The Contract and Exchange

Question 1

Why can a solicitor act for both a buyer and a lender in a residential transaction?

Answer 1

Because they have a substantially common interest. Both want a property that is:
- worth what the buyer has paid
- which is suitable for its purpose
- easy to sell if the buyer wants to move or the lender needs to repossess and sell the house

Risk of a conflict arising is low because:
- a high street lender will have standard non-negotiable mortgage terms and conditions and prescribed documents
- solicitor’s discretion in acting for a high street lender is limited by standard instructions

Question 2

Acting for a lender in commercial transactions

Answer 2

Most lenders in commercial transactions will instruct their own solicitors as there is much more potential for conflict.

Lender’s solicitor will:
- specify what enquiries and searches are needed
- ask the buyer’s solicitor to send copies of all searches and replies to enquiries
- review them and ask the buyer’s solicitor to send copies of all searches and replies to enquiries
- review them and ask the buyer’s solicitor to make such additional enquiries as the lender’s solicitor to send copies of all searches and replies to enquiries
- draft the legal charge and other security documents
- either draft the certificate of title or ask the buyer’s solicitor to provide it

Question 3

What is a mortgage offer?

Answer 3

A formal offer by the lender to lend. It is subject to the lender being satisfied with the transaction and the security.

Question 4

What is a facility letter?

Answer 4

Roughly the equivalent of a mortgage offer. Both mortgage offer and facility letter 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 to the property is satisfactory for lending purposes.

A certificate of title for a residential mortgage is usually one page form which is completed and signed.

It confirms to the recipient matters relating to the property through a series of statements of facts and disclosures

A commercial certificate of title is must more complex.

Question 6

CLLS Certificate of title

Answer 6

Certificate of title for commercial property is similar to a report on title but unlike a report that can follow any format the certificate of title is prescriptive.

City of London Law Society is the industry standard.
Format: series of statements that would be given if the property title is in perfect order.
- solicitor completing must give disclosure after a statement if any are incorrect

Lender will rely on the solicitor’s certificate and will be able to sue if there are any material errors or omissions.

Question 7

When should the company’s solicitor receive confirmation from the lender’s solicitor that the draft COT is approved?

Answer 7

Before exchange of contracts.

A buyer’s solicitor should not exchange contracts unless the source of funds is confirmed. Exchanging without confirmation means the lender could have issues with the property and then not want to lend, leaving the buyer contracted to buy without access to the main source of funds. There would be financial penalties under the contract if the buyer did not complete.

Question 8

Requirements for property contract

Answer 8

• be in writing
• incorporate all the terms which the parties have expressly agreed
• be signed by, or on behalf of, each party to the contract

Note: not a deed, cannot transfer land.

Question 9

Why use a property contract?

Answer 9

• fix a completion date so all parties know when they will need to have money and make practical arrangements
• tie related transactions, eg if using the money from the sale to buy another property
• set out related obligations such as buying furniture and other contents
• include conditions such as obtaining specific planning permission

May be unnecessary:
- gift of property between family members
- land of law value

Question 10

Types of contracts

Answer 10

• Residential: Standard Conditions of Sale
• Commercial: Standard Commercial Property Conditions

Tailor made:
- longer
- incorporate standard commercial property conditions
- may be weighed in favour of seller

Question 11

What is the role of special conditions in a property contract?

Answer 11

Special conditions may be used in both residential and commercial property contracts to add to or amend the standard conditions.

The Standard Conditions of Sale may be amended, excluded or supplemented by ‘special conditions’. This applies in respect of both residential and commercial property transactions. Though, in respect of residential transactions, if the seller’s solicitor is following the Law Society Conveyancing Protocol, special conditions may only be added if ‘absolutely necessary for the purposes of the transaction’.

Question 12

Specified incumbrances

Answer 12

Both sets of conditions amend the duty to disclose latent incumbrances and list incumbrances which the seller need not disclose.

SCS: seller needs to disclose any incumbrances registered at the Land Registry, Land Charges registry and at companies house.

SCPC: Buyer is deemed to buy the property subject to any incumbrances which would be revealed by a prudent buyer’s searches and enquiries. Onus on buyer to carry out all relevant searches and enquiries.

Question 13

Title guarantee

Answer 13

An exception to caveat emptor is the title guarantee. The seller can offer one of two types of guarantee (or none) as to the quality of title of the property. Both types of title confirm that the seller has the right to sell the property.

1. Full title guarantee
2. Limited title guarantee
3. No title guarantee

Question 14

Full title guarantee

Answer 14

Full title guarantee: this is the default and should be offered unless there is a good reason not to. This means that the property is free of all incumbrances other than those disclosed in the contract and those which

Question 15

Limited title guarantee

Answer 15

Limited title guarantee: is given by sellers with little knowledge of the property, such as executors of a deceased estate. This means that no incumbrances have been created over the property during the seller’s period of ownership

Question 16

No title guarantee

Answer 16

No title guarantee: means that the seller does not guarantee the seller’s right to sell the property or that the property is free of incumbrances.

The buyer has no remedy against the seller if a title issue arises after completion.

An administrator or liquidator selling property may offer no title guarantee.

Question 17

Completion date and time

Answer 17

• usually fixed by the parties
• default under SCS and SCPC is 20 working days after the date of the contract
• time for completion is 2pm, meaning money should be received by the seller’s solicitor before 2pm
• If the buyer will use that money from a related sale to buy the property, then the buyer’s solicitor should ensure that there is sufficient time to receive and forward the funds.

Question 18

“Time is of the essence”

Answer 18

Means that the contract must be performed by the specified time and if not the non-defaulting party can walk away from the contract and claim damages for the breach.

Question 19

Notice to complete

Answer 19

Both the SCS and SCPC state time is not of the essence until a notice to complete is served.

This means that if a party fails to complete by the specified completion date and time, the other party can claim damages for the breach but cannot yet walk away from the transaction.

Party is who is ready to complete can serve a notice to complete and make time of the essence.

Contract rate sets the interest that is payable by the defaulting party for delayed completion.

Question 20

Deposit

Answer 20

SCS and SCPC require the buyer to pay a 10% deposit on exchange of contracts but this can be varied by a special condition.

If parties agree to a lower deposit but the buyer doesn’t complete on time and the seller serves notice to complete the buyer must immediately pay the balance of the 10% deposit (unless also amended by special condition).

Balance of purchase price payable on completion is the purchase price less the deposit.

SCS: cheque or electronic
SCPC: electronic only

Will be held by seller’s solicitor as stakeholder or agent.

Question 21

Difference between stakeholder and agent

Answer 21

Stakeholder: cannot pay to seller until completion

Agent: seller can demand payment immediately

SCS and SCPC provide for deposit to be held as stakeholder.

Exceptions: residential sellers can use part or all of the deposit for a deposit on a related transaction.

Question 22

VAT

Answer 22

Residential: usually exempt supply or zero rated supply, buyer does not need to worry as SCS purchase price is inclusive of VAT.

Commercial: VAT should always be considered.
Default position - property is standard rated supply meaning VAT is payable on top of the purchase price
Exceptions:
- if property is over three years old and the seller has not made an option to tax then there will be no VAT to pay
- parties should amend SCPC with a special condition

Question 23

Risk under SCS and SCPC

Answer 23

Once contracts are exchanged, risk passes to the buyer.

Means that if the property is damaged or destroyed between exchange and completion the buyer must still complete.

The buyer’s solicitor should therefore advise the buyer to obtain insurance quotes before exchange, ready to insure the property from the date of exchange.

Lender may also want confirmation that the insurance is in place before advancing the completion funds.

In some cases it may be better for the seller to keep their insurance policy going (eg if the building is still under construction) in which case a special condition is needed.

Question 24

Indemnity covenants

Answer 24

Both SCS and SCPC make indemnity covenants an obligation of the contract. Will not apply if the seller did not give an indemnity covenant.

Parties may way to agree the wording and set it out in a special condition.

Question 25

Pre-written special conditions in the standard residential contract

Answer 25

1) tie clauses to SCS
2) allows the parties to amend the title guarantee from full to limited by changing the front page
3) allows the parties to specify included and excluded contents (furniture etc) on an attached list
4) either sold vacant or subject to leases and tenancies
5) can agree different time for completion than 2pm
6) liability for misrepresentation is limited to written statements (not for fraud)
7) occupier’s consent - any occupier’s over 18 give confirmation they will leave the property

Question 26

Special conditions SCPC

Answer 26

3) limited title guarantee
6) specify deposit and balance of purchase price will come from an account other than the buyer’s solicitor’s client account
8) space for specific terms of the transfer or draft annexed: eg reserving rights (covenants, easements)
9) tick for VAT, capital allowances and rights of residential tenants

Question 27

How often do businesses pay VAT collected to HMRC?

Answer 27

Every three months

Question 28

When does a business need to register for VAT with HMRC

Answer 28

When they have a VAT taxable turnover of more than £85,000 each year.

Below that registration is voluntary.

Question 29

What is the advantage of VAT registration?

Answer 29

Businesses will be able to offset the input tax it has paid to suppliers against the output tax it charges its customers.

Question 30

What are exempt supplies?

Answer 30

They are businesses which make supplies are not taxable for VAT.

This means they are unable to recover input taxes.

E.g. A bank provides banking services which are VAT exempt supplies. If the bank pays input tax on stationary, office furniture etc it has no output tax to offset and the input tax is an additional cost to the bank.

Question 31

Property and VAT

Answer 31

If a VAT registered business sells property that is a standard rated supply it must charge VAT on the purchase price.

The VAT on the land it sells is output tax.

If the business has had to pay VAT in connection with the property then it can offset that input tax against the output tax.

E.g. Development company pays a construction company £1 million plus £200,000 VAT to build a warehouse. It sells the warehouse for £1.5 million plus £300,000 VAT. The development company pay HM revenue £300,000 output taxes less £200,000 input taxes = £100,000.

Question 32

What property is VAT exempt?

Answer 32

• Residential property (except for newly constructed property)
• Commercial property over 3 years old and the owner has not opted to tax.

Question 33

What property is zero-rated?

Answer 33

Newly constructed residential property is zero-rated. The buyer doesn’t pay VAT but because the output is taxable the seller can recover its input tax from HMRC

Question 34

What property is standard-rated?

Answer 34

Newly constructed commercial property (less than 3 years old) is standard rated.

Older commercial property is standard rated if the seller has opted to tax.

Question 35

Option to tax

Answer 35

CPSE asks the seller whether an option to tax has been made and if so to provide a copy of the option and any related correspondence with HMRC

Whether VAT is payable on the property could be a concern if the buyer is not able to recover VAT (eg bank or insurance company) - effectively means the price is increased by 20%

Question 36

VAT provisions in SCPC

Answer 36

Default: standard rated
- seller warrants that the property is a standard-rated supply
- the buyer agreed to pay the VAT over the purchase price in exchange for a VAT invoice from the seller

A1:
- seller warrants that the property is not subject to VAT
- seller agrees not to exercise the option to tax

A2:
- seller warrants that it is using the property for the business of letting to produce rental income
- The parties agree various other matter necessary to the transaction being treated as a TOGC (exempt from VAT)

Question 37

What is the effect of the purchase price not expressly stating to be exclusive of VAT?

Answer 37

It will be deemed to be VAT inclusive.

Question 38

Who prepares the draft contract?

Answer 38

The seller’s solicitor.

• Seller’s solicitor will refer to the heads of terms to the seller for instructions on any point on which there is doubt
• if law society conveyancing protocol is adopted then the contract should be in standard form and official copies and protocol forms will be sent to the buyer’s solicitor at the same time.
• known as the contract bundle

Question 39

What does the buyer’s solicitor do after recieving the contract?

Answer 39

Buyer’s solicitor checks the contract against the heads of terms and the buyer’s instructions.

May want to amend or take account of matters that arise from the buyer’s solicitor’s investigation

May go back and forth.

Question 40

What is the redemption figure?

Answer 40

The amount needed to pay off the loan/mortgage in full.

Question 41

Do the seller and buyer sign the same contract?

Answer 41

No they each sign their own copy and these are exchanged.

Usually exchanged by telephone.

Question 42

Law society formula B - telephone call

Answer 42

Before exchange each solicitor will have received their respective client’s signed contract.

Exchange conversation involves:
- identifying any blanks left in the contract and agreeing what wording/figures need to be inserted
- agreeing any handwritten amendments or special conditions
- agreeing and writing in the completion date in the appropriate space

Once both solicitors are happy that the contracts are complete and identical they agree that they will exchange the contracts under Law Society Formula B, agree to the date and time of exchange and give each other their names to write on the contract.

The contract is then exchanged and from that time onwards the parties are legally obliged to complete.

Question 43

What undertakings are imposed by Law Society Formula B

Answer 43

• to hold the signed contract to the other solicitor’s order - means that the buyer’s signed part belongs to the seller and vice versa
• to post the signed contract to the other solicitor that day by first class post or DX or hand delivery
• buyer’s solicitor: send the deposit in the form of payment specified by the contract

Question 44

Formula A and C

Answer 44

A: where same solicitor holds contracts for both seller and buyer

C: chain transactions, where money from one property is used to buy the next (most use formula b and are careful with timing)

Question 45

Release method

Answer 45

Never exchange on one transaction hoping you can exchange on the other.

Solicitor will ‘release’ the contract to the solicitor who is dealing with a related transaction - means that if the solicitor manages to exchange on the related transaction by an agreed time the first contract is treated as exchanged but if not the exchange is cancelled.

Question 46

What happens after exchange?

Answer 46

• Each of the parties’ solicitors should prepare a memorandum of exchange with the key contract terms for the file. It is also wise to keep a copy of the signed contract in case the original is lost in the post to the other solicitor
• Risk passes to the buyer (should have insurance)
• Parties will start to make arrangements for completion such as submitting certificate of title to the lender and requesting mortgage funds in time for the completion date
• buyer also holds an equitable interest in the property which may be protected by notice on register or as a class c(iv) land charge - only necessary if there is going to be a long time until completion