U3. The Draft Contract and Exchange Flashcards
1
Q
What happens in exchange of contracts?
A
- Both parties become bound
- The Buyer gains an equitable interest in the property
2
Q
Is it compulsory to exchange contracts before completion?
A
No, and in most commercial contracts parties proceed straight to completion or exchange contracts and complete on the same time.
3
Q
Who prepares the draft contract?
A
The sellers solicitor (following deduction and investigation of title), and then sent to the buyers solicitor for approva
4
Q
What happens if the buyer request ammedments to the sellers solicitors draft contract?
A
The seller must make any ammedments and produce 2 clean copies in readiness for exchange
5
Q
What 3 things usually form the Draft Contract?
A
- The Particulars of Sale (Details on the Transaction)
- The Incoproration of STANDARD CONDITIONS
- The addition of SPECIAL CONDITIONS
6
Q
What are the 2 types of Standard Conditions and what are they for?
A
To save time on fully bespoke terms and conditions on each transactions, it is usual to incorporate either:
- Standard Conditions of Sale (for Residential Transactions) or
- Standard Commercial Property Conditions (for Commercial Transactions).
Part 1 Provides usual standard conditions, and Part 2 is additional conditions which can be incorporated where appropriate.
7
Q
What are ‘Special Conditions’ in a contract for property?
A
These are additional conditions (to the standard conditions) relevant to the particular transaction and agreed between the parties.
8
Q
What 13 things are contained within the Particulars of Sale on the draft contract?
A
- Date (Left blank and inserted on exchange)
2. Seller
3. Buyer name and current address
4. Property Freehold or leasehold
5. Title Number/Root of Title
6. Specified Incumbrances (anything adverse/burdening the land such as positive covenants, restrictive covenants and adverse easements) (mortgages are not included)
7. Title Guarantee (Full / Limited)
8. Completion date (left blank and inserted on exchange)
9. Contract Rate (Typically ‘The Law Societys Interest rate from time to time in force.’)
10. Purchase Price
11. Deposit
12. Content Price (If separate price agreed for chattels / fittings at the property) - Balance (amount payable on completion
9
Q
What are Specified Incumbrances?
A
Specified Incumbrances are adverse title matters the property is sold to. They include:
- Covenants (Both Positive that burden the land and Restrictive )
- Adverse easements
Mortgages and charges or financial natures are not within the definition of specified incumbrances.
10
Q
Where are Specified Incumbrances found?
A
- They are set out in the charges register, However
- Property register should also be checked as adverse matters may be included within a positive right which benefits the property.
11
Q
What is ‘Title Gaurante’ in the Particulars of Sale in the draft contract?
What are the 3 types?
A
They relate to the guarantee that the seller can give about the title and incumbrances and assistance they will give to transfer it.
- Full Title Gaurantee (When the seller owns the legal and equitable interest ie owner occupiers)
- Limited Gaurantee (Where the seller does not own the whole legal and equitable interest in the property and had limited knowledge about it, such as a personal representative or trustee)
- No Title Gaurantees (Seller has no knowledge at all about the property and is simply disposing of it in a professional capacity, such as a sale by trustee in bankruptcy or a mortgagee in possession)
12
Q
What does the seller covenant in cases of full and limited guarantees?
A
- They will have the right to dispose of the property
- They will, at their own cost, do all they reasonable can to give the title they purport to give.
13
Q
Who would have a Full Tile guarantee and what do they covenant?
A
Sellers who have both the legal and equitable interest (ie occupier owners)
In addition to the usual conditions of:
- They will have the right to dispose of the property, and
- Will at their own cost do all they reasonably can to give the title they purport to give… they also covenant that
- The Property is free from all charges, incumbrances, and third-party rights that those they do not know about and could not reasonably be expected to know about.
14
Q
Who would have a Limited Title Gaurantee and what do they covenant?
A
Those who do not own the whole legal and equitable interests and has limited knowledge, such as trustees and personal representatives.
In additions to the usual conditions, they covenant that they have not, since the last disposition for value (transfer) have charged, incumbered or granted any third party rights, and have not allowed anyone else to do so, and are not aware of anyone else doing so.
15
Q
Who would have no title guarantee?
A
People with no knowledge about the property, simply disposing of it in a professional capacity, such as a sale by trustee in bankruptcy or a mortgagee in possession.
16
Q
What class of title does the seller transfer to the buyer on completion of property transaction?
A
in registered land, the same class of title the seller has.
In unregistered land being registered for the first time, all reasonable assistance to enable the buyer to be registered as proprietor.
17
Q
What is the contract rate as refered to in the Particulars of Sale in the exchange of contracts?
A
The rate of interest that will be paid by the defaulting party on the purchase price in the vent of late completion.
It is a penalty.
18
Q
What is the most straightforward contract rate for a property transaction?
A
Insert ‘The Law Society’s Interest Rate from time to time in force), which is provided as the default provision in any event under both sets of standard conditions. (Residental and Commerical Conditions)
Alternatively, the sellers solicitor will use another bank to set the rate, such as ‘4% above the base lending rate of Lloyds Bank’. It is common to add ‘Or should that bank cease to publish such a rate, such other comparable rate as the seller shall reasonably require.’
19
Q
What happens to the deposit if the buyer does not complete the transaction?
A
The Seller may forefit and keep the deposit + any accured interest.
A notice to complete must first be served.
20
Q
What happens to the deposit if the seller does not complete the transaction?
A
The buyer can demand repayment of the deposit + accrued interest in the even the seller fails to complete
21
Q
Who holds the buyers deposit after exchange of contracts?
A
The Sellers Solicitor
22
Q
What are the 2 ways the sellers solicitor can hold the buyers deposit after exchange of contracts?
A
- As a stakeholder
- As an Agent
23
Q
How is the deposit held under the standard conditions by the sellers solicitor ?
When is the deposit given to the seller?
A
The Sellers Solicitor holds the money as a stakeholder until completion, in which it is released with accused interest.
This is the safest way for the buyer as not released until completion.
24
Q
How can a deposit be held as an agent by the sellers solicitor?
What are the effects of this?
A
Must be provided for as a special condition (as it changes the standard conditions providing for stakeholder)
This is much more risky as the deposit can be released to the seller immediately and used for any purpose whatsoever.
25
If the deposit is held by the sellers solicitor as a stakeholder, can that money be given to the seller before completion?
Yes, if the seller agrees to buy another property in England and Wales for their RESIDENCE, they may use all or part of the deposit in that transaction.
26
How can the deposit be paid from the buyer to the sellers solicitor?
Residental Properties / Standard Condtions
-Electronic transfer or client account cheque
Standard Commerical Property Conditions
-MUST be paid by electronic transfer
27
What can be done if the buyers client account cheque would not have enough time to clear before completion?
If the cheque would not have enough time to clear by completion, the sellers solicitor may agree for the buyers solicitor to hold the deposit to the order of the sellers solicitor (making it payable on demand)
28
What should be done in the Particulars of Sale for the exchange contract if the property is a newbuild, and so a completion date cannot be fixed?
1. Provide in the contract that completion will take place on notice.
2. Add a longstop date in the contract to allow the buyer to withdraw in the event of significant delay
29
What are the 2 types of Special Conditions?
1. The 7 Prescribed Special Conditions, which must either be kept, deleted, or amended
2. Additional Bespoke Special Conditions which may be added if required
30
What do the 7 Prescribed Special Conditions relate to?
1. - Incoporation of standard terms into contract
2. - Combines contract terms, standard conditions, agreement to transfer and appropriate title guarantee
3 - Fixtures and Fittings
4- Vacant Possesion (is there any leases or vacant)
5 - Standard Time of Completion (2pm) or not
6. Relaince on Written Representations only
7 - Occupiers Consent
31
What is the standard rules with regards to fixtures and fittings?
Fittings - Will remain in the property
Fixtures and Chattels - Will be removed from the property
32
What is the standard time of completion?
When should this be altered by the special conditions?
2PM.
If there is a chain, this should be adjusted to allow sufficient time to complete both transactions on the same day (ie completion of sale by 12pm and associated purchase by 2pm)
33
What is the Prescribed Special Condition 6?
That parties can generally only rely on written representations passing between the parties or their solicitors.
34
What must any nonowner adult occupiers agree to on exchange of contracts?
This provides from any adult occupiers:
a) An agreement to the sale of the property
b) A release / waiver of any rights in the property (including fixtures, fittings and contents)
c) an agreement to vacate the property on the completion date.
35
What is an Indemnity Covenant?
An Indemnity Covenant is a covenant inserted on the transfer, that the buyer will observe and perform covenants affecting the title, and will indemnify the seller in respect of any future breaches.
(nb do not get confused between an indemnity covenant and an indemnity insurance policy)
36
When is an indemnity covenant required?
1. Positive Covenants
-Positive covenants do not run with the land, so to protect themselves the original seller should require an indemnity covenant
2. The seller is the original coventor, or gave an indemnity covenat to the previous owner.
-This is because the seller could still be liable even after the transfer
37
Do positive covenants run with the land?
No, and so the new buyer will not be bound unless expressly stated otherwise
37
Do Restrictive Covenants run with the land?
Yes, and so the new buyer will be bound
37
How can you tell if the seller has given an indemnity covenant to the previous owner?
By checking the proprietorship register for registered land, or
The conveyance for unregistered land
37
Do indemnity covenants automatically apply?
When should they also be expressly stated?
Indemnity Covenants automatically apply to:
1. Positive Coventants, or
2. The seller is the original coventor, or gave an indemnity covenant themselves.
Despite this, they should also be expressed during exchange of contracts.
38
When does the risk of damage and destruction, and so responsibility of insurance pass from the seller to the buyer?
Under the standard conditions, the risk of damage and destruction of the property passes to the buyer on exchange of contracts.
39
After the exchange of contracts but before completion, if the property is damaged, does the buyer have to complete?
Yes, Under the standard conditions, the risk of damage and destruction of the property passes to the buyer on exchange of contracts.
40
When should the buyer of a freehold put the building insurance 'on risk'?
Immeditley from exchange of contracts as that is when they become liable
41
Why should a seller keep their insurance policy even though the buyer is responsible for the risk of damage and destruction on exchange of contracts?
1. The completion may not actually happen
2. Normally a condition of mortgages
42
What happens if a Solicitor gives wrong advice about passing of the risk on exchange of contracts?
Liable for negligence
43
What is the VAT Postion for a transaction for a residential property?
VAT EXEMPT
Standard Conditions for exchange of contracts provides contents price are inclusive of VAT
44
What is the VAT Position for New Commercial Properties? (Completed up to 3 years ago)
How is this affected on the exchange of contracts?
The Automatic Standard Rate Applies
It should be made clear that the purchase price is exclusive of Vat, and so will be charged in addition of the purchase price. Standard Commercial Property Conditions 2 should be adopted
45
What is the VAT Position for Old Commerical Property Transactions?
How is this affected on exchange of contracts?
Exempt from VAT UNLESS the option to tax has been exercised by the seller.
if option tax is exercised, this will be standard rated supply and paid on top of the purchase price. Standard Commercial Property Conditions 2 should be adopted
If tax is not added, Standard Commerical Property Conditions Part 2, Condition A1
46
What is Standard Commerical Property Condition Part 2?
Warrants that VAT is payable at the standard rate on top of the purchase price and a VAT Invoice will be provided on completion.
Remember, part 2 doesn't apply unless expressly incorporated
47
What is Standard Commerical Property Condition Part 2, Condition A1?
Warrants that VAT is not payable. However, if the law changes before completion making the transaction a taxable supply, VAT will be payable by the buyer
Remember, part 2 doesn't apply unless expressly incorporated
48
What 5 things must the solicitor explain to their client before exchange of contracts?
1. The Results of Investigation of title (Ancillary rights, adverse rights, and covenants)
2. The results of searches and enquires
3. The Contract (Key terms, their effect and implications to both buyer and seller)
4. The Mortgage
5. The need for the buyer to inspect the property and to be satisfied with the property and its state and condition.
49
What is the result of a solcitor failing to report to their client before exchange of contracts?
Failing to do so, or not in detail relevant to the buyer (ie just stating there are mine entries without explaining the implications) is negligence.
50
What 5 things should the buyers solicitor explain to the buyer before the exchange of contracts regarding their mortgage?
1. Outline key terms to the buyer, including the interest rate and any conditions attached to the mortgage such as early repayment charges
2. The client should understand the consequences of default
3. Their obligations to keep the property insured and in good condition.
4. Their obligation to comply with planning requirements and statutory provisions.
5. They must understand that they usually require their mortgagees consent to carry out structural alteration and additions or to let out the property or to share occupation.
51
What 2 things will most lenders require when lending for the purchase of a property
Most lenders will require that:
1. The mortgage is registered against the property as security for the advance
2. Title to the property is good and marketable, with all necessary ancillary rights, and free from any materially adverse rights, covenants, restrictions, or liabilities that could have an impact on the property, its use, enjoyment, and value as security for lending purposes.
52
What is the UK Finance Mortgage Lenders Handbook?
What is each of the 3 parts relating too?
It provides key requirements of conveyancers in secured lending for both commercial and residential transactions.
Part 1 - General Requirements
Part 2 - Specific Requirements of Specific Lenders
Part 3 - Requirements when acting for a lender only (not also a buyer)
53
How is a mortgage made?
When is the document dated?
Must be made by deed, and the lender will usually provide a partially pre-printed deed for completion and execution by the buyer/borrower.
The document is dated on completion
54
What is a Certificate of Title?
A certificate of title (sometimes referred to as a report on title) is a formal document addressed to the lenders from the lenders/buyers solicitor confirming that:
1. It is safe to lend
2. The Charge will be registered (usually as a first legal charge)
3. The buyer's title to the property will be good and marketable, with all necessary ancillary rights, and free from any materially adverse rights, covenants, restrictions, or liabilities that could have an impact on the value of the property, its use, enjoyment, and its value as security for lending purposes.
55
When must the lenders/buyers solicitor issue a certificate of title to the lender?
If there are no issues, the report may be made at the pre completion stage.
If there are issues needing reporting to the lender which may influence the decision to provide the advance, it should be reported before exchange of contract.
56
What are the sellers solicitors 4 pre exchange steps?
1. Prepare 2 identical clean copies of the contract and send one to the buyer
2. Arrange for the contract to be signed by or on behalf of the seller and by any non-owning adult occupier
3. Agree a completion date in principle with the client and other solicitor
4. Request a Redemption statement from the mortgagee made up to the proposed completion date, with a daily rate of interest thereafter.
57
What is a redemption statement?
When should it be sought by the sellers solicitor?
A statement setting out the amount required to redeem the mortgage (ie amount required from the seller on sale for the remaining mortgage)
The statement should be sought before exchange of contracts to ensure there will be sufficent funds avaliable on completion to fulfil the undertaking to discharge the charge(s)
58
What are the buyers solicitors 8 pre exchange steps?
1. Check there are no outstanding points regarding investigation of title, survey, and searches and enquires.
2. Check there are no outstanding points / conditions regarding the mortgage
3. Arrange for the contract to be signed by or on behalf of the buyer
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
59
What must you have before exchange of contracts?
What must the client be aware of?
1. The clients written authority
2. Must be aware they will be bound by the terms and completion date
60
Can the exchange of contracts be signed by someone other than the client?
Yes it may be signed on their behalf, but clear written authority to do so must be obtained.
61
Can 2 copies of the exchange contract be signed, one for the buyer and one for the seller?
Yes, as long as they are identical
62
What are the 3 methods of exchange of contracts can take place via?
1. In person
2. Post/document exchange
3. Telephone via law society formal A,B, or C
63
Why can the Law Society Formulas for exchanging contracts via telephone only be made by qualified professionals?
Because each formular requires an undertaking from the solicitor
64
What are the 3 Law Society Formulars for exchange of contracts via telephone?
1. A - Where one Solicitor holds both signed parts of the contract
2. B - Where each Solicitor Holds their clients signed part
3. C - For Chain transactions
65
When is formula A of the Law Societys Formulas for exchange of contract via telephones used?
What are the 4 undertakings?
Used when one Solicitor holds both parts of the singed contract (usually the sellers solicitor)
§ The deposit is release on condition the seller solicitors undertakes that:
1. They hold both parts of the signed contract (and the client account cheque in respect of the deposit)
2. They will insert the completion date
3. They will hold their clients part contract to the order of the buyers solicitor
4. They will send their clients part contract out to the buyers Solicitor that day by first class post, document exchange, or personal delivery.
66
When is formular B of the Law Societys Formulars for exchange of contract via telephone used?
What are the 3 undertakings
Used when each solicitor holds their clients own signed part of the contract.
Each Solicitor undertakes:
1. They hold their clients signed contract (And for the buyers solicitor the client account cheque in respect of the deposit)
2. They will insert the completion date
3. They will hold their clients signed part to the other order and will send it out to them that day by first class post, document exchange or personal delivery (together with the deposit cheque held by the buyers solicitor)
67
When is Formula C used in for the exchange of contracts via telephone?
What are the 2 parts?
Used in Chain transactions where the deposit is sent further up the chain and all transactions need to be synchronised.
Part one (Agreement to release) - The Solicitor at one end of the chain telephones the next one in line and each confirms that they hold part contract signed by their client. The Solicitor at the end of the chain undertakes to exchange if they are called back by the other within a specified time on the same day (they are said to unconditionally and irrevocably 'release' their part contract for a specified time). This is repeated along the chain until a formul B exchange takes place at the other end.
Part two (Exchange) - There are then exchanges back along the chain.
If Formular C is adopted, a note must be made of each conversation (the agreement to release) and the actual exchange.
68
What 5 things should be noted following the exchange of contracts using the Law Society formulas?
1. Names of the Solicitors effecting the exchange
2. Dates and Time of Exchange
3. Formula used and any agreed variations to it
4. Deposit
5. Completion date
If Formular C is adopted, a note must be made of each conversation (the agreement to release) and the actual exchange.
69
What 3 things should happen after an exchange of contracts?
1. Prepare file notes/ correspondence
2. Diarise the completion date
3. Inform the clients and the estate agents
70
What are the 3 consequences of exchanging contract?
1. Bound to complete
The parties become committed under a binding contract to complete on the agreed date
2. Legal and equitable ownership
The seller retains legal ownership, but the buyer gains an equitable interest under an estate contract. The seller holds the property on constructive trust for the buyer and must take reasonable care of the property so that it can be transferred in the same condition.
3. Risk and Insurance responsibility
Risk and responsibility to insure the property pass to the buyer under the standard conditions
71
How does the buyer occupy the property if he occupies it before completion?
If the buyer occupies the property before completion, they do so as a licence. The mortgagees consent would be required.
72
How should the buyers equitable interest be protected after the exchange of contracts?
Strictly speaking, the buyers interest under the exchange of contracts should be registered as a Class C (IV) Land charge, however this is only really done when there are more than 6 weeks before exchange and completion
