Unit 3 The Contract Flashcards
Acting for borrower and lender
The 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
Paragraph 6.2(a) exception - ‘substantially common interest’.
Conditions are that both clients have given their informed written consent, effective safeguards have been put in place to protect any client confidential information and that the solicitor is satisfied that it is reasonable for them to act for both clients.
Large commercial transactions lender normally has own solicitor. Common for borrowers sol to do report.
Contract races
In a contract race, a pre-contract package is sent to multiple buyers who then compete to be ready to exchange contracts first.
Problems arise when the seller instructs their solicitor that they do not want the prospective buyers to know as they have to be informed.
Paragraph 1.4 of The Code of Conduct. 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.
If the seller refuses to agree to such disclosure, the solicitor cannot disclose the contract race to the prospective buyers because they have a duty of confidentiality. Instead, the solicitor should immediately stop acting in the matter.
VAT
To charge and collect the VAT, the supplier must be a ‘taxable person’ = a person whose turnover over the past 12 months has exceeded the registration limit, currently £85,000.
Output tax - input tax = amount sent to HMRC.
Input tax is only recoverable if attributable to a taxable (or output) supply.
If you only sell or supply exempt goods and services, then your business is exempt, you cannot register for VAT and you cannot recover any input tax e.g. insurance companies, building societies, banks etc.
VAT - Differences between standard, exempt and zero- rated supplies
VAT is charged at different rates depending on the type of supply.
- Standard rated supplies attract VAT at the standard rate, currently 20%.
- There is a reduced rate of 5% for items such as domestic fuel supplies and certain construction, conversion and renovation services.
- Zero- rated supplies are still taxable supplies, but are charged at a zero rate
- Exempt supplies are non- VATable. However, sometimes a supplier of land has the option to charge VAT (‘the option to tax’).
VAT - taxable supply in property transactions
Most residential transactions do not involve the payment of VAT. The sale of a new build house by a developer is zero rated so the buyer will not pay any VAT, and the subsequent sale of a residential property by a private individual will not be in the course of a business, so the seller will not be charging VAT to the buyer in addition to the purchase price.
There is a difference between ‘old’ and ‘new’ commercial properties for VAT purposes.
A new commercial property is one which is within 3 years from completion of the building.
Supplies of interests in, rights or licences to occupy commercial land or buildings are generally exempt.
Taxable supplies, or can be made into taxable supplies by the seller exercising the ‘option to tax’ (ie to charge VAT):
* The sale of a greenfield site is exempt, subject to the option to tax.
* The supply of construction services is standard rated.
* Professional services, provided by an architect or surveyor for example, are standard rated.
* The sale of a new freehold building is standard rated.
* The sale of an old freehold building is exempt, subject to the option to tax.
* The grant of a lease is exempt, subject to the option to tax.
VAT - why a client would make an option to tax
- Seller of a new commercial building has no choice but to charge the buyer VAT.
- Seller of an old commercial building has a choice.
May want to do this to enable recovery of the input tax incurred in relation to the building, e.g. building work costs and professional fees incurred in renovating the building to get it ready to sell.
Disadvantage: - Seller has to charge VAT on the purchase price.
If the buyer cannot recover its input tax VAT, or can only make a partial recovery (only makes untenable supplies), then the purchase price is, in effect, increased and the building will be unattractive. - 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 consideration for SDLT/ LTT purposes so there will be extra SDLT/ LTT to pay, which is ‘tax on tax’.
Exchange of Contracts
Common when granting a lease to by- pass the contract and proceed straight to completion by granting the lease itself.
But might want one.
e.g. parties are satisfied with the property’s title and the information revealed in the searches and enquiries, but there is going to be a delay before completion can take place.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions
Usually drafted by the seller’s solicitor and sent to the buyer’s solicitor as part of the initial pre- contract package.
The Standard Conditions of Sale (‘SC’) - used for all residential transactions and some simple commercial transactions, for example those involving properties which are empty, with a straightforward title and a relatively low price.
The Standard Commercial Property Conditions (‘SCPC’) - suitable for use with high value commercial properties.
Both divided into 3 parts:
1. On the front page, there are headings relating to the description of the property and the terms of the sale (particulars of sale).
2. In the middle of both versions are the standard condition.
3. On the back page are the special conditions.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - Specified incumbrances
= third party rights which will survive the transfer of the property to the buyer.
SC 3.1.1 (SCPC 4.1.1) - the seller sells free of all incumbrances other than those specified in the contract or of a type listed in SC 3.1.2 (SCPC 4.1.2).
List:
* those specified in the contract
* those discoverable by inspection before the date of the contract
* those the seller does not and could not reasonably know about
* public requirements.
* mortgages etc.
Seller’s solicitor must list as Specified incumbrances in the contract everything not covered by SC 3.1.2 or SCPC 4.1.2.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - Title guarantee
Can sell with either full or limited title guarantee.
A seller should sell with full title guarantee if they own the entire legal and equitable title to the property.
Limited title guarantee is given where the seller has limited knowledge of the property, eg where the seller is an executor or trustee.
Occasionally a seller will insist that no title guarantee is given at all, eg where the seller is a person appointed following the insolvency of the owner.
With both 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 covenant making the lease liable to forfeiture.
With full 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 know about.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - Contract rate
= 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).
Most conveyancers opt for ‘the Law Society’s interest rate from time to time in force’, which is published weekly in the Gazette and is currently 4% above the base lending rate of Barclays Bank plc.
SCs and SCPCs provide this rate at 1.1.1(e).
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - Deposit: stakeholder and agent
A deposit is a pre- payment of part of the purchase price made by the buyer to the seller.
Under SC 7.4 or 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.
If the SC are being used, SC 2.2.5 allows the seller to use the deposit as a deposit on a related purchase of a house for the seller.
Parties can agree to vary this arrangement.
The SC provide that 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.
Exchange of Contracts - Special conditions
Some pre- printed special conditions.
- Whether the sale includes any contents or excludes any fixtures (special condition 3)
-Whether the property is to be sold with vacant possession or subject to leases or tenancies (special condition 4). - Special condition 5 will only be relevant where the time for completion has been altered by agreement and should be deleted if the parties have agreed that completion should take place by 2pm on the agreed day.
- Special condition 6 is a standard clause that should be left in as it makes it clear to the parties that they should not rely on any representations that have not been made in writing.
- Special 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.
Examples of new conditions to possibly include:
* the appointment of a second trustee for the purposes of the transfer
* arranging for the seller to obtain or pay for a restrictive covenant insurance policy
* disclosing a defect 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 inclusion of an indemnity covenant in the transfer to protect the seller from liability once they have lost physical possession of the property
SC 4.6.4 and SCPC 7.6.5 state that, where the seller has such an ongoing liability in relation to the property, the buyer must give the seller a personal indemnity covenant in the transfer.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - Insurance and risk
Under both sets of standard conditions, the risk of damage to the property passes to the buyer on exchange of contracts (SC 5.1.1 and SCPC 8.1).
Lender may insure the property on being requested to do by the buyer’s solicitor, but if not, the buyer will have to take out a new insurance policy.
SC 5 and SCPC 8 provide that the seller is under no obligation to insure a freehold property unless required to do so by a special condition in the contract e.g. may want this where new build under construction.
Seller probably will not cancel policy in case it doesn’t complete.
Where there are two policies in place on the same property, 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 purchase price is reduced accordingly.
Exchange of Contracts - Standard Conditions of Sale and the Standard Commercial Property Conditions - VAT
SC 1.4 that the purchase price and the contents price are inclusive of any VAT.
Commercial property:
(a) The purchase price is exclusive of VAT and VAT will be added on top.
Good for commercial building within 3 years of construction where seller has no choice but to charge VAT.
Or where opt to on old building to recover costs.
(b) The purchase price is inclusive of VAT so that VAT, if any, cannot be added on top.
Good for old building where seller doesn’t need to opt to tax,
(c) The purchase price is exclusive of VAT, so VAT can be added on top in the unlikely event that the law changes to make an exempt supply chargeable at the standard rate, but the seller is contractually obliged not to opt to tax.
