Unit 1 Due diligence

Question 1

Freehold Property Transaction - exchange of contracts and completion

Answer 1

Completion = money paid, deed completed

Exchange = not compulsory, fixes completion date

Can take place simultaneously.

Parties not bound until contracts exchanged. Shouldn’t exchange until searches etc done as ‘caveat emptor/buyer beware’ - seller not obligated to disclose info about property, onus on buyer to discover. Caveat emptor does not entitle the seller to give misleading answers to the buyer’s enquiries.

Question 2

Freehold Property Transaction - The pre- contract stage

Answer 2

Seller’s solicitor submits a pre- contract package of documents to the buyer’s solicitor which includes a draft contract and evidence of the seller’s title.

Buyer’s solicitor must check the documents of title, raise requisitions.
Any incorrect replies on the part of the seller could lead to the buyer having an action for misrepresentation.

On exchange of contracts the buyer will usually pay a deposit, typically 10% of the purchase price. Usually held by the seller’s solicitor until completion.

Question 3

Freehold Property Transaction - The pre- completion stage

Answer 3

= the time in between exchange and completion.

Transfer deed is drafted by buyers conveyancer and executed.

Buyer does pre-completion searches to check that the information obtained at the pre- contract stage remains valid and to ensure that there will be no problems registering the title.

On completion the buyer will pay the balance of the purchase money and the seller will hand over the keys to the property.

Question 4

Freehold Property Transaction - The post- completion stage

Answer 4

Seller’s solicitor must ensure that any mortgage the seller had on the property is paid off and removed from the title. They will usually have given an undertaking to do this.

Buyer’s solicitor must ensure that SDLT/LTT is paid on the transfer. Register their client as the new owner of the property and register any new mortgage over the land.

Question 5

Freehold Property Transaction - The Law Society Conveyancing Protocol

Answer 5

Applies to residential conveyancing only.

Set of instructions to conveyancers as to how to carry out a residential sale and purchase and is accompanied by a series of standard documents.

All firms that want to be members of The Law Society’s Conveyancing Quality Scheme (‘CQS’) are required to comply with the Protocol, a Client Service Charter and mandatory training and enforcement procedures. Membership of the CQS is required to be on panels of solicitors approved by the residential mortgage lenders.

Question 6

Professional conduct issues in a property transaction - who can you act for

Answer 6

• Acting for seller and buyer
  Para 6.2 - a solicitor cannot act for both parties if there is a conflict of interest or a significant risk of such a conflict.
  High risk if land is being transferred for value or where do not have equal bargaining power or where there has to be a negotiation on price.
  Exceptions:
  Paragraph 6.2(a) - where the parties have a ‘substantially common interest’ DOES NOT APPLY TO PROPERTY PURCHASES.
  Paragraph 6.2(b) - competing for the same objective.
  So may be possible to act for two competing buyers.
• Acting for joint buyers
  May need to advise separately.
• Acting for borrower and lender
  Para 6.2
  Risk of a conflict is high if:
• the mortgage is not a standard mortgage
• the mortgage is a standard mortgage but you do not use the approved certificate of title
  Exception in para 6.2(a) substantially common interest.
  Bear in mind para 6.3 duty of confidentiality.

*Acting for joint borrowers
e.g. home is owned by a married couple jointly and one of them agrees to mortgage it as security for a business loan.
Lender should with borrowers consent provide solicitor with all details like amount of the indebtedness, terms etc.
Solicitor should explain to spouse and obtain confirmation.

Question 7

Professional conduct issues in a property transaction - contract races

Answer 7

= a pre-contract package is sent to multiple buyers who then compete to be ready to exchange contracts first. Legitimate if all buyers know they are engaged in a race.

Para 1.4 - where a solicitor acts for a seller of land, they must not mislead or attempt to mislead the buyers, either by their own acts or omissions, or by being complicit in the acts or omissions of others.
Para 6.3 duty of confidentiality.
If the seller refuses to agree to such disclosure, should immediately stop acting in the matter.

Question 8

Professional conduct issues in a property transaction - undertakings

Answer 8

An undertaking is a statement made by or on behalf of a solicitor, or the firm, to someone who reasonably places reliance on it, that the solicitor or firm will do something, cause something to be done, or will not do something.

Para 1.3 - undertakings must be performed within an agreed timescale or within a reasonable amount of time.

Failure to honour an undertaking is professional misconduct. Personally liable.

Undertakings are binding even if they are given in relation to something outside the solicitor’s control.

Question 9

Sources of finance for a property transaction - solicitor obligations and restrictions

Answer 9

Solicitor is obliged to provide the client with the best possible information about the likely overall cost of their matter, at the beginning and at appropriate points throughout the transaction.

Have to send a letter of engagement to their client setting out the costings at the beginning of the transaction.

Restrictions on sols when they provide financial advice:
(a) Subject to (d) below, cannot carry out regulated activity in relation to a regulated mortgage contract, unless authorised to do so.

(b) A regulated mortgage contract= where the borrower is an individual, the lender takes a first legal charge over property in the UK and at least 40% of the property is intended for occupation by the borrower or a member of their immediate family.

(c) Regulated activities include arranging or advising on a regulated mortgage contract (ie a specific mortgage product), but not giving generic advice such as the differences between types of mortgage, or arranging the execution of a mortgage chosen independently by the client or on the advice of an authorised person.

(d) If a regulated activity is involved and the firm is not authorised by the Financial Conduct Authority (FCA) to carry out regulated activities (which most firms will not be), the solicitor can still arrange or advise on a regulated mortgage contract by relying on the s 327 exemption for professional firms - exemption allows solicitors to carry out regulated activities if they are incidental to the provision by the firm of professional services, ie services regulated by the SRA.

(e) Arranging or advising on a regulated mortgage contract under the exemption for professional firms is subject to the solicitor complying with the SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules. These rules do not allow a solicitor to recommend that a client enters into a regulated mortgage contract, except where the advice is an endorsement of a recommendation made to the client by an authorised person.

Question 10

Types of mortgage

Answer 10

• Repayment mortgage
  Borrower will make monthly payments to the lender made up partly of instalments of the original amount borrowed and partly of interest chargeable.
• Interest only mortgage
  Borrower will also make monthly payments to the lender, but those payments will only comprise interest chargeable on the loan. But at the end of the mortgage term the borrower will still owe the lender the whole of the original amount borrowed.
• Other types of mortgage
  Sharia compliant to avoid payment of interest e.g. bank buy property and resells to buyer at higher price, or leases it back to them.

Question 11

Property taxation

Answer 11

• SDLT
  First-time buyers of residential property can claim relief from SDLT if they intend to occupy the property as their main residence and the purchase price is no more than £625,000. They do not pay anything on purchases up to £425,000 and pay 5% on the portion from £425,001 to £625,000.
  Paid to HMRC within 14 days of completion.
• LTT
  No relief for first- time residential buyers.

Rates for both above higher for non-residential/mixed use.

• CGT
  Private residence relief if used as their main residence.

Question 12

Investigation of title - freehold registered land

Answer 12

Obtain official copies of register and title plan.

Deduction of title = seller’s obligation to prove to the buyer their ownership of the property they are trying to sell.
Normally done before exchange.

Official copies:
(a) the Property register
(b) the Proprietorship register
(i) Absolute title: the most common and best class, the registered proprietor has vested in them the legal estate subject only to the entries on the register, overriding interests and where the proprietor is a trustee, minor interests of which they have notice, such as the interests of the beneficiaries under the trust.
(ii) Possessory title: granted where the proprietor is in possession of the property but has lost the title deeds or is claiming through adverse possession, this means that the proprietor is also subject to all adverse interests existing at the date of first registration.
(iii) Qualified title: granted where there is a specific identified defect which the Registrar feels cannot be overlooked or ‘cured’ by the grant of absolute title.

(c) the Charges register.
Look for
(i) covenants
(ii) easements
(iii) charges
(iv) leases
(v) notices

Question 13

Investigation of title - freehold unregistered land

Answer 13

Check if registered or pending app.
SIMR for cautions.

Title proved by title deeds. Seller provides copies before exchange.
Then if sale of whole get original if sale of part get certified copies (sol checks them against originals at completion = verification of title).

Find good root of title:
* deal with or show who owns the entire interest (legal and equitable) that is being sold by the current owner
* contain a recognisable description of the relevant land
* do nothing to cast doubt on the seller’s title
* be at least 15 years old.

Sellers prepare epitome of title.

Check each deed for:
* the chain of ownership
* description of the land
* stamp duties
* incumbrances
* execution
(a) be in writing
(b) make it clear on the face of it that it is a deed
(c) be signed by the person granting the interest in the presence of a witness who ‘attests’ the signature (ie provides evidence of it)
(d) be delivered as a deed.
Before 31 July 1990, a deed had to be signed and sealed by its maker and delivered as a deed.
* land charges searches
form K15
Some incumbrances only bind if registered

Question 14

Issues that might be revealed - easements

Answer 14

E.g. rights of way, rights of drainage and rights of support.

Should appear in charges register but may be in property register if extracted text from a conveyance or if financial obligations attached to easements.

Unregistered - easements usually granted or reserved in first para of conveyance.

The buyer of the property with the benefit of this right of way should be advised that if they want to use the right of way, they will need to contribute to the costs of maintenance (by virtue of the rule in Halsall v Brizell).

Question 15

Issues that might be revealed - Mines and minerals exceptions and reservations

Answer 15

Right to extract substances with someone else.

On property register.
Unregistered - in conveyance.

May indicate there has been mining before so check for subsidence.

Coal mining search.

Do SIMR to see if mines and minerals are registered under a separate title.

Question 16

Issues that might be revealed - Declaration as to rights of light and air

Answer 16

Sometimes a landowner will sell off a part of their land (‘Part A’) and retain the other part (‘Part B’) for their own purposes.

In order to preserve the right to develop Part B in the future, they may have declared in the transfer of Part A that Part A does not enjoy the benefit of any rights of light and air over Part B. So there will be nothing to stop the owner of Part B building on that land and, for example, blocking off light to the windows in the building on Part A.

Question 17

Issues that might be revealed - Co- ownership

Answer 17

If tenants in common will be restriction on title.

In unregistered land, the conveyance to joint buyers will state whether the equitable interest is to be held as joint tenants or tenants in common.
Can assume JT not severed if:
1. There is no memorandum (written record) of severance endorsed on the conveyance of the property to the joint tenants
2. There are no bankruptcy proceedings registered against either of the joint tenants at the Land Charges Registry
3. The transfer by the surviving joint owner to the buyer contains a statement that the survivor is solely and beneficially entitled to the land.

Where there is only one surviving legal owner and the equitable interest was held by the co-owners as tenants in common, another legal owner (often referred to as a ‘second trustee’) needs to be appointed to overreach the equitable interest of the deceased co- owner. The appointment of the second trustee can be made in the transfer of the property or by separate deed of appointment.

Question 18

Issues that might be revealed - Restrictive covenants

Answer 18

Prevent land being used in particular ways and are usually binding on successors in title to the original parties.

Appear in charges register.

Unregistered - conveyance.
If post 1925 has to be registered as a D(ii) land charge to be binding.

Options for dealing:
(a) ask the seller if they know who currently owns the property with the benefit of the covenant and, come to some arrangement
(b) obtain a restrictive covenant insurance policy for the proposed breach of covenant
(c) apply to the Upper Tribunal (Lands Chamber) for modification or discharge of the covenant under s 84 Law of Property Act 1925, on the grounds that the covenant is obsolete or confers no practical benefit of substantial value or advantage (or is contrary to the public interest) and the loss of the covenant can be compensated in money.

Question 19

Issues that might be revealed - Positive covenants

Answer 19

= obliges the covenantor to carry out works or incur expenditure.

In charges register.
Unregistered - conveyance.

Burden does not run to a successor in title to the original covenantor.
But may be chain of indemnity - will be an entry on proprietorship register or in conveyance.

Question 20

Issues that might be revealed - Unknown covenants

Answer 20

Earlier deed lost.

Will be entry on charges register.

Safest option is to assume they are restrictive and binding on buyer - get indemnity insurance.

Question 21

Issues that might be revealed - Leases

Answer 21

Registered:
- If more than 7 years will be notices on charges register.
- If not registered it will not bind but be an overriding interest if tenant in occupation.
- If legal lease under 7 years and in occupation overriding interest.

Unregistered:
- a legal lease (other than a parol lease for three years or less) will have been created by deed and should be one of the title deeds scheduled in the epitome of title.
- parol lease does not require any formalities and will be binding on buyer whether they know about it or not.

Question 22

Issues that might be revealed - Notices (registered land only)

Answer 22

= an entry in the Charges register in respect of the burden of an interest affecting a registered estate or charge.

Agreed notices = put on with permission of owners.

Unilateral notices = where owner refused consent.

Entry of notice does not guarantee interest is valid or exists.
Merely serves to ensure that the priority of the interest referred to in the notice is protected against any subsequent interests.

Question 23

Issues that might be revealed - Home rights

Answer 23

= statutory right for a non- owning spouse or civil partner to occupy the matrimonial home.
Does not create an interest in land.

In registered land, a home right will bind a buyer if it is protected by a notice in the Charges register by the date when the transfer of the property to the buyer is registered.

In unregistered land a home right must be protected as a Class F land charge in order to be binding on a buyer.
Seller should be required to obtain from the non-owning occupier a release of all rights in the property and agreement to vacate on or prior to completion. This is usually dealt with in the contract.