W4

Question 1

Why does the lender in a commercial transaction usually want their own solicitor?

Answer 1

The lender in a commercial transaction usually wants their own solicitor because the documentation is non-standard and may be negotiable. Additionally, the transaction may be more complex.

Question 1

In a residential transaction, who does the buyer’s solicitor usually act for?

Answer 1

In a residential transaction, the buyer’s solicitor usually acts for the lender as well.

Question 2

What is the purpose of a mortgage offer or facility letter in a lending transaction?

Answer 2

A mortgage offer (residential) or facility letter (commercial) is issued by the lender to indicate the terms and conditions of the loan. It provides the borrower with information about the loan and serves as a formal offer by the lender to lend.

Question 3

What is a legal mortgage and what rights does it give to the lender?

Answer 3

A legal mortgage is a charge used to provide the lender with security over the property. It gives the lender the right to repossess and sell the property if necessary.

Question 4

What is a City of London Law Society certificate of title and when is it required?

Answer 4

In commercial transactions, the lender’s solicitor or the buyer’s solicitor usually needs to provide the lender with a City of London Law Society certificate of title. This certificate confirms that the property has sufficient value and marketability to repay the loan.

Question 5

What are the aims of a lender in a lending transaction?

Answer 5

To a lender, their only interest is whether the property has sufficient value and marketability to repay their loan. They are primarily concerned with the financial aspects of the transaction.

Question 6

How does the approach to accepting risk differ between a buyer and a lender in a lending transaction?

Answer 6

While a buyer may be tempted to accept certain title risks in the interest of allowing the transaction to proceed, a lender generally gives little leeway in accepting risk. Lenders are more cautious and have stricter requirements.

Question 7

Is it a conflict of interest for the same solicitor to act for both the buyer and the lender in a residential transaction?

Answer 7

Under paragraph 6 of the Code of Conduct for Solicitors, the same solicitor cannot act for two parties in a transaction where there will be a client conflict or a significant risk of one unless the clients have a substantially common interest. In the case of a residential transaction, a solicitor can usually act for both the buyer and the lender because they have a substantially common interest in the property.

Question 8

Why do lenders in commercial transactions usually instruct their own solicitors?

Answer 8

Lenders in commercial transactions usually instruct their own solicitors because there is much more potential for conflict. For example, if the buyer defaults on a large development site, the lender may have rights to step in and develop the site, which can lead to conflicts with the buyer’s interests.

Question 9

What are the responsibilities of the lender’s solicitor in a commercial transaction?

Answer 9

The lender’s solicitor in a commercial transaction will specify necessary enquiries and searches, review the buyer’s solicitor’s replies, draft the legal charge and other security documents, and either draft the certificate of title or request it from the buyer’s solicitor.

Question 10

What are the key documents involved in a lending transaction?

Answer 10

The key documents involved in a lending transaction include the mortgage offer or facility letter, the certificate of title, and the legal charge (or mortgage deed). These documents outline the terms and conditions of the loan and provide security for the lender.

Question 11

What is the difference between a residential certificate of title and a commercial certificate of title?

Answer 11

A residential certificate of title is usually a one-page form that certifies the title to the property is satisfactory for lending purposes. On the other hand, a commercial certificate of title is much more complex and provides a detailed summary of the property’s title and related matters.

Question 12

What is the purpose of a certificate of title in a lending transaction?

Answer 12

A certificate of title is a document in which a solicitor certifies that the title to the property is satisfactory for lending purposes. It provides assurance to the lender that the property has a good title and can be used as security for the loan.

Question 13

What are the Standard Conditions of Sale and the Standard Commercial Property Conditions?

Answer 13

The Standard Conditions of Sale (SCS) are incorporated into residential contracts, while the Standard Commercial Property Conditions (SCPC) are incorporated into most commercial property transactions. These standard conditions provide a framework for contract terms and are periodically updated to reflect changes in the law.

Question 14

What is the buyer’s responsibility when it comes to incumbrances in a property purchase?

Answer 14

The buyer is deemed to buy the property subject to any incumbrances that would be revealed by a prudent buyer’s searches and enquiries. This places the onus on the buyer to carry out all relevant searches and enquiries.

Question 15

What are the two types of title guarantee that a seller can offer?

Answer 15

The seller can offer either full title guarantee or limited title guarantee. Both types confirm that the seller has the right to sell the property.

Question 16

What is the difference between full title guarantee and limited title guarantee?

Answer 16

Full title guarantee means that the property is free of all incumbrances other than those disclosed in the contract and those which it didn’t and couldn’t reasonably have known about. Limited title guarantee is given by sellers with little knowledge of the property, such as executors of a deceased estate, and means that no incumbrances have been created over the property during the seller’s period of ownership.

Question 17

What happens if a buyer fails to complete on time?

Answer 17

If a buyer fails to complete on time and the seller serves notice to complete, the buyer must immediately pay the balance of the 10% deposit (unless this provision is also amended by special condition). The buyer has no remedy against the seller if a title issue arises after completion.

Question 18

What is the completion date and time in a property transaction?

Answer 18

The completion date is usually fixed by the parties. If the parties do not fix a completion date, then the standard conditions default to the date that is 20 working days after the date of the contract. The time for completion under both sets of standard conditions is 2 pm.

Question 19

Why is it important for the buyer’s solicitor to ensure sufficient time to receive and forward funds for a property purchase?

Answer 19

If the buyer will use money from a related sale to buy the property, the buyer’s solicitor should ensure that there is sufficient time to receive and forward the funds. This is to ensure that the money is received by the seller’s solicitor before 2 pm, the completion time.

Question 20

What does it mean for time to be of the essence in a property transaction?

Answer 20

Time is not of the essence until a notice to complete is served. This means that if a party fails to complete by the specified completion date and time, the other party can claim damages for the breach but cannot yet walk away from the transaction. However, the party who is ready to complete can serve a notice to complete and make time of the essence.

Question 21

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

Answer 21

The buyer is required to pay a 10% deposit on exchange of contracts. If the parties agree to a lower deposit, but the buyer fails to complete on time and the seller serves notice to complete, the buyer must immediately pay the balance of the 10% deposit. The deposit can be paid by a cheque from the buyer’s solicitor’s client account or electronically.

Question 22

What happens to the deposit in a property transaction?

Answer 22

The deposit may be held by the seller’s solicitor as stakeholder or agent. When held as stakeholder, the deposit is kept safe and not paid to the seller until completion. When held as agent, the seller may demand the deposit immediately after exchange. It is common for the deposit to be held as stakeholder to minimize the risk of loss if the seller is unable to complete.

Question 23

What are the considerations regarding VAT in property transactions?

Answer 23

Residential property is usually an exempt supply or a zero-rated supply, meaning that no VAT is payable by the buyer. Under the standard commercial property conditions, VAT is payable at the normal rate (currently 20%) on top of the purchase price, unless there are exceptions such as the property being over three years old and the seller not having made an option to tax.

Question 24

When does risk pass to the buyer in a property transaction?

Answer 24

Once contracts are exchanged, risk passes to the buyer. This means that if the property is damaged or destroyed between exchange and completion, the buyer must still complete.

Question 25

What is the purpose of indemnity covenants in a property contract?

Answer 25

Indemnity covenants can be used to pass the burden of positive covenants by a chain of indemnity covenants. If the chain is unbroken, the seller can require the buyer to give an indemnity covenant and continue the chain. However, if the seller did not give an indemnity covenant, then this obligation does not apply.

Question 26

What are special conditions in a property contract and how are they used?

Answer 26

Special conditions can be pre-written on the standard residential or commercial form of contract, or tailor-made by the parties’ solicitors. They can cover a wide variety of matters and can amend, exclude, or supplement the standard conditions of sale. Pre-written special conditions in the standard contracts deal with common amendments, while tailor-made special conditions can address specific requirements of the parties.

Question 27

What is the purpose of keeping the details of an agreement confidential?

Answer 27

The purpose of keeping the details of an agreement confidential is to ensure that neither the Seller nor the Buyer discloses any information about the agreement, documents supplied, or the transfer made under the agreement to any third person.

Question 28

What are some special conditions that can be included in a commercial contract?

Answer 28

Some special conditions that can be included in a commercial contract are limited title guarantee, specific terms of the transfer, or the draft transfer being annexed. Other special conditions may allow for the deposit and balance of purchase price to come from an account other than the buyer’s solicitor’s client account. There are also options for VAT treatment, capital allowances, and rights of residential tenants in a property.

Question 29

What is the role of VAT in a property sale contract?

Answer 29

VAT plays a role in a property sale contract as it is charged on certain taxable supplies. The seller, as a taxable person, collects VAT on the sale price of the property, while the buyer, as a taxable person, pays VAT on the property obtained. The VAT treatment of the property depends on whether it is exempt, zero-rated, or standard-rated. The Standard Commercial Property Conditions provide a framework for accommodating different types of VAT treatment in the contract.

Question 30

What is a taxable person in relation to VAT?

Answer 30

A taxable person is a VAT registered business that supplies certain goods or services and charges VAT on the sale price. They collect VAT from their customers and pay it to HM Revenue & Customs every three months. A taxable person can offset the input tax they have paid against the output tax they have collected.

Question 31

Why is it important for businesses to register for VAT?

Answer 31

Businesses with a VAT taxable turnover of more than £85,000 each year must register for VAT with HM Revenue & Customs. Registering for VAT allows businesses to offset the input tax they have paid to suppliers against the output tax they charge their customers. However, businesses that only make exempt supplies and are unable to recover input tax may choose not to register for VAT.

Question 32

What are the different VAT treatments for property sales?

Answer 32

Different types of property sales have different VAT treatments. Exempt supplies include residential property (except newly constructed property) and commercial property over 3 years old that has not been opted to tax. Zero-rated supplies include newly constructed residential property. Standard-rated supplies (20% VAT) include newly constructed commercial property (less than 3 years old) and older commercial property that has been opted to tax. The VAT treatment depends on the specific circumstances and options chosen by the parties involved.

Question 33

What is the option to tax in relation to property sales?

Answer 33

The option to tax allows a seller to choose whether a property that is over 3 years old will be exempt or standard-rated for VAT purposes. The option to tax is personal and cannot be relied upon by the buyer. If a buyer wants to continue charging VAT on rent, they will need to make their own option to tax. The option to tax is an important consideration in determining whether VAT is payable on the property.

Question 34

What are some conditions in a commercial property contract that relate to VAT?

Answer 34

In a commercial property contract, conditions related to VAT may include warranties about the VAT status of the property, the buyer agreeing to pay VAT over the purchase price, and conditions that override the default standard-rated treatment. These conditions provide a framework for accommodating different types of VAT treatment, such as exempt supplies or transactions treated as a Transfer Of a Going Concern (TOGC). The specific conditions depend on the circumstances and choices made by the parties involved.

Question 35

What is the process of exchanging contracts in a property sale?

Answer 35

Exchange of contracts is the point at which the parties are bound to complete the sale. Before exchange, both the seller and buyer need to ensure that they are ready. The buyer’s checklist may include receiving all search results and replies to enquiries, having insurance in place, and ensuring cleared funds for the deposit. The seller’s checklist may include obtaining a redemption figure from the lender, replying to outstanding enquiries, and preparing engrossments of the contract. Exchange of contracts can be facilitated by using Law Society Formula B or other appropriate methods.

Question 36

What is the purpose of the contract bundle in a property sale?

Answer 36

The contract bundle in a property sale includes the draft contract, official copies, and protocol forms. It is prepared by the seller’s solicitor and sent to the buyer’s solicitor. The contract bundle serves as the basis for checking the contract against the heads of terms and the buyer’s instructions. It ensures that both parties have the necessary documents and information to proceed with the sale.

Question 37

Why is it important for both the seller and buyer to be ready before exchanging contracts?

Answer 37

Before exchanging contracts, both the seller and buyer need to ensure that they are ready because after exchange, they are committed to completing the sale. Being ready includes checking all necessary documents, obtaining clearances and approvals, and having the required funds and insurance in place. Failure to be ready at the time of exchange can result in significant financial loss and complications in the sale process.

Question 38

What is the role of solicitors in the process of exchanging contracts?

Answer 38

Solicitors play a crucial role in the process of exchanging contracts. The seller’s solicitor drafts the contract and refers to the heads of terms and title for instructions. The buyer’s solicitor checks the contract against the heads of terms and buyer’s instructions, and may propose amendments if necessary. Both solicitors ensure that their respective clients are ready for exchange and comply with the necessary undertakings. Solicitors also facilitate the exchange of contracts, which can be done by telephone using Law Society Formula B or other appropriate methods.

Question 39

What is the purpose of Law Society Formula B in the exchange of contracts?

Answer 39

Law Society Formula B is frequently used to facilitate the exchange of contracts by telephone. It imposes undertakings on the solicitors involved to ensure they can comply with the requirements of exchange. Law Society Formula B is designed to tie related transactions together and provides a method for the release of contracts. It is important for solicitors to follow the prescribed procedures to ensure a smooth and legally binding exchange of contracts.

Question 40

What is the purpose of exchanging contracts in a property transaction?

Answer 40

Exchange of contracts is the point at which the parties enter into a binding contract. It signifies that the parties have entered into a binding obligation to complete the transaction.

Question 41

How are contracts typically exchanged in property transactions?

Answer 41

Traditionally, contracts were exchanged by meeting in person and exchanging paper copies. However, nowadays, contracts are almost always exchanged by telephone. The solicitors carry out the exchange according to Law Society Formula B, which is a prescribed set of steps and obligations.

Question 42

What happens during the exchange conversation between solicitors?

Answer 42

During the exchange conversation, the solicitors identify any blanks left in the contract, agree on the wording/figures that need to be inserted, agree on any handwritten amendments or special conditions, and write in the completion date. Once both solicitors are satisfied that the contracts are complete and identical, they agree to exchange the contracts under Law Society Formula B and give each other their names to write on the contract.

Question 43

What undertakings do solicitors have after the exchange of contracts?

Answer 43

After the exchange of contracts, solicitors have certain undertakings. These include holding the signed contract to the other solicitor’s order, posting the signed contract to the other solicitor by first class post or DX, and sending the deposit in the specified form of payment. Undertakings are formal promises made by solicitors in the course of acting as a solicitor.

Question 44

What is Law Society Formula A used for?

Answer 44

Law Society Formula A is used when the same solicitor holds contracts signed by both the seller and the buyer. It may be appropriate in situations where the solicitor knows they will be abroad at the time of exchange.

Question 45

When is Law Society Formula C used?

Answer 45

Law Society Formula C is used for chain transactions, where the money from one property is used to buy the next. It is not commonly used, as it is complex. Instead, parties usually adopt Law Society Formula B and take care to tie the transactions together.

Question 46

What is the risk of exchanging on one property without tying it to another property in a chain transaction?

Answer 46

If you exchange on one property without tying it to another property in a chain transaction, there is a risk that the second exchange will fall through. It is important to tie related sales and purchases together to avoid this risk.

Question 47

What happens after the exchange of contracts in a property transaction?

Answer 47

After the exchange, each party’s solicitors should prepare a memorandum of exchange with the key contract terms for the file. It is also wise to keep a copy of the signed contract in case the original is lost in the post. The buyer should have insurance in place in case the property is damaged or destroyed. The parties will start making arrangements for completion, such as submitting the certificate of title to the lender and requesting mortgage funds.

Question 48

What is the purpose of the release method in property transactions?

Answer 48

The release method is used to tie related transactions together in property transactions. It allows for the exchange of contracts on one property while waiting for the exchange on another property. If the exchange on the related transaction occurs by an agreed time, the first contract is treated as exchanged. Otherwise, the exchange is cancelled.

Question 49

What is the role of solicitors in a property transaction after the exchange of contracts?

Answer 49

After the exchange of contracts, solicitors play a crucial role in preparing a memorandum of exchange, keeping copies of the signed contract, and making arrangements for completion. They also ensure that the buyer has insurance in place and handle the release method for tying related transactions together.

Question 50

What is the significance of insurance in property transactions after the exchange of contracts?

Answer 50

After the exchange of contracts, the risk passes to the buyer. Therefore, it is important for the buyer to have insurance in place in case the property is damaged or destroyed before completion.

Question 51

What is the purpose of a memorandum of exchange in a property transaction?

Answer 51

A memorandum of exchange is prepared by each party’s solicitors after the exchange of contracts. It contains the key contract terms and serves as a record for the file. It is also advisable to keep a copy of the signed contract in case the original is lost in the post.

Question 52

What is the buyer’s equitable interest in a property after the exchange of contracts?

Answer 52

After the exchange of contracts, the buyer holds an equitable interest in the property. This interest may be protected by a notice on the register or, for unregistered land, a class c(iv) land charge.