becomes insolvent).

Question 21

List the typical special conditions which may need to be included in the contract (specific to that transaction).

Answer 21

• appointment of a second trustee;
• disclosing a defect in title;
• seller selling with limited/ no title guarantee;
• deposit of less than 10%;
• deposit to be held as an agent rather than stakeholder;
• payment of VAT;
• removal of fixtures by the seller;
• inclusion of an indemnity covenant;

Question 22

What do SC 4.6.4 and SCPC 7.6.5 say about indemnity covenants?

Answer 22

The buyer MUST give an indemnity covenant where the seller has ongoing liability in relation to the property. This will allow the seller to recover losses of the buyer should there be a future breach and the seller is sold by the original covenantor.

Question 23

When does the risk of damage to the property pass to the buyer?

Answer 23

On exchange of contracts.

Buyer therefore needs sufficient warning in order to make insurance arrangements.

Question 24

What will a lender typically require sufficient evidence of on exchange of contracts?

Answer 24

The lender will require proof that the insurance taken out by the buyer in relation to property damage is sufficient for the value of the property. The lender sometimes insures the property itself but if not will require the buyer to take out a policy.

Question 25

Is the seller obligated to insure a property for the sale?

Answer 25

No. If this is needed then it must be added as a special condition into the contract.

In practice however, the seller will usually keep their insurance policy in place until completion.

Question 26

What is the risk where the seller and buyer both have active insurance policies on exchange and completion?

Answer 26

The buyer may not be able to claim the full proceeds from the policy. If this happens because the seller’s policy is also in existence, then it is customary for this to be reflected in the purchase price (and the standard conditions provide for this).

Question 27

List the three ways VAT can be charged on the purchase price of a property (commercial property only).

Answer 27

1) Purchase price is exclusive of VAT, and VAT will be paid in addition;
2) Purchase price is inclusive of VAT;
3) Purchase price is exclusive of VAT, so it can be added on top in unlikely event law changes to make exempt supply chargeable at the standard rate, but the seller is contractually obliged not to opt to tax.

Question 28

1) In what type of transaction would it make sense for the VAT not to be included in the purchase price so it can be added on top if the law changes between exchange and completion?; and

2) What condition of the SCPC provides for this?

Answer 28

1) Appropriate where the seller is selling old commercial property (so does not need to opt to tax) but is not willing to take the risk incase (between exchange and completion) the law turns the exempt supply into a standard rated supply. Particularly applies where the buyer is VAT sensitive.

2) SCPC Part 2 A1 - this disapplies SCPC 2 (ie that VAT will be added onto purchase price), and retains the seller’s right to add VAT on to the purchase price between exchange and completion if there is a change of law making the sale of property a supply chargeable to VAT.

Question 28

Why do cash rich buyers often choose to use a lender for the purposes of the property?

Answer 28

The interest payable on the loan is a deductible tax expense (which could be less than the return they will make by investing the cash or using it in other ways).

Question 29

What sets out the specific search requirements of lenders?

Answer 29

The UK Finance Mortgage Lenders’ Handbook for Conveyancers.

Question 30

What is required by the lender on residential transactions with regards to title and what 3 things does it confirm to the lender?

Answer 30

A certificate of title approved by the Law Society and UK Finance.

It confirms to the lender:

1) There are no legal problems with the property (ie has good marketable title ) so lender can safely lend against it;
2) Who will own the property once the sale is completed; and
3) The completion date when funds are needed.

Question 31

In respect of title, what will a lender in a commercial property transaction require and what does it confirm to the lender?

Answer 31

A more detailed certificate of title (ie the one provided by the City of London Law Society).

This is a report about the property, a summary of the info obtained by the solicitor during title investigation and pre-contract searches and enquiries.

Question 32

True or False: A lender for a commercial property transaction can sue a firm if the certificate of title they give to the lender contains incorrect information.

Answer 32

True.

Question 33

List the steps necessary to prepare for exchange of contracts (pre-exchange steps).

Answer 33

1) Report to Client - buyer solicitor reports to buyer in writing, explaining results of title investigation, searches and enquiries and the terms of the contract and mortgage offer;

2) Report to Lender - buyer solicitor should report to lender in order for lender to confirm the property is good security for the loan and has good marketable title;

3) Ensure Deposit Funds are Available - deposit funds should be available to buyer solicitor in cleared funds ready to be sent to seller solicitor on exchange;

4) Check Mortgage Offer and Client has Sufficient Funds to Complete - buyer needs to have mortgage offer in place and needs to have accepted it (and have complied with all its relevant conditions). Buyer solicitor should also check buyer has funds to proceed with purchase at completion;

5) Arrangements for Insurance - usually risk passes to buyer on exchange and therefore ends insurance n pace from exchange. Arrangements must be made in advance of actual exchange so insurance takes effect;

6) Contract Signed - both solicitors need to ensure their client has signed the contract. Usually wet ink but can be electronic if formalities are satisfied. Solicitors can sign on clients behalf if express authority is given.

7) Completion Date - both solicitors need to discuss desired completion date with client and each other in advance of exchange.

Question 34

Explain authority to exchange.

Answer 34

Needs to be obtained from clients by the solicitors in writing and this must be noted on the file.

Question 35

List the three ways an exchange of contracts can occur.

Answer 35

1) In person - physically handling contracts over to the other solicitor;
2) By post - solicitor’s each send their client’s contract to the other by post;
3) Over the phone.

Question 36

What is contained in the file note confirming exchange?

Answer 36

• date and time;
• formula used (A,B or C);
• completion date;
• deposit to be paid;
• identities of the solicitors involved in he exchange.

Question 36

What happens to the legal and beneficial ownership of the property on exchange?

Answer 36

Seller retains legal title until completion but holds equitable interest on behalf of the buyer.

Question 37

1) Which condition of the SCPC states the purchase price is exclusive of VAT and will be added on top?

2) Which type of transaction is this suitable for?

Answer 37

1) SCPC 2, but if the SC are used it will need to be incorporated as an express special condition;

2) This condition would be appropriate for the standard rated supply of a commercial building within three years of construction where the seller has no choice but to charge VAT (ie a new commercial property being sold).

Question 38

1) Which condition of the SCPC and/or SC states the purchase price will be inclusive of VAT, and cannot be added on top?

2) Which type of transaction will this be appropriate for?

Answer 38

1) If SCPC are used it will need to be incorporated as a special condition; if SC are used it will be provided for at condition 1.4 of the SC;

2) This will be appropriate for transactions concerning the supply of an old commercial building where the seller does not have input tax to recover (eg seller has not carried out refurbishment) and so has no reason to opt to tax. As such, this option is also popular with VAT sensitive buyers.

Question 39

Explain the law society formula A exchange method.

Answer 39

• One of the solicitors holds both signed contracts by both parties. This will be because the other party’s solicitor will have sent them the signed contract prior to exchange.
• In this formula, the undertaking is that the solicitor holding both signed contracts will, that same day, send their client’s signed part of the contract to the other side (either by first class post or by physically handing this over).
• in addition, buyer solicitor also undertakes to, that day, send the other side a banker’s draft or client account cheque for the agreed deposit.

NOTE: amendment to the formula will be needed if:

• the buyer is sending the deposit by electronic means;
• party’s solicitor who holds both signed contracts sends this contract the next day (as the requirement is that is should be sent by first class post or hand delivered that same day).

Question 40

Explain the law society formula B exchange method.

Answer 40

• used where each solicitor holds their own client’s exchange contract;
• quickest method as the exchange can be completed over the phone before the contracts are sent to each other;
• undertaking to send DATED contract by first class post (or hand delivered) that same day (if not this needs to be amended to account for it being sent the day after for example);
• undertaking also to send monies via banker’s draft cheque or client accounts cheque (if sent by electric means formula needs amending).

Question 41

Explain the law society formula c exchange method.

Answer 41

Most complex form of exchange and typically used in residential transactions where there is a chain of transactions which need to be synchronised