W1: Caveat Emptor, taking instructions, financing freehold transactions Flashcards
caveat emptor: what is it? what are the implications for the buyer?
- buyer beware - buyer takes property as they find it
- no onus on seller to disclose information or encumbrances on the property (with 2 exceptions)
- burden on buyer to find out as much as possible about the property via:
1. investigating title = land registry official copies/deed
2. seller’s replies to pre-contract enquiries
3. ordering searches
4. survey of property
what are the 2 exceptions to caveat emptor
- misrepresentation - seller must not make
- seller must disclose latent encumbrances and defects in title
misrepresentation by seller: what is it? and what are some examples of it? what are the implications for the byer?
misrepresentation = false statement / conduct / omission by the seller that induces a buyer to contract (exception to caveat emptor)
examples of misrepresentation:
- false statements in replies to enquiries
- false statements in person
- concealing physical defects
buyer has remedies in common law (damages) or under Misrepresentation Act 1997
if standard conditions of sale are incorporated, what does the buyer have to prove for misrepresentation?
only that there was an error or omission from seller
no need to prove that they were induced to rely on seller’s conduct or false statement
what are latent encumbrances and defects in title?
- seller has the obligation to disclose latent encumbrances and defects in title of which it is aware or has the means to know, acting reasonably and diligently (exception to caveat emptor)
- latent encumbrance = something which is not apparent or cannot be discovered when inspecting the premises
- defects in title = a matter that brings into question the seller’s ownership of the property or the rights and burdens that affect the property (e.g., missing deeds with covenants)
- examples = right of way that is not apparent on inspection, right of drainage, disputes or complaints sent to or received by neighbouring properties, restrictive covenants, tenancy, local land charge, planning control developments or issues, building works and building regulatios issues, alterations to property
what are the buyer’s options when it discovers defects before exchange?
- walk away - no legal liability incurred before exchange
- require seller to remedy, as a condition of the contract, before completion
- remedy it themselves with a contribution from the seller
- negotiate reduction in price
matters to address with client when taking initial instructions (6)
- likely timescale = difficult to predict and depend on external factors like what issues are uncovered from investigations and other party’s speed (residential up to 2 months, commercial may be 2 weeks for exchange and 4 weeks for completion)
- likely costs = provide an estimate and make sure buyer has funding for legal fees, deposit, full price on completion, tax, interest on borrowing, disbursements
- co-ownership = ask how they want their equitable interest to be - joint tenants or tenants in common
- tax considerations of transaction = SDLT, CGT, VAT
- advise buyer to do surveys
- how will the buyer fund the transaction?
how can you explain the difference between legal and beneficial ownership to a client?
there are 2 aspects to ownership of property:
- Legal ownership: names of the owners is shown on the Land Registry, a max of 4 legal owners is allowed, a maximum of 4 registered owners in the Land Registry is allowed, owners must be over 18, and legal ownership can be sole or under a joint tenancy
- Beneficial ownership: this is not registered or available to the public, there is no maximum number or minimum age, and beneficial owners can be sole, joint tenants, or tenants in common
what is a joint tenancy and when would this be / not be suitable? advantages (3), disadvantages (3)
What does it mean?
- Each owner owns the whole of the property rather than a distinct share
- When the owner dies, the property passes in its entirety to the other owner (by survivorship)
Advantages:
- Suitable where clients are married or in a stable long-term relationship
- The probate process can be avoided if one owner dies
- Less complicated than setting up a TIC so legal fees will be lower
Disadvantage:
- Whatever financial contribution to the purchase price (equal or unequal), owners will not have a share reflecting this
- Owners cannot leave their share of the property to another person if they want to as it automatically passes to the remaining owner
- Not suitable for business relationships
what is a tenancy in common and when would this be / not be suitable? advantages (2), disadvantages (4)
What does it mean?
- TiC each own a separate share in the property
- TiC can own an unequal share in the property – which could reflect payment contributions
- On the death of one TiC, their share will pass to one of the beneficiaries as stated under the will or by intestacy rules if there is no will (spouse/children) – their share will not automatically transfer the other owner (no right of survivorship)
Advantages:
- Each owner chooses who to leave their share of the property to (especially if one has children)
- The amount of money paid in is reflected in ownership and thus protected
Disadvantages:
- Working out shares can be complicated, but the situation is easier where payments are equal
- If one owner dies without a will, the matter will go through probate to decide who will inherit – the share does not automatically pass to the co-owner. This is time consuming and subject to uncertainty as someone may claim against the estate, including the share of the property.
- If an owner dies and the share passes under their will/intestacy, then the co-owner would potentially share the house with a stranger and may have to raise funds to buy the beneficiary out
- Either owner could decide to sell their share without the other’s permission or knowledge
how to make and record co-ownership arrangements (3 points)
- make it via making a VALID TRUST IN LAND - requires: in writing and signed by the declarants
- recorded in TR1 form (Land Registry transfer deed) - you can select to include a declaration of trust, you can select an unequal shares and you must add the shares for each beneficiary
- if there are 2 beneficial tenants in common but only 1 legal owner, record a tenants in common restriction on the proprietorship register
Surveys - why should you advise the buyer to survey the property? (3)
Buyers should always be advised to instruct a surveyor to undertake a physical inspection of the property because:
- physical defects should be identified (caveat emptor)
- if defects are identified, buyer can renegotiate price, require the seller to remedy as a condition to completion, repair themselves with a contribution from the seller, or withdraw before exchange
- lenders may refuse to lend if there are physical defects as this affects the property value
types of surveys and when to use them (3 types)
- Basic valuation = The cheapest and least detailed option, identifying obvious major defects. This is sufficient for the lender’s purposes. Buyer should be advised to obtain a different fuller survey.
- Homebuyer’s report = More detailed, suitable for most properties in reasonable condition less than 150 years old
- Full structural survey = Most expensive and detailed option. Suitable for any property but must be done for listed properties, properties that had extensive renovations in the past, or properties that the buyer plans to extensively alter in the future.
what are the TAX considerations pre-exchange?
- SDLT/LTT = Buyer pays if value of property is above threshold (figures differ in residential and commercial properties)
- CGT = seller pays on gain in value (but usually not residential seller due to private residence relief)
- VAT = VAT may be payable on certain property transactions by the buyer and seller
what are the sources of funding (residential/commercial)?
residential = client money, mortgage loan, proceeds of related sale
commercial = money raised from syndicate of lenders, lender funding, raising equity finance
