Unit 3

Question 1

What happens to the legal interest at completion?

Answer 1

The legal interest in the property passes from the seller to the buyer at completion.

Question 2

What is the purpose of a contract in a property transaction?

Answer 2

A contract is merely an agreement to transfer the land at a later stage. Parties fix the terms of the transaction by exchanging contracts.

Note - a contract is not needed for very property transaction. The contract does not transfer the land because a deed is needed to do that.

Question 3

What are the benefits of exchanging contracts?

Answer 3

Gives parties certainty regarding the terms of the transaction, the extent of the property, financial terms, timetable for completion and prevents the parties from withdrawing from the transaction without being liable to the other for breach of contract.

Question 4

Standard Conditions of Sale

Answer 4

Used for all residential transactions and some simple commercial transactions (e.g. those involved properties which are empty, with a straightforward title and a relatively low price).

Divided into 3 parts:
* Front page - headings relating to the description of the property and the terms of the sale (‘the particular’s of sale’)
* Middle page - contains standard conditions, designed to apply to all transactions. These are the terms which govern the transaction unless the parties specifically agree something different.
* Back page - special conditions, which are specifically drafted to meet the particular requirements of a transaction.

Question 5

Standard Commercial Property Conditions

Answer 5

More suitable to use with high value commercial properties and contain more detailed provisions for the management of occupational leases with which the property is being sold.

Divided into 3 parts:
* Front page - headings relating to the description of the property and the terms of the sale (‘the particular’s of sale’). The Contract Rate may be inserted on the front page. If it is wished to rely on Condition 1.1.1(e) this can be left blank. If left blank, compensation will be payable to the seller at the contract rate specified in Condition 1.1.1(e) in the event that the buyer defaults in performing its obligations under the contract and completion is delayed. This is confirmed at paragraphs 10.3.1 and 10.3.2 SCPC. The contract rate specified in Condition 1.1.1(e) is ‘The Law Society’s interest rate from time to time in force’.
* Middle page - contains standard conditions, designed to apply to all transactions. These are the terms which govern the transaction unless the parties specifically agree something different. The SCPC has two parts: (i) Part 1 (longer): which will apply unless excluded and (ii) Part 2 (shorter): which only applies if specifically included.
* Back page - special conditions, which are specifically drafted to meet the particular requirements of a transaction.

Question 6

Who usually drafts the contract?

Answer 6

The seller’s solicitor typically drafts the contract and sends it to the buyer’s solicitor in the pre-contract package.

Question 7

What is the ‘open contract rule’?

Answer 7

Open contract rules derive from statute and common law to assit where the contract is silent.

The rules are not always satisfactory so it is best to have express conditions in the contract. Hence why the profession has devised ‘standard conditions’ which are designed to work for almost all transactions.

Question 8

How do firm-specific contracts differ from SC and SCPC?

Answer 8

Each firm’s version will be slightly different but each will contain similar details about the property, the financial terms and appropriate special conditions though perhaps in a different order to the pre-printed versions.

There will always be a clause incorporating one of the two sets of standard conditions.

Question 9

Key conditions SC

Answer 9

Specified incumbrances:
* If these third party rights are not specified, the seller could be in breach of SC 3.1.1, which says that the seller sells free of all incumbrances other than those specified in the contract or of a type listed in SC 3.1.2.
* SC 3.1.2 - lists the following incumbrances subject to which the property is sold: (i) those specified in the contract; (ii) those discoverable by inspection before the date of the contract; (iii) those the seller does not and could not reasonable know about; (iv) public requirements; (v) those, other than mortgages, which the buyer knows about; (vi) entries made before the date of the contract in any public register, except for those maintained by the Land Registry, the Land Charges Department and Companies House.

Seller’s solicitor must list as Specified incumbrances in the contract everything not covered by SC 3.1.2. Seller’s solicitors tend to list all incubrances revealed by their title investigation.

Question 10

Key conditions SCPC

Answer 10

Specified incumbrances:
* If these third party rights are not specified, the seller could be in breach of SCPC 4.1.1, which says that the seller sells free of all incumbrances other than those specified in the contract or of a type listed in SCPC 4.1.2.
* SCPC 4.1.2 - lists the following incumbrances subject to which the property is sold: (i) those specified in the contract; (ii) those discoverable by inspection before the date of the contract; (iii) those the seller does not and could not reasonable know about; (iv) public requirements.
* SCPC 4.1.2 also states that matters, other than mortgages, disclosed or which would have been disclosed by the searches and enquiries which a prudent buyer would have made before entering into the contract.

Seller’s solicitor must list as Specified incumbrances in the contract everything not covered by SCPC 4.1.2. Seller’s solicitors tend to list all incubrances revealed by their title investigation.

Question 11

As the seller’s solicitor what information do you obtain when taking instructions?

Answer 11

Seller’s solicitor will have obtained information about the buyer, the price, the deposit and the fixtures and fittings when they took instructions.

The solicitor should also have information about the seller, which they need to cross-check with the information in the proprietorship register in the official copies for a registered property, or the title of deed for an unregistered property.

Question 12

How will the property be referenced in the contract?

Answer 12

Registered property will be referred to by its title number and the class of title (found in the properietorship register of the official copies).

Unregistered property is defined in the contract by reference to the root of title.

Question 13

What is a specified incumbrance?

Answer 13

Specified burdens on the property in the contract.

Incumbrances are third party rights.

Question 14

What can be the consequence of non-disclosure of an incumbrance?

Answer 14

Non-disclosure of an incumbrance burdening the property might result in the buyer having a right to resciend the contract and/or claim damages.

Question 15

Do positive covenants need to be mentioned in the specified incumbrances section?

Answer 15

No, they do not need to be listed because the burden of a positive covenant doesn’t run to the successor in title as a mater of land law. However, many solicitors will include them, particularly if positive covenants are mixed with the restrictive covenants in an entry in the Charges register.

Question 16

Should mortgages be listed as a specified incumbrance?

Answer 16

The buyer’s solicitor must make sure that the seller’s mortgage is not included in the list of incumbrances to which the sale is subject. This is because the mortgage should be discharged shortly after completion.

Question 17

What are the 3 types of title guarantee?

Answer 17

Full title guarantee: a seller should sell with full title guarantee if they own the entire legal and equitable title to the property. A full title guarantee implied more comprehensive implied covenants for title that would be the case with limited title guarantee.
* The seller will also impliedly covenant that the land is disposed free from incumbrances other than those the seller does not know about and could not reasonably have known about.
* However, s 6 LPMPA limits the above covenant to exclude matters to which the disposition is expressly made subject, matters about which the buyer knows at the time of the disposition and matters which at the time of the disposal were entered on the register of title. This is a wider covenant than the one implied by giving limited title guarantee, namely that the seller has not incumbered the property and is not aware that anyone else has done so since the last disposition for value (a seller who purchased the land for value will only be covenanting that incumbrances have not been created since they acquired the property).

Limited title guarantee: is given where the seller has limited knowledge of the property (e.g. when the seller is an executor or trustee)

No title guarantee: will be given when the seller is a person appointed following the insolvency of the owner.

With full and limited title guarantee, the seller will be impliedly covenanting in the transfer of the property that:
1. They have the right to dispose of the land
2. They will do all they reasonably can to transfer the title
3. In the case of leasehold land, the lease is subsisting at the time of disposal and there is no breach of ovenant making the leasie liable to forfeiture.

Question 18

What is the Contract Rate?

Answer 18

The contract rate is the rate of interest that will be charged if a party is late in completing.

The interest is charged on the purchase price (less the deposit if it is the buyer in default as the buyer has already handed this over on exchange).

The rate must be high enough to incentivise a potential defaulting party to complete on time.

Most conveyancers opt for the Law Society’s interest rate which is published weekly in the Gazette and is currently 4% above the base lending rate of Barclays Bank plc.

Question 19

What is a deposit?

Answer 19

A pre-payment of part of the purchase price made by the buyer to the seller.

Evidences the buyer’s committment to the transaction.

If the buyer fails to complete, under SC 7.4 and SCPC 10.5 the seller may forfeit and keep the deposit.

SC 2.2 and SCPC 3.2 provide that a deposit of 10% of the purchase price is payable on exchange of contracts and is paid to the seller’s solicitor as ‘stakeholder’, which means that the seller’s solicitor cannot hand it over to the seller until completion.

Question 20

Can the seller’s solicitor hand over the deposit to the seller straight away?

Answer 20

SC 2.2 and SCPC 3.2 provide that a deposit of 10% of the purchase price is payable on exchange of contracts and is paid to the seller’s solicitor as ‘stakeholder’, which means that the seller’s solicitor cannot hand it over to the seller until completion.

Question 21

What does SC 2.2.5 allow the seller to do?

Answer 21

SC 2.2.5 allows the seller to use the deposit as a deposit on a related purcahse of a house for the seller.

Question 22

Can parties to a transaction agree to lower the deposit below 10%?

Answer 22

Yes, sometimes the seller will agree to accept a reduced deposit, perhaps 5% - that should be clearly stated in the contract.

This is a risk for seller as there will be less of a fund to forfeit if the buyer fails to complete.

The parties should consider incorporating a special condition requiring the buyer to top up the deposit to the full amount if completion is delayed.

Question 23

Can the solicitor act as an ‘agent’ rather than a ‘stakeholder’ regarding the deposit transfer?

Answer 23

Sometimes the buyer will agree that the deposit can be held by the seller’s solicitor as ‘agent’, meaning that the deposit can be released to the seller immediately after exchange and can be used by the seller for any purpose whatsoever.

This is a risk for the buyer because if the parties do not complete, the seller may not be in a position to return the deposit.

Question 24

When is the deposit paid?

Answer 24

On exchange of contracts.

The SC provide that the deposit can be paid by electronic means or by cheque drawn on the conveyancer’s client account.

The SCPC provide for payment by electronic means ONLY.

In both cases the funds must come from an account in the name of a conveyancer at a clearing bank.

An electronic payment must be paid into the account in the name of the seller’s conveyancer at a clearing bank, or if SC 2.2.5 applies, to an account at a clearning bank of a conveyancer nominated by the seller’s conveyancer.

Question 25

What is the purpose of special conditions?

Answer 25

Special conditions relate to the individual characteristics of the property and the particular circumstances of the transaction.

They appear on the back page of a pre-printed contract.

Question 26

Pre-existing special conditions

Answer 26

Condition 2: includes wording for including VAT for new commercial buildings.

Condition 3: whether the sale includes any contents or excludes any fixtures

Condition 4: whether the property is to be sold with vacant possession or subjec to leases or tenancies.

Condition 5: will only be relevant where the time for completion has been altereed by agreement and should be deleted if the parties have agreed that completion should take place by 2pm on the agreed day.

Condition 6: standard clause that should be left in as it makes it clear to the parties that they should not rely on any representations have not been made in writing.

Condition 7: will need to be completed where there is a non-owning adult occupier of the property; the occupier is agreeing to the sale and to give vacant possession on completion, and releasing any rights they may have in the property to allow the sale to take place.

Question 27

Can new special conditions be added?

Answer 27

Yes. Every property transaction is unique and it is impossible to describe everything that might require a special condition.

Examples of when parties may require special conditions dealing with:
* appointment of a second trustee for the purpose of the transfer (overreaching)
* arranging for the seller to obtain or pay for a restrictive covenant insurance policy
* disclosing a defent in title
* the seller selling with limited or no title guarantee
* a deposit of less than 10% and/or for the deposit to be held as agent rather than stakeholder
* the payment of VAT
* the removal of fixtures by the seller
* the includes of an indemnity covenant in the transfer to protect the seller from liability once they have lost physical possession of the property

Question 28

What is the purpose of an indeminity covenant?

Answer 28

An indemnity covenant is necessary when the title is burdened with covenants and the seller is either the original covenantor or has given an indemnity covenant to their seller when they acquire the property. This means they will have ongoing liability even agter they part with the property and are no longer in a position to ensure compliance with the covenants.

Note - restrictive covenants run with the land to the next owner.

Question 29

Indemnity covenants and SC and SCPC

Answer 29

SC 4.6.4 and SCPC 7.6.5 state that where the seller has an ongoing liability (posiive covenant) in relation to the property, the buyer must give the seller a personal indemnity covenant in the transfer. If the buyer breaches the covenant, the seller will be indemnified from being sued.

Question 30

When should a solicitor draft a special condition?

Answer 30

When the parties have agreed to something more unusual, their solictors must consider what the contract already says about such mattes in either that standard or pre-printed special conditions and whether that is good enough or a new special condition should be drafted.

Question 31

To whom does the risk of damage to the property pass on exhange of contracts?

Answer 31

Under SC 5.1.1 and SCPC 8.1, the risk of damage to the property passes to the buyer on exchange of contracts.

The buyer will need to complete the purchase even if the property is damaged or destroyed between exchange and completion.

Buyers should take out insurance to be put into place at the moment of exchange.

Question 32

Buyer’s insurance

Answer 32

A buyer should take out insurance because the risk of damage to the property passes to the buyer on exchange.

The buyer and any lender will need to be satisfied that the insurance is adequate in terms of the value of the property, the estimated cost of reinstatement and the type of risks covered.

Where the buyer is financing the purchase using a mortgage, the lender may insure the property on being requested to do so by the buyer’s solicitor, but if not, the buyer will have to take out a new insurance policy.

Alternatively, buyers with several properties may already have a ‘block policy’ to which the new property can be added.

Question 33

Is the seller under any obligation to insure a freehold property?

Answer 33

SC 5 and SCPC 8 state that the seller is under no obligation to insure a freehold property unless required to do so by a special condition in the contract.

If it is agreed that the risk should remain with the seller, then SC 5.1.3 and SCPC 8.1.2 require the seller to maintain the policy until completion and if the property suffers damage prior to completion, to hand the insurance proceeds over to the buyer and assign to the buyer all the seller’s rights under the policy.

Question 34

Is the seller likely to cancel their insurnace after exchange has taken place?

Answer 34

Even when the risk passes to the buyer on exchange, the seller will probably not cancel their policy in case the buyer fails to complete or because it is a term of theirt mortgage that the policy is maintained.

Question 35

What happens when there are two policies in place on the same property?

Answer 35

There is a danger that when a claim is made, the buyer’s insurer will reduce the proceeds because another policy exists.

SC 5.1.5 and SCPC 8.2.4(b) therefore provide that if this happens and the buyer is unable to recover the full amount of the proceeds, the purcahse price is reduced accordingly.

Question 36

VAT under SCPC 2

Answer 36

The purchase price is exclusive of VAT and VAT will be added on top (SCPC 2)

• Appropriate for the standard rate supply of a commercial building within 3 years of construction where seller has no choice but to charge VAT.
• Appropriate for the sale of an old commercial property where the seller needs to opt to tax to recover VAT paid on refurbishments and/or professional costs and the buyer is not VAT-sensitive.

If the seller of a commercial property which is less than 3 years old wants to opt to tax - the effect of the SCPC being incorporated into the contract is that, by virtue of SCPC 2, the seller warrants that the sale is a chargeable supply and the buyer is to pay an additional amount equal to the VAT on completion. In this way, nothing further needs to be done to the draft contract to deal with VAT.

Question 37

VAT under SC 1.4 or a special conditions in an SCPC contract

Answer 37

The purchase price is inclusive of VAT so that VAT, if any, cannot be added on top (SC 1.4 or a speical condition in an SCPC contract)

• Appropriate for old commercial properties with buyer not opting to tax.
• Popular for VAT-sensitive buyers (banks, insurance, building societies)

Note - there is a risk if the law changes and the exempt land becomes standard rated, the seller will be liable to pay VAT out of the purchase price.

Question 38

VAT under SCPC Part 2, Condition A1

Answer 38

The purchase price is exclusive of VAT, so VAT can be added on top if the law changes between exchange of contract and completion to make an exempt supply chargeable at the standard rate, but the seller is contractually obliged to not opt to tax (SCPC Part 2, Condition A1).

• Appropriate for old commercial buildings with no need to opt to tax but seller doesn’t want to take the risk, and the buyer is VAT-sensitive or would rather not pay VAT as there will be a cash-flow delay in recovering VAT on the purchase price.

Question 39

Things to know with regards to lenders

Answer 39

• Given their financial input for the transaction, mortgage lenders seek to limit their exposure to the risks by setting out their own specific instructions and requirements for a conveyancer.
• When choosing a lender, the buyer will need to consider the amount they can borrow, the interest rates available and the particular products on offer. Consider whether the chosen lender has specific requirements as to the nature of the property or the amount of control a lender has over decisions that need to be made in the conveyancing process.
• Lenders will perform a basic valuation on a property to ensure it is suitable for securing the mortgage.
• A mortgage is likely to be a single mortgage deed in the lender’s standard form, perhaps incorporating the lender’s standard T&Cs (a published booklet) and if the lender is a Building Society, the Building Society Rules.

Question 40

Process of issuing a mortgage

Answer 40

1. Lender will perform a basic valuation of the property to ensure it is suitable to secure a mortgage
2. Will check the buyer is creditworthy
3. Lender will issue a document to the buyer setting out the terms on which the lender is prepared to make the loan - mortgage offer (residential/simple commercial loans) / commitment letter with a term sheet attached followed by a facility agreement containing the detailed terms of the lending arrangement (complex loans)
4. The docs mentioned above will give details of the loan amount, the interest rate, the term the initial repayments and any other conditions (e.g. buyer must carry out certain repair works and the mortgage can be retained until the words are done)
5. Lender’s requirements must be met before the conveyancer will be in a position to request the release (draw down) of the mortgage funds.

Note - mortgage offer may allow the lender to withdraw the offer, even after the buyer has exchanged contracts.

If you are acting for the buyer ensure that they have received, understood and accepted the mortgage offer prior to the exchange of contracts.

Question 41

Do lenders have the power of sale?

Answer 41

Mortgages made by deed have implied into it a power of sale under s 101 LPA 1925, although a mortgage deed will usually have an express power.

Question 42

Why do lenders want a first legal mortgage over a property?

Answer 42

A lender will want a first legal mortgage so in the event that the borrower cannot repay the loan, it is paid first out of any proceeds of sale.

Advice the buyer on the consequences of defaulting on the mortgage payments and the powers of the lender in the event of default.

Question 43

Acting for the lender

Answer 43

Ethics: possible to act for both borrower/lender in a residential transaction, where a standard mortgage is used because there will be limited scope for negotiation. In a commercial transaction, there is likely to be more negotiation regarding the mortgage terms, so you should not act for both the borrower/lender in a commercial property transaction.

The buyer’s solicitor will be asked to prepare a certificate of title to disclose to the lender any problems with the property. Lender’s solicitor can then held the lender to decide what action it wants to take in relation to any problems disclosed.

The lender’s solicitor can obtain copies of title and searches from the borrower’s solicitor and report to the lender directly, with the borrower paying the costs.

Majority of UK mortgage lenders are members of UK Finance or the Building Societies Association.
* UK Finance provides instructions for lenders (UK Finance Mortgage Lenders’ Handbook for Conveyancers).
* The Handbook provides instrutions for the conveyancer on matters a specific lender will lend on, the types of searches required by the lender, and what circumstances indemnity insurance for defects in title can be accepted.
* Part 1 applies to all lenders using the Handbook
* Part 2 is where individual lenders set out specific requirements that are different to Part 1
* Part 3 sets out standard instructions to be used where a conveyancer is represented the lender but not the borrower.

The lender will require a certificate from the solicitor acting for them that the property has ‘GOOD AND MARKETABLE’ title.
* Residential transactions: lender will usually require a cirtificate of title in the form approved by the Law Society and UK Finance which aims to reduce the risk of conflict of interest when the solicitor acts for both the lender/borrower.

Question 44

What does the certificate of title confirm?

Answer 44

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

In commercial transactions, the lender will require a more detailed certificate of title, such as the one produced by the City of London Law Society.
* This certificate is a report about a property, a summary of the information which has been ascertained by a solicitor in the title investigation and the pre-contract searches and enquiries.
* It is prepared by the buyer’s solicitor based on the information from their pre-contract investigations.
* A certificate of title will often be addressed to the buyer and the lender, sometimes just the lender.
* Will sometimes be addressed to the buyer and the lender, sometimes just the lender. Avoiding duplication reduces volume of paperwork that need to be reviewed and saves costs.

The certificate is given immediately prior to completion of the loan. Drafts will be provided to the buyer’s/lender’s advisors as earlier stages, so they should have warning of any major issues.

Question 45

What are the steps relating to the preparation for and exchange of contracts?

Answer 45

1. Report to client: buyer’s solicitor should report to the buyer in writing, explaining the results of title investigation, searches and enquiries and the terms of the contract and the mortgage offer.
2. Report to lender: buyer’s solicitor should report to the lender, who will need to know the property is good security for the loan and has ‘good and marketable’ title
3. Ensure deposit funds are available: the deposit funds should be available to the buyer’s solicitor in cleared funds, ready to send to the seller’s solicitor at exchange.
4. Check the mortgage offer is in place and that the client has sufficient funds to complete: buyer need to have the mortgage offer in place (and accepted it) and to have complied with any conditions attached to the mortgage offer (or be in a position to do so). The buyer’s solicitor should also check that the buyer has the funds to proceed with the purchase at completion.
5. Ensure arrangements are in place for insurance immediately following exchange: in most cases the contractual position is that risk passes to the buyer on exchange and therefore the buyer needs to have insurance in place from exchange. These arrangements need to have been made in advance of actual exchange so the insurance takes effect immediately.
6. Contract signed: usually needs to be signed in ‘wet ink’. In 2019, Law Commission report included that electronic signatures can be lawfully used to execute documents provided the person signing the document intends to authenticate it and any execution formalities are satisfied. A solicitor can sign the contract on behalf of their client if they have the client’s express authority to do so.
7. Completion date: both solicitors will need to discuss this with their client and the other side in advance of exchange of contracts.

Question 46

What should be included in a pre-contract report?

Answer 46

Summarise the results of the pre-contract searches and the investigation of title. The report will also explain the terms of the contract and the mortgage offer. The report will also include some disclaimers e.g. that the solicitor cannot advice on the value or structure of the property.

Question 47

What are the consequences of exchange?

Answer 47

Following exchange, a binding contract exists from which neighter party may withdraw without incurring liability for breach.

The seller retains the legal title in the proerty until completion but holds the beneficial interest on behalf of the buyer.

During this period the seller is entitled to remain in physical possession of the property, but it is possible for the parties to agree that the buyer can occupy the property as a licensee.

Seller must pay any outgoings until completion.

Unless the contract provides otherwise, the buyer bears the risk of any loss or damage to the property, hence the needs to ensure that insurance of the property is in place and effective from the moment of exchange.

Question 48

Practice and authority to exchange

Answer 48

• Before exchanging contracts, both solicitors must obtain their client’s authority to exchange
• Authority should be obtained in writing and a note made on the file because a solicitor who exchanges contracts without their client’s express/implied authority will be liable to the client in negligence.
• Clients should be made aware of the consequences of exchange.

Requirements for creating a binding contract are outlined in s 2 LPMPA. Contract must be in writing, incorporate all agreed terms, contained in one document or where contracts are exchanged, in each copy of the contract.

Question 49

Method of exchange

Answer 49

Exchange of contracts can be done by:
1. In person, by one solicitor attending the other’s office and handing the contract over
2. By post, with each solicitor sending their client’s party of the contract by post to the over
3. Over the phone

Most reliable and effective way is to do it over the phone. This only works if there are arrangements in place to ensure that each solicitor forwards their client’s part of the contract to the other and the seller’s solicitor receives the buyer’s deposit.

Question 50

What are the Law Society’s 3 protocols for exchange?

Answer 50

Formula A: is used where one solicitor holds both parts of the contract duly signed. One of the solicitors will have already sent their client’s sined part of the contract to the other side prior to exchange of contracts. In Formula A, the undertakings are that the solicitor holding both signed parts of the contract will, that same day, sent their client’s signed part of the contract to the other side by first class post, through a document exchange, or by hand. The buyer’s solicitor also undertakes, that day, to sent to the other side a banker’s draft or client account cheque for the agreed deposit, with their client’s signed part of the contract if it is the buyer’s solicitor who holds both parts.

Formula B: is used where each solicitor holds their own client’s signed part of the contract. The undertakings in a Formula B exchange are that each solicitor holds their own client’s signed part of the contract; that each solicitor will, that same day, send the signed part of the contract that they are holding to the other side by first class post, through a document exchange, or by hand duly dated, and that the buyer’s solicitor, together with the signed part of the contract, will that day also send to the other side a banker’s draft, or client account cheque for the agreed deposit.
* Is quicker than Formula A
* Most common way of exchanging contracts

Formula A and B both contain undertakings that the buyer’s solicitor will send to the seller’s solicitor a banker’s draft or client account cheque. If the deposit is to be sent electronically, the relevant formula will have to be varied accordingly by agreement between the two solicitors.

Formula C: most complex formula. Is mainly used in residential property work when there is a chain transaction. A chain transaction occurs where there are two or more properties being sold. Exchanges of contracts must be synchronised in the chain so that nobody ends up owning two properties, their own and the one that they are buying, or no property at all.

Solicitors should record the exchange. A file note is also made recording the fact of exhcange with the following information:
* the date and time of exchange;
* the formula used and the exact wording of any agreed variation to the formula;
* the completion date;
* the deposit to be paid; and
* the identities of the solicitors involved in the exchange.

Question 51

Acting for borower + lender

Answer 51

Can usually act for both borrower/lender in a residential transaction (property to be used as the borrowers private residence) where a standard mortgage is used. Ensure that one of the exceptions in 6.2(a) “substantially common interest” applies + conditions (consent, safeguards, reasonable to act).

You should also not act for borrower/lender, who are using a standard mortgage but you do not use the approved certificate of title.

There is a high risk of conflict when acting for borrower/lender in a commercial transaction, where the mortgage is not a standard mortgage and therefore the mortgage is much more likely to be negotiation.

Note - when acting for borrower/lender bare in mind paragraph 6.3 (duty of confidentiality) as it conflict with the duty of disclosure to the other client.

The lender’s solicitor may still act the borrower’s solicitor to carry out the title investigation and searches/enquiries and to report results to the lender. Avoids duplication and saves costs.

Question 52

Contract races

Answer 52

Pre-contract package is sent to multiple buyers who then compete to be ready to exchange contracts first.

Legitimate selling technique so long as the buyers know that they are engaged in a race.

Problem arises when the seller instructs their solicitor to not disclose to perspective buyers that they are in a race.

Paragraph 1.4 provides that a solicitor must not mislead or attept to mislead the [buyers]. Thus, the solicitor should immediately notify the buyers after obtaining their client’s consent. If the client refuses to consent to disclosure, cease acting, but do not disclose the info because you will be bound by the duty of confidentiality (6.3).

Question 53

VAT - Value Added Tax

Answer 53

To charge and collect the VAT, the supplier must be a ‘taxable person’ - a person whose turnover the past 12 months has exceeded the registration limit, currently 85k.

output tax - input tax = paid to HMRC

collected every three months.

Question 54

Who are VAT-sensitive buyers

Answer 54

insurance companies, banks, building societies

Question 55

VAT Rates

Answer 55

Standard rate - 20%
Reduced rate - 5% for items such as domestic fuel supplies and certain construction, conversion and renovation services.
Zero rated - 0% are still taxable supplies, but are charged as a zero rate.
Exempt supplies - but sometimes there will be an ‘option to tax’

Question 56

Examples of taxable supplies or those that can be made taxable by the seller exercising the ‘option to tax’

Answer 56

• sale of a greenfield is exempt, subject to option to tax
• supply of constructive services is standard rated
• professional services are standard rated
• the sale of a new freehold builing (within 3 years of construction) is standard rates
• the sale of an old freehold building is exempt, subject to option to tax
• grant of a lease is exempt, subject to option to tax

Question 57

VAT and SDLT/LTT

Answer 57

If the option to tax has been made before the date of transaction (or indeed if there is a VAT element in the price because the building is new), the VAT will count as chargeable considerations for SDLT/LTT purposes to there will be extra SDLT/LTT ro pay which is ‘tax on tax’.

Question 58

What documents should always be obtained prior to exchange of contracts?

Answer 58

Local Authority Search Results - they could reveal important information (e.g. about planning permission, building regulations consent or the status of the nearby roads etc.) any of which could give rise to a legitimate concern on the part of the buyer. The result of the search therefore are ordinarily required before exchange.

Question 59

Can only the buyer be liable to pay compensation for late completion?

Answer 59

Yes, in a contract incorporating the SCPC, SCPC 10.3 only requires the buyer to pay compensation to the seller in the event of late completion and there is no corresponding requirement for the seller to pay.