Pre-exchange: standard conditions SCS/SCPC and special conditions

Question 1

why would a contract of sale be used? (3 reasons)

Answer 1

not mandatory

good if:

• Contract can fix a completion date, so that all parties know when they will need to have money and make practical arrangements with lenders (good if funding by borrowing)
• Contract can tie related transactions, e.g., if using the money from the sale to buy another property
• Contract can include conditions or terms reflecting issues that arose during investigations and searches to be completed before completion e.g., obtaining specific planning permission

downside:

• without a contract, parties can withdraw at any time before completion and their losses are only limited to expenses incurred in expectation of completion (e.g., search fees, solicitor’s fees)
• if parties withdraw after exchange, they face significant financial loss

Question 2

validity requirements for sale contract of land (3)

Answer 2

1. in writing
2. incorporate all the terms
3. signed on behalf of each party

Question 3

who prepares the contract?

Answer 3

• seller’s solicitor prepares the draft contract
• buyer’s solicitor amends

Question 4

what are the standard forms of sale contracts - residential vs commercial

Answer 4

• Residential = Standard Conditions of Sale (SCS) (required if parties use Law Society Conveyancing Protocol)
• Commercial = Standard Commercial Property Conditions (SCPC)

standard conditions must be EXPRESSLY incorporated by reference to have effect

Question 5

is it mandatory for parties to use the standard conditions?

residential vs commercial?

Answer 5

• residential context = if solicitors adopted the Law Society Conveyancing Protocol, the SCS must be used
• otherwise, in residential and commercial contexts, tailor-made contracts can be made OR standard conditions with amendments

Question 6

if standard conditions are used, what encumbrances must be disclosed?

Answer 6

seller MUST disclose latent encumbrances and defects in title but standard conditions amend this duty and list encumbrances which the seller need not disclose:

• encumbrances / defects specified in the contract
• discoverable by inspection
• which the seller does not and could not reasonably know about

residential vs commercial

• residential (SCS) = seller MUST to disclose any encumbrances registered at Land Registry, Land Charges Registry, and Companies House (otherwise they breach SCS)
• commercial (SCPC) = buyer deemed to buy property subject to any encumbrances which would be revealed by a prudent buyer’s searches and enquiries (onus on buyer and seller need not disclose these except for mortgages which seller must disclose)

Question 7

what is the position regarding title guarantees under the SCS and SCPC?

Answer 7

seller can offer the following:

1. full title guarantee = DEFAULT guarantee - means that property is free of all encumbrances other than those disclosed in the contract and those which it did not and could not have reasonably known about

the rest are special conditions

2. limited title guarantee = given by seller with limited knowledge of property (executors/ lenders) –> means that no encumbrances or third party rights have been created during the seller’s period of ownership
3. no title guarantee = seller does not guarantee its right to sell or that the property is free from encumbrances - buyer has no remedy against seller if issues arise after completion (administer/ liquidator)

Question 8

what is the default completion date and time under standard conditions?

Answer 8

• completion date = 20 working days after the date of the contract
• time = 2 pm (means seller solicitor must receive money before 2pm)

Question 9

if there is a related sale, how is this dealt with considering the default completion date and time?

Answer 9

if buyer will use money from a related sale to buy the property, then the buyer’s solicitor should ensure that there is sufficient time to receive and forward the funds = completion time for the related sale should be 30 mins or 1h before the purchase in question

Question 10

What if transfer is not completed by the set date/time?

Answer 10

• SCS/SCPC default = time is not of the essence until a notice to complete is served
• time of the essence = contract must be performed by the specified time otherwise the non-breaching party can walk away and claim damages
• SO: under standard conditions, if transfer is not completed on time, non-defaulting party CANNOT walk away but CAN claim damages
• BUT: non-defaulting party can serve a notice to complete - which makes time of the essence

+

• interest is payable for each day delay

Question 11

what is the default deposit under standard conditions of sale contract?

Answer 11

• default = 10% deposit payable on exchange of contracts (balance paid on completion)
• payable via = electronically for commercial ; cheque or electronically for residential
• can be lowered by special condition –> BUT if buyer does not complete on time and seller serves a notice to complete, buyer must immediately pay the full 10% deposit

Question 12

how does the seller’s solicitor hold the deposit under SCS/SCPC?

Answer 12

SCS and SCPC require seller solicitor to hold deposit as STAKEHOLDER not agent

• agent = seller may demand the deposit immediately after exchange (risk for buyer so buyer should not accept this)
• stakeholder = seller’s solicitor must keep the deposit safe and not pay it to the seller until completion

Question 13

residential transactions under SCS - what if seller wants to use a portion of deposit to fund another transaction? Can solicitor give them?

Answer 13

seller’s solicitors can hold money as agents (not stakeholders) to pay this - any remaining deposit will be held as stakeholder

Question 14

what is the position on risk and insurance under standard conditions of sale? what do you advise your client?

Answer 14

• Once contracts are exchanged, risk passes to the buyer (under both SCS and SCPC)
• This means that if the property is damaged or destroyed between exchange and completion, the buyer must still complete.
• ensure buyer gets insurance from date of exchange + lender may also want confirmation of insurance before advancing the completion funds
• seller is under no obligation to insure the property
• but seller’s insurance policy can keep going e.g., if property is still under construction - so a special condition is needed in contract

Question 15

what is the position on indemnity covenants under standard conditions of sale?

Answer 15

• SCS and SCPC REQUIRE buyer give an indemnity covenant where there is an unbroken chain of indemnity
• does not apply where chain is broken
• indemnity covenant may be an entry in official copy but not needed

Question 16

what is the default position for VAT under SCS?

Answer 16

• residential property is usually exempt supply (older residential property) or zero rated supply (newly constructed residential property)
• price is inclusive of VAT under SCS

Question 17

VAT - default under SCPC

Answer 17

Buyer pays VAT at 20% on top of the purchase price (VAT-exclusive) for:

• newly constructed commercial property 3 years old or less
• old commercial property of more than 3 years where the owner opted to tax

standard conditions = assume property is standard-rated and taxed at 20%

parties can amend SCPC with special conditions = seller warrants in contract that

1. the property is not subject to VAT and agrees not to exercise the option to tax = for commercial property older than 3 years (exempt supply) where owner did not opt to tax
2. transaction is a transfer as a going concern (exempt supply) where seller uses the property for the business of letting to produce rental income, the buyer will do the same

Question 18

what are special conditions?

Answer 18

• SCS and SCPC may be amended, excluded, or supplemented with special conditions
• special conditions can be tailor made or standard forms have some special conditions included with tick boxes so they may be chosen as appropriate

Question 19

what are some standard special conditions?

Answer 19

• amend title guarantee given by seller
• amend contents, fixtures included in sale
• state if property sold with vacant possession or subject to leases
• change time of completion
• limit parties’ liability from misrepresentation to written statements (good for seller)
• property is sold with consent of occupiers listed and who will vacate after completion
• vacant possession

Question 20

in residential context following Law Society Conveyancing Protocol, can you add special conditions?

Answer 20

• Yes but only if they are absolutely necessary
• if Law Society Conveyancing Protocol is NOT followed then any special conditions can be negotiated

Question 21

what do you do in the special conditions if a surviving tenant in common is executing and signing along with the executor of a deceased tenant in common?

Answer 21

there should be a special condition stating that the living tenant in common is transferring with full title guarantee and the executor is transferring with limited title guarantee