The draft contract and exchange of contracts

Question 1

Who normally prepares the draft contract?

Answer 1

The seller’s solicitor

Question 2

What three parts does a contract contain?

Answer 2

1. particulars of sale
2. the relevant standard conditions
3. special conditions

Question 3

Define specified incumbrances?

Answer 3

Adverse title matters that the property is sold subject to. They include covenants and adverse easements.

Question 3

Do relevant incumbrances burden a buyer?

Answer 3

They usually run with the land unless they are positive covenants

Question 4

Where would you find relevant incumbrances?

Answer 4

The property register

Question 5

What are the main options for title guarantee?

Answer 5

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

Question 6

What is full title guarantee?

Answer 6

Usually given when the seller owns the whole legal and equitable interest in the property.
Additionally the seller covenants that the property is free from all charges, incumbrances, and third party rights other than those they do not and could not reasonably be expected to know about.

Question 7

What is limited title guarantee?

Answer 7

Usually given when the seller does not own the whole legal and equitable interest and has limited knowledge about it. Such as sale by a trustee or PR.
The seller covenants that they have not, since the last disposition for value, charged or incumbered the property or granted any third party rights.

Question 8

What is no title guarantee?

Answer 8

Usually given when the seller has no knowledge at all about the property and is simply disposing of it in a professional capacity. Such as sale by a trustee in bankruptcy or a mortgagee in possession.

Question 9

What does stakeholder mean in terms of a deposit?

Answer 9

Under special conditions the deposit is held by the seller’s solicitor as stakeholder until completion and it cannot be handed over until completion. On completion it may be released to the seller with accrued interest.

Question 10

Are there any exceptions under special conditions regarding the deposit being held as stakeholder?

Answer 10

If before completion the seller agrees to buy another property in England and Wales for their residence, they may use all or any part of the deposit as a deposit in that transaction.

Question 11

What does agent mean in terms of a deposit?

Answer 11

The deposit can be released to the seller immediately and used for any purpose whatsoever.

Question 12

What needs to happen for a deposit to be held as agent?

Answer 12

A special condition will need to be inserted into the contract

Question 13

Which is less risky for the buyer, stakeholder or agent?

Answer 13

Stakeholder

Question 14

Under the SCPCs how must a deposit be paid?

Answer 14

By electronic transfer not client account cheque

Question 15

What should a buyer’s solicitor include in a contract for a new build property when it is not possible to agree a fixed completion date and why?

Answer 15

A longstop date as this allows the buyer to withdraw in the event of significant delay

Question 16

What are some examples of when bespoke additional special conditions may also need to be added?

Answer 16

• An indemnity covenant to be given by the buyer in the transfer
• Payment of a reduced deposit
• Grant of easements, impositions of covenants, declarations

Question 17

What is an indemnity covenant?

Answer 17

• A covenant to be inserted into the transfer that the buyer will observe and perform covenants affecting the title and will indemnify the seller in respect of any future breach.

Question 18

When would an indemnity covenant be needed?

Answer 18

• Restrictive covenants as they usually run with the land and bind the buyer
• If the seller is the original covenantor, or they gave an indemnity covenant to the then seller on their purchase of the property the seller should insist that the buyer provide an indemnity covenant.

Question 19

Where would you find an indemnity covenant?

Answer 19

In the proprietorship register in registered land or the conveyance to the seller in unregistered land

Question 20

Under the standard conditions when does the risk of damage to and/or destruction of the property pass to the buyer?

Answer 20

On exchange of contracts

Question 21

Who is obligated to insure the property from exchange of contracts of a freehold property?

Answer 21

The buyer must be advised to put buildings insurance ‘on risk’ immediately from exchange.

A seller should be advised to maintain their buildings insurance until completion even though the risk passes to the buyer. The seller is usually under an obligation to keep the property insured under the terms of any existing mortgage. Plus there is a risk that the sale may not proceed to completion.

Question 22

What should be included in a report to the client before exchange?

Answer 22

1. The results of investigation of title
2. The results of searches and enquiries
3. The contract
4. The mortgage
5. The need for the buyer to inspect the property and be satisfied as to its state and condition

Question 23

How must a mortgage be made?

Answer 23

By deed (s 52 LPA)

Question 24

What is a certificate of title?

Answer 24

A formal document addressed to the lender from the lender's/buyer's solicitor confirming it is safe to lend. Also confirms the charge will be registered and the buyer's title to the property will be good and marketable.

Question 25

On a new build property what is the standard requirement of the Handbook for the COT?

Answer 25

It should not be submitted until the completed UK Finance Disclosure of Incentives Form has been received from the developer and an NHBC or equivalent cover note is available.

Question 26

What are the pre-exchange steps for the seller's solicitor?

Answer 26

1. prepare two identical copies of the contract and send one to the buyer's solicitor 2. arrange for the contract to be signed by the seller 3. agree a completion date in principle with the client and other solicitor 3. request a redemption statement from the mortgagee

Question 27

What are the pre-exchange steps for the buyer's solicitor?

Answer 27

1. check no outstanding points regarding investigation of title, survey, and searches and enquiries 2. check no outstanding points regarding the mortgage 3. arrange for the contract to be signed 4. report to the client 5. report to the lender 6. obtain cleared funds for the agreed deposit and confirmation regarding the balance due 7. advise client regarding insurance 8. agree a completion date in principle with the client and other solicitor

Question 28

What is Formula A?

Answer 28

Used when one solicitor holds both parts of the signed contract.

Question 29

What is Formula B?

Answer 29

Most popular - each solicitor holds their own signed part of the contract.

Question 30

Formula C?

Answer 30

Used in chain transactions where the deposit is sent further up the chain and all transactions need to be synchronised.

Question 31

What are the consequences of exchange?

Answer 31

The parties become committed under a binding contract to complete on the agreed completion date. The seller retains legal ownership, although the buyer gains an equitable interest under an estate contract. The seller must take care of the property but the risk and responsibility to ensure passes to the buyer.

Question 32

What is the VAT position in a property transaction?

Answer 32

Residential property - VAT is not normally payable New commercial property (completed up to 3 years ago) - VAT paid on the purchase price Old commercial property (more than 3 years) - Exempt from VAT unless option to tax has been exercised by the seller