UNIT 3 - Contract Flashcards
A solicitor is acting for a buyer of a freehold property and exchanged contracts last week using the Standard Conditions of Sale (Fifth edition – 2018 Revision) with no relevant special conditions. Completion is to take place tomorrow. The seller’s solicitor has just rung to say that there has been a fire at the property and it has been damaged.
Which one of the following best describes the advice the solicitor should give about the implications of the fire for the sale and purchase transaction:
A) The buyer will have to complete the purchase, but the seller will have to repair the property and pay damages for the delay in completion.
B) The seller is responsible for any damage which they cause, but not if the damage is caused by others.
C) The buyer may rescind the contract and claim back their deposit.
D) The risk passes from the seller to the buyer on exchange of contracts and so the buyer will have to complete the purchase. The buyer can claim on the insurance that they should have taken out on exchange.
E) Completion will be delayed until the seller has received the insurance proceeds and used them to reinstate the property.
CORRECT ANSWER D - Under SC 5, risk passes to the buyer on exchange, which means that that the buyer must complete the purchase even if the property is damaged or destroyed between exchange and completion. The buyer is unable to rescind the contract even if the property
is destroyed (so option C is wrong). SC 5 also provides that the seller is under no obligation to insure a freehold property unless required to do so by a special condition in the contract and the facts tell us that there were no relevant special conditions in this case (so option E is wrong and option B is not the best answer). The buyer should have been advised to take out insurance on the property to come into effect on exchange, so they would be able to make a claim under the policy (as in option D), rather than look to the seller (as in option A).
In which of the following circumstances should a solicitor acting on a sale and purchase of a commercial property recommend that in the contract the purchase price is expressed to be inclusive of VAT?
A) The solicitor is acting for a buyer which is an insurance company.
B) The solicitor is acting for a buyer which is a firm of accountants.
C) The solicitor is acting for a seller and the property has been recently constructed.
D) The solicitor is acting for a seller and the property is a 1950s office building.
E) The solicitor is acting for a seller and the buyer is an insurance company.
CORRECT ANWER A - An insurance company is ‘VAT-sensitive’, ie it makes exempt supplies and may not be able to recover any VAT it has to pay on the purchase price. By contrast, a firm of accountants makes mainly standard rated supplies and is unlikely to object to paying VAT in addition to the purchase price since it will recover it (so option B is not the best answer).
A seller should never be advised by its own solicitor to make the purchase price inclusive of VAT (so options C, D and E are wrong). This is because if the supply is standard-rated (as with a new building), or it wants to opt to tax in order to recover VAT paid on refurbishment (as with the 1950s building), or the law changes the VAT status of the sale between exchange and completion, the seller will be unable to add the VAT to the agreed price. The sale proceeds will be reduced by the amount of VAT payable to HM Revenue and Customs.
Of course the seller may have to agree to a VAT inclusive purchase price as part of the commercial terms for the transaction, in which case, the seller’s solicitor must draw their client’s attention to the possible financial consequences of that decision.
A solicitor acts for a buyer who is buying a property from the executor of a deceased owner. The title to the property is currently unregistered. The executor is described in the contract as the seller. The solicitor is explaining to the client the concept of ‘limited title guarantee’ referred to in the contract.
Which of the following is the best advice to the buyer about the seller selling with limited title guarantee?
A) The seller should be selling the property with full title guarantee if the grant of probate appointing the executor has been granted, rather than limited title guarantee.
B) Limited title guarantee means that there is an implied covenant that the seller has not incumbered the title to the property and the seller is not aware that anyone else has done so since the last disposition for value.
C) Limited title guarantee means that once the title to the Property is registered, the class of title in the proprietorship register will be Possessory Title.
D) Limited title guarantee means that there is an implied covenant that the property is disposed free from incumbrances other than those the seller does not know about and could not reasonably know about.
E) Limited title guarantee means that once the title to the property is registered, the class of title on the proprietorship register will be Qualified Title.
CORRECT ANSWER B - as it is the correct definition of limited title guarantee. Option
A is not the best answer as you would expect an executor to sell with limited title guarantee because they will have limited knowledge of the property. Option D describes full title guarantee. Options C and E are not the best answers as title guarantee for the purpose of the contract does not link to the class of title in registered land (see 2.3.2(b)); the property may still be registered with Absolute Title even though it has been sold to the buyer by a seller only offering limited or no title guarantee. Title guarantee is about the seller; class of title is about the property.
Which ONE of the sentences below completes the following sentence in the most appropriate way?
Exchanging contracts ….
A) Transfers the legal ownership in a property from the seller to a buyer.
B) Is advisable if completion cannot take place straight away.
C) Is advisable if a party wants to be able to unilaterally withdraw without liability.
D) Is required in every property transaction.
E) Is most common when the seller is granting a lease.
CORRECT ANSWER B - If there is going to be a delay before completion can take place, such as to finalise the buyer’s financing arrangements or to organise the practical arrangements, such as booking a removal company, then it is advisable to fix the terms of the transaction by entering into and exchanging contracts. However, it is not always necessary to have a gap in time and exchange of contracts and completion can take place simultaneously.
Option A is wrong, as the contract cannot transfer the land, a deed is needed for this.
Option C is wrong as entering into a binding contract means that neither party can unilaterally withdraw from the transaction without incurring liability to the other for breach.
Option D is wrong as a contract is not required for every property transaction.
Option E is wrong as the granting of a lease is a common example of when a contract is not used.
On receipt of a pre-contract sale package a solicitor notices that there are two entries in the charges register of the title. They relate to a mortgage. The solicitor turns to the contract which contains the Standard Conditions of Sale but does not find mention of the mortgage listed as an incumbrance.
Should the solicitor amend the contract so that the mortgage appears as an incumbrance subject to which the property is sold?
A) Yes, because a mortgage is an incumbrance and therefore must be mentioned as such.
B) No, because a mortgage is not an incumbrance.
C) No, because even though a mortgage is an incumbrance, the property is not being sold subject to it and it will be discharged shortly after completion.
D) Yes, because the mortgage will not be paid off until after completion and therefore the property is sold subject to it
E) Yes, because the incumbrances listed in the contract are the ones which will not affect the buyer.
CORRECT ANSWER C - best answer as the relevant provisions in the Standard Conditions of Sale (“SC”) and the Standard Commercial Property Conditions (“SCPC”) provide that the property is sold free from incumbrances unless (i) they are specified in the contract; and/or (ii) are of a type listed in SC 3.1.2. or SCPC 4.1.2. If the mortgage is listed in the contract, it indicates the expectation that the buyer is taking on the burden of the mortgage post completion, when in fact, the buyer will expect that the mortgage will be discharged shortly after completion and the related entries removed from the title.
Option A is therefore wrong, as the buyer will not want to buy subject to the seller’s existing mortgage.
Option B is wrong as a mortgage is an incumbrance, just not one which a buyer will agree to buy subject to.
Option D is wrong as, by listing the mortgage as an incumbrance, the buyer will be agreeing to take subject to it. The buyer expects the seller to discharge the mortgage immediately after completion and therefore should not agree to take the property subject to the mortgage.
Option E is wrong as the incumbrances listed in the contract will bind the buyer after completion.
The seller client calls the solicitor just before the planned phone call with the buyer’s solicitor to effect exchange, to say that the client forgot to mention that their neighbour crosses the end of the very long back garden of the property for sale as a short-cut to get to the nearby shops. The client says that they have just put up with it, as the neighbour has been doing it since even before the seller acquired the property in the early 1990s.
Does the seller’s solicitor need to amend the contract?
A) Yes, because this is an incumbrance and you must tell the buyer about it so they can buy free from it
B) No, because it is now too late to include anything which should have been in the replies to enquiries.
C) No, because it is not an incumbrance given that there is no duty on anyone to do anything positively such as pay money for maintenance.
D) Yes, because this is a restrictive covenant which might affect value and so must be specified in the contract.
E) Yes, because this is an incumbrance and the contract should specify all burdens affecting a property unless they are in a category set out in the conditions of sale.
CORRECT ANSWER E - This is an incumbrance. The Standard Conditions of Sale (and the Standard Commercial Property Conditions) set out categories of incumbrance which are deemed to be disclosed to the buyer, but anything not falling within these categories should be specified in the contract as a “Specified Incumbrance”. This prescriptive easement does not fall within the categories of deemed disclosure, so the contract should be amended to specify that the sale is subject to this incumbrance, otherwise the contract will be made so that the sale is free of it.
Option A is wrong as incumbrances bind a buyer.
Option B is also wrong; since contracts have not yet been exchanged, it is not too late to amend the contract, although the buyer and their solicitor may not be happy about such a last minute change.
Option C is wrong because incumbrances are not limited to just positive covenants/obligations.
Option D is wrong as the use of the back garden is not a restrictive covenant.
What is a covenant for title?
A) Implied covenants given by a buyer to a seller included in a transfer to protect a buyer.
B) A restrictive covenant affecting the title to the property usually found in the charges register.
C) A positive covenant affecting the title to the property usually found in the property register.
D) Covenants given by a seller to a buyer and implied into a transfer where the seller sells with full or limited title guarantee.
E) A covenant given by the buyer to the seller to continue a chain of indemnity covenants
CORRECT ANSWER D - We use the word “covenant” a great deal and the different references to “covenant” can be confusing. ”Covenant” is a legal word for a promise. A covenant for title is referring to those implied promises, which statute implies into a transfer where the seller agrees to give ‘full title guarantee’ or ‘limited title guarantee’. These implied promises are given by the seller (if the seller gives full or limited title guarantee) to protect the position of the buyer.
Option A is therefore wrong, as they are given by the seller, not the buyer. Covenants for title must also be distinguished from a restrictive covenant, a positive covenant and an indemnity covenant, which rules out Options B, C and E.
A solicitor is acting for a party who has exchanged contracts to sell a property. The client does not have a related purchase. The deposit was paid and was ten percent of the purchase price. The solicitor released the deposit to the seller client. The seller client has become insolvent and will not be able to complete the sale. In examining the contract, the solicitor sees the deposit was to be held as stakeholder.
Should the solicitor be concerned?
A) No, the deposit is forfeit whichever of the parties fails to complete.
B) No, the solicitor can simply ask the seller client to return the deposit, so the solicitor is able to return it to the buyer when the time comes.
C) No, the solicitor was permitted to release the deposit to the seller client.
D) Yes, the solicitor was acting as stakeholder and therefore should have kept the deposit in the client account until completion.
E) Yes, because even though the solicitor was entitled to release the deposit to the seller, it will be difficult to get the money back from the seller client now
CORRECT ANSWER D - The solicitor has been negligent as they should have held the deposit in their client account pending completion. Whereas holding a deposit as “agent” allows the seller’s solicitor to release the deposit to their client immediately after exchange, holding it as “stakeholder” means the deposit should not have been released to the seller unless and until completion takes place. Given that the seller client is now insolvent and will not be able to complete the sale, it is most unlikely that it will be able to return the deposit to the buyer.
Option A is wrong because under both sets of standard conditions, the deposit is forfeited only if the buyer, not the seller, fails to complete.
Option B is wrong because the seller’s solicitor should not have released the money to its client and now that the seller is insolvent, it may not be able to return the money.
Option C is wrong as it is describing the situation where the deposit is held as “agent”, not “stakeholder”.
Option E is wrong because the solicitor was not entitled to release the deposit to the seller until completion.
A solicitor is instructed by a client on a house sale and purchase transaction.
Which ONE of the following statements best describes whether the Standard Conditions and/or the Standard Commercial Property Conditions allow the seller to use the deposit from the house sale to fund the deposit on the purchase?
A) The Standard Conditions of Sale and the Standard Commercial Property Conditions allow this.
B) Neither the Standard Conditions of Sale nor the Standard Commercial Property Conditions allow this.
C) Only the Standard Conditions of Sale allow this.
D) Only the Standard Commercial Property Conditions allow this.
E) If using the Standard Conditions of Sale you would need to draft a special condition to allow this.
CORRECT ANSWER C - The Standard Conditions of Sale (”SC”) are usually used for house sales and purchases. They provide more closely for the types of risks which affect such transactions than the Standard Commercial Property Conditions (“SCPC”). One example is SC 2.2.5 which allows a deposit to be used to fund a deposit on a related purchase. The deposit will need to be held as “stakeholder” to comply with SC 2.2.6 and the money must be paid into the client account of a conveyancer nominated by the seller’s conveyancer at a clearing bank.
Options A and D are wrong as there is no equivalent provision in the SCPC.
Option B is wrong as the SC allow this.
Option E is wrong; SC 2.2.5 and 2.2.6 will automatically apply therefore a special condition is not required to allow use of the deposit, A special condition is only required to exclude such a use.
A solicitor acted in the purchase of a house for a first time buyer. On viewing the house, the buyer noticed that it had “normal” fixtures and fittings, including carpets throughout, bathroom and a kitchen with a free-standing electric cooker. On the day of completion when the buyer client obtained the keys, they found the house stripped of the carpets, the electric cooker and the bathroom sink. No special condition was included in the contract. They ask the solicitor for help.
Was it a breach of contract for the seller to take the carpets, cooker and the bathroom sink?
A) It was not a breach of contract for the seller to take them as the carpets, cooker and bathroom sink are all chattels which are not included in the sale.
B) It was a breach of contract for the seller to take them as the carpets, cooker and bathroom sink are all fixtures which are included in the sale unless a special condition appears in the contract.
C) It was not a breach of contract for the seller to take them as the carpets, cooker and bathroom sink are all fixtures which are only included in the sale if a special condition appears in the contract.
D) It was a breach of contract for the seller to take the bathroom sink because it is a fixture but the carpets and cooker are chattels and can be taken.
E) It was a breach of contract for the seller to take the cooker and bathroom sink because they are fixtures but not the carpets because they are chattels and can be taken.
CORRECT ANSWER D - The bathroom sink is a fixture and will automatically pass to the buyer with the house unless a special condition is included giving the seller the right to remove it. The free-standing electric cooker and carpets are chattels which will only be included in the sale if there is a special condition saying this. Both sets of standard conditions contain pre-printed special conditions which can be individually checked to include them in the contract.
Option A is wrong as not all of the items are chattels.
Option B is wrong as the items are not all fixtures.
Option C is wrong for two reasons; they are not all fixtures, but even if they were, fixtures are part of the land and pass automatically unless they are excluded by a special condition, not included by one.
Option E is wrong as a free-standing electric cooker is a chattel, not a fixture.
A solicitor colleague acts for a client who is selling a commercial building. It is less than three years old. The solicitor normally acts for residential clients so is not sure what to do about VAT in drafting the contract for sale and asks for your advice on how to deal with it.
What would be the best advice in this situation?
A) Use the Standard Conditions of Sale condition 1.4. This condition sets out that the purchase price is exclusive of VAT and VAT will be added to the price.
B) Use the Standard Commercial Property Conditions condition 2. This condition sets out that VAT is chargeable on the sale and VAT will be added to the price.
C) Use the Standard Conditions of Sale and add a special condition stating that the purchase price is exclusive of VAT and VAT will be added to the price.
D) Use the Standard Commercial Property Conditions and add a special condition stating that the purchase price is exclusive of VAT and VAT will be added to the price.
E) Use the Standard Commercial Property Conditions Part 2 Condition A1. This condition sets out that the purchase price is exclusive of VAT and VAT will be added to the price.
CORRECT ANSWER B - The sale of a new commercial building (i.e. one which is less than three years old), attracts VAT at the standard rate. The seller must account for VAT to HM Revenue and Customs. The Standard Commercial Property Conditions (“SCPC”) already contain wording which deals with this situation in condition 2. That condition sets out (i) the sale of the property constitutes a supply chargeable to VAT at the standard rate; (ii) the buyer must pay the VAT in addition to the purchase price; and (iii) the seller is to provide the buyer with a VAT invoice for the VAT paid.
Option D is not the best answer therefore as there is no need to add a special condition.
Option A is wrong in this situation because Standard Condition 1.4 (unless it is amended by a special condition) sets out that the purchase price already includes the sum equal to the VAT, so the seller would have to account for VAT out of the purchase price, thereby reducing the amount it realises from the sale by that amount of VAT. This condition would be more appropriate to use for a residential property which is an exempt supply.
Option C is not the best answer as the SCPC already contain the appropriate wording and can be used for this transaction.
Option E is wrong on the facts because SCPC Part 2 Condition A1 deals with a situation in which the supply of the property is exempt from the charge to VAT and there is a law change between exchange and completion, rendering the supply of the property chargeable to VAT at the standard rate.
You have a new client, Portfolio Properties Limited. They buy, do up and sell property, hoping to make a profit. They normally buy using cash but feel ready to take a loan to buy the next property and have been talking to lenders about the terms of the loan. To keep costs at a minimum they want you to act for them in both the purchase and in the lending transaction. They have heard of a special type of report on title that you can prepare for a lender which saves fees.
Which ONE of the following statements would you choose to explain the procedure to them?
A) Depending on the terms of the offer from the lender, the firm could act for the buyer and the lender in respect of the title to the property and prepare a certificate of title for the lender which confirms a good and marketable title to the property.
B) Depending on the terms of the offer from the lender, the firm could act for the buyer and the lender and prepare a certificate of title for the lender which confirms a good and marketable title to the property.
C) Depending on the terms of the offer from the lender, the firm could act for the buyer and the lender and the seller’s solicitor will produce a certificate of title for the lender which confirms a good and marketable title to the property.
D) Depending on the terms of the offer from the lender, the seller’s firm could act for the lender and the seller’s solicitor will produce a certificate of title for the lender which confirms a good and marketable title to the property.
E) Depending on the terms of the offer from the lender, the seller’s firm could act for the lender and the seller’s solicitor will produce a report on title for the lender which confirms a good and marketable title to the property.
CORRECT ANSWER A - The client seems to be referring to a certificate of title. In commercial transactions, this is a commonly used method of avoiding duplication of title investigation by both the buyer’s solicitor and the lender’s solicitor. It saves time and expense for the borrower and the lender. The buyer’s solicitor acts for both the buyer and the lender in respect of the title to the property (but not for both parties on the terms of the loan) and produces the certificate of title. That rules out Options B and C.
Options D and E are wrong as the seller’s solicitor would not be able to act for a buyer’s lender because there would be a conflict of interest. Option E is also wrong in that it refers to a report on title rather than a certificate
Which ONE of the following statements best describes a certificate of title in the City of London Law Society’s form?
A) A special type of report which is relied on by property owners and lenders alike and is given immediately prior to exchange of contracts. A certificate of title is prepared by a solicitor, reporting on the results of searches and enquiries in the normal way but with a certificate which confirms that the title to the property being reported on is good and marketable
B) A special type of report on title which is set out in a series of statements which cannot be altered. If a statement cannot be agreed with, the solicitor makes a disclosure against the statement which sets out how the statement does not apply to the property. By giving the certificate of title, a solicitor is confirming that the title to the property being reported on is good and marketable.
C) A special type of report on title which is set out in a series of statements which can be altered. If a statement cannot be agreed with, the solicitor deletes the statement. The person relying on the certificate can sue the solicitor if they delete the statement which confirms that the title to the property being reported on is good and marketable.
D) A special type of report on title which is set out in a series of statements which cannot be altered but which is prepared by a seller’s solicitor as part of the conveyancing protocol and leads to a reduction in costs because the buyer does not need to perform searches and enquiries.
E) A special type of report on title which is set out in a series of statements which can be altered. If a statement cannot be agreed with, the solicitor changes the statement so that it does not apply to the property. A solicitor is, by the certificate of title, confirming that the title to the property being reported on is good and marketable.
CORRECT ANSWER B - A certificate of title is a special type of report on title but it is set out in a series of statements which either, (i) the solicitor does not change and does not disclose against, thereby warranting the statement to be true (for example, there are no rights of way crossing the property); or (ii)are not true so the solicitor discloses the issue (for example, that there is aright of way crossing the property) against the statement. The solicitor is setting out that the title is good and marketable subject to the disclosures against the statements. The statements themselves, may not be altered, which rules out Options C and E.
Option C is also wrong because the person relying on the certificate would sue the solicitor if the statement confirming good and marketable title turns out to be untrue, not if it is deleted.
Option A is wrong because the certificate is given immediately prior to completion of the loan, not exchange of contracts, although drafts of the certificate will have been provided earlier than this and the buyer’s solicitor will not exchange until they know that the lender is satisfied with the certificate and any disclosures. In addition, the certificate also covers the results of searches and enquiries, so the solicitor does not report on them in the normal way.
Option D is wrong as the City of London Law Society’s form of certificate is used in commercial transactions, whereas the conveyancing protocol is only used in residential transactions. In addition, the protocol does not include a report on title and the buyer must still perform searches and enquiries.
A solicitor has been instructed to act for the buyer of a house. They have written to the seller’s solicitor to confirm their instructions and to ask for the pre-contract package, however the buyer has just contacted them in a panic; the estate agent let slip that there is someone else interested in purchasing the house. The buyer is now worried that the seller could be actively engaged in negotiations with both parties without them even knowing about it.
Which of the following statements best summarises the advice which can be given to the buyer?
A. They do not need to worry because the seller cannot negotiate with another party after they have accepted the buyer’s offer.
B. They do not need to worry because as the buyer’s solicitor has already contacted them, the seller’s solicitor will be under a duty to only deal with a sale of the property to the buyer.
C. They do not need to worry because the seller’s solicitor should tell them if they intend to send a pre-contract package to other prospective purchasers.
D. They do not need to worry because the seller’s solicitor is prohibited from sending documents to more than one potential buyer.
E. They do not need to worry because the seller’s solicitor owes a personal duty of disclosure to the buyer so must tell the buyer if they intend to send a pre-contract package to other prospective buyers.
CORRECT ANSWER C - Paragraph 1.4 of The Code of Conduct states that a solicitor must not mislead or attempt to mislead, either by their own acts or omissions, or by being complicit in the acts or omissions of others. This means that the seller’s solicitor should (with their client’s consent) inform all buyers immediately of the seller’s intention to deal with more than one buyer.
Option A is wrong as until contracts are exchanged, the seller is free to negotiate with others.
Option B is also wrong as solicitors are under no such duty.
Option D is wrong as the seller’s solicitor is permitted to send out more than one contract, provided they comply with paragraph 1.4 of The Code of Conduct and do not mislead.
Option E is wrong as the seller’s solicitor’s personal duty of disclosure (in paragraph 6.4 of the Code of Conduct) is to their own client, not the buyer and they also owe a duty of confidentiality to the seller, so cannot disclose the contract race without their client’s consent.
A solicitor is acting for the seller of a property registered with freehold title absolute. The seller and their deceased partner are the registered proprietors and the title reveals that they owned the beneficial interest as tenants in common. It has therefore been agreed that a second trustee will be appointed to join in the sale, solely to overreach the deceased partner’s trust interest.
Which of the following best explains the basis for deciding the appropriate title guarantee to be given by the second trustee in the draft contract?
A. The contract should state that limited title guarantee is given because the second trustee does not own an equitable interest in the property.
B. The contract should state that no title guarantee is given because the second trustee is only being appointed to overreach the deceased’s beneficial interest and therefore has no right to dispose of the land.
C. The contract should state that full title guarantee is given because the property is registered with title absolute.
D. The contract could state that limited title guarantee is given because this implies that the property is disposed of free from incumbrances, other than those the second trustee does not know about and could not reasonably know about.
E. The contract could state that possessory title guarantee is given because this implies that the second trustee has not incumbered the property and is not aware that anyone else has done so since the last disposition for value.
CORRECT ANSWER A - It is advisable for a trustee to give limited title guarantee in these circumstances.
Option B is wrong as although it is possible for a trustee not to give any title guarantee, Option B is based on incorrect reasoning; a second trustee does have the right to dispose of the land, so it is wrong to give this as the reason why they cannot give any title guarantee.
Option C is wrong; title guarantee and class of title are not dependent upon one another and are separate issues.
Option D is wrong because, although this is an implied covenant for title, the wording is that implied by a covenant giving full title guarantee, not limited. This implied covenant is the most problematic for a trustee and is usually the reason why trustees do not give full title guarantee. This covenant has much wider reach than the limited title covenant (described in Option E) as it requires knowledge of the property since before the owner bought it.
Option E is however also wrong as there is no such thing as possessory title guarantee. The wording is an implied covenant for title, but it comes from the limited title guarantee. It is generally acceptable to trustees as it means that the trustee has not themselves incumbered the property and is not aware that anyone else has incumbered it either since (effectively) it was last sold. It is therefore narrower than the equivalent covenant implied by full title guarantee referred to in Option D above.
