Preparing For Exchange Of Contract

Question 1

What is the purpose of a contract?

Answer 1

Not needed. For every property transaction. Contract cannot transfer land, becuase deed is needed.
Contract is just an agreement to transfer the land at a LATER stage.

If there is going to be a delay before completion, contract will be wanted.

Question 2

What are the standard conditions of sale and standard commercial property conditions?

Answer 2

Series of choices that the parties must make. Contract is drafted by seller solicitor and sent to buyers solicitor as part of initial pre-contract package.

The 2 sets of standard conditions are these. SC are used for all residential and some simple commercial transactions.

SCPC are suitable for high value commercial operatives.

Question 3

What are the 3 parts that SC and SCPC are divided into?

Answer 3

1: hearings relating to description of property and terms of sale. Particulars of sale

2: standard conditions - designed to apply to all transactions. Either SC or SCPC. They are the terms that govern the transaction, UNLESS the parties specific agree to something diffenret.

3: special conditions - they are specifically drafted to meet the requirements of that transactions. Some are pre-printed suggestions.

Question 4

What are key conditions in the Sc and SCPC?

Answer 4

Title number/rot of title
Specific incumbrances
Title guarantee
Completion date
Purchase price
Deposit
Balance needed after

Question 5

What are the conditions of specified incumbrances?

Answer 5

Necessary to specify in contract all the burdens on the property against the heading “specified incumbrances”. Third party rights which will survive the transfer of the property to the buyer (restrictive cov, easements).

If not specified, seller could be in breach of SC.

SC and SCPC both list incumbrances subject to which the property is sold:

-

Question 6

What special conditions about specific incumbrances are both in SC and SCPC

Answer 6

specified in contract
- discoverable by inspection
- those seller doe not and could not reasonably know about
- public requirements

Question 7

What conditions for special incumbrances are just in Sc and just in SCPC?

Answer 7

SC also includes:
- those the buyer knows about (not mortgages )
- entries made before date of contract in any public register

SCPC:
- matters (not mortgages) disclosued or should have been by seraches and enquiries which a prudent buyer should have made before entering contract.

Question 8

What is the contract rate in SC and SCPC?

Answer 8

Rate of interest that will be charged if a party is late in completing.

Rate must be in enough to incentivise.

Usually 4% above base lending rate can change if want.

Question 9

What does SC and SCPC say about deposit?

Answer 9

Seller may forfeit and keep deposit, if buyer fails to complete.

Provides that a deposit of 10% is needed, and is paid to sellers solicitor as STAKEHOLDER, meaning they cannot hand it over to seller until completion.

Question 10

What is the difference between SC and SCPC with deposit?

Answer 10

If SC, allows the seller to use the deposit as a deposit on a RELATED purchase of a house for the seller.

SCPC does not allow this

Question 11

What are the purposes of special conditions?

Answer 11

Relate to teh individual characteristics of a prperty and the particualr circumstances or the transaction

Question 12

What are examples of special conditions that are set in SC?

Answer 12

Sale includes chattels listed

Sale excludes fixtures which are at a property

Property is sold with vacant possession OR property is sold subject to filling lease or tenancies

Neither party can rely on any representation made by other, unless int rioting

Each occupier consent to vacate.

Completion will be agreed at 2pm on the agreed day

Question 13

What might the parties require special conditions for dealing with?

Answer 13

Appointment of second trustee

Arranging for seller to obtain/pay for restrictive covenant insruance policy

Disclosing defec in title

Seller selling with limited or no title guarantee

Payment of VAT

Indemnity covenant

Question 14

Should insruance be taken out pre-contract stage?

Answer 14

Under SC and SCPC< the risk of damage to prperty PASSES to buyer on completion of contracts, meaning the buyer MUS complete the purchase even if it is destroyed or damaged.

Therefore, buyer and any lender will need to be satisfied that there is insruance in place to protect this.

Question 15

Is the seller under ligation to insure a freehold property?

Answer 15

Under SC and SCPC no, but can be through special condition in teh contract.

Question 16

What do SC and SCPC say about VAT?

Answer 16

SC - purchase price and content price are INCLUSIVE of any VAT (expected that no VAT will be charged or paid - because residential)

Contracts for sale and purchase of commercial should be dealt with in addition.

Question 17

What are the 3 possibilities of VAT being paid in commercial properties?

Answer 17

1. Purchase price is EXCLUSIVE of VAT, and VAT will be added on top (commercial buildings within 3 years of construction - no choice)
2. Purchase price is INCLUSIVE of VA, sot hat VAT , if any, cannot be added on top (old, nothing to recover, opts out)

3: purchase price is EXCLUSIVE of VAT, so VAT can be charged on top in UNLIKLEY 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. (VAT sensitive)

Question 18

What are the requirements of a lender?

Answer 18

Limit their exposure to risks by setting out their OWN instructions and requirements.

Once lender is satisfied tat property is good security and buyer is creditworthy, lender will issue a document to the buyer setting out terms on which the lender is prepared to make the loan (mortgage offer).

Question 19

What is the purpose of a certificate of title to the lender?

Answer 19

Lender wll want to know that property is adequate security for loan.

Good and marketable title.

Certificate confirms to lender:

• no legal problems with the property (good and marketable title)
• who will own the prperty once sale is complete
• completion date when funds are needed

Question 20

What are the preparations for and exchange of contract steps?

Answer 20

Report to client (in writing, exaplaining result of title investigation, seraches etc)

Report to lender (good and marketable title etc)

Ensure deposit funds are available

Check mortgage Ofer is in place, and client has funds to complete

Ensure arrangements are in place for Insruance IMMEDIATELY following exchange

Contract signed (wet ink)

Completion date

Question 21

What are the 3 ways in which a contract can be exchanged?

Answer 21

In person, by one solicitor attending the others office and handing the contract over

By post, with each soicitor sending clietn part of contract by post to the other solicitors office

Over phone

Question 22

What are the advantages and disadvantages of exchange of contracts in person or phone

Answer 22

Person: physically receive. However, no time to travel. Could instruct an agent, but would increase costs.

Post: saves time, but unreliable

Phone: most cost-effective and reliable way. Only works if there are arrangements in place to ensure that each solicitor forwards their clients part of contract to other.

Question 23

What are the 3 Law Society Formulae A B and C for exchange of contract over the phone?

Answer 23

A: used where 1 solicitor holds BOTH parts of signed contract. One of the solicitors have ALREADY sent. Undertakings to post and send

B: each solicitor holds their own clients signed part of contract. Quicker, becuase doesnt require post before exchange. Undertaking: each solicitor will, that same day, sign part of contract by first class, together with signed part of contract, and that day, agreed deposit is sent. MOST COMMON

C: most complex. Usually used if residential property is in a chain transaction. Have to synchronise all the exchanges in teh chain so no one ens up with 2 properties

Question 24

What are the consequences of exchange?

Answer 24

A binding contract exists, neither party can withdraw without liability for breach

Seller retains legal title in property until completion, but holds beneficial interest on behalf of the buyer.

Seller is entitled eto remain in physical possession of the prperty.

Seller must pay outgoings until completion.

Immediately after exchange, solicitors should inform clients and estate agent that exchange has taken place.

Question 25

When do you use SC or SCPC?

Answer 25

SC is for residential and simple commercial

SCPC is for large commercial

Question 26

What are the key conditions set out in SC and SCPC?

Answer 26

Information about the buyer
The price
The deposit
Fixtures and fittings
Information about the seller
Title number
Specified incumbrances
Title guarantee
Completion date
Contract rate
Purchase price
Deposit
Balance after deposit

Question 27

What are specified incumbrances?

Answer 27

The burdens on the property.

Incumbrance’s are all third party rights that will transfer through to the buyer : restrictive covenants, easements, obligations of shared facilities etc.

If these are not specified, then the seller could be in BREACH of SC 3.1.1, and the seller sells FREE of these, other than those listed in the contract.

Question 28

What are the incumbrances that must be listed in standard conditions SC and SCPC?

Answer 28

Those in the contract
Those discoverable by inspection before date of contract
Those the seller does not and could not reasonably know about
Public requirements

Question 29

What are the different title guarantees?

Answer 29

Full title guarantee - the seller owns the ENTIRE legal and equitable title to the property

Limited title guarantee - given where the seller has limited knowledge of the property - eg, executor or trustee.

No title guarantee - seller is a person appointed following insolvency of an owner

Question 30

What does a full title guarantee imply?

Answer 30

They have the right to dispose of the land
They will do al they reasonably can to transfer title
For leasehold - the lease is subsisting at the time of disposal and there is no breach of covenant making lease liable to forfeiture.

Question 31

How can the deposit be held, and what are the differences between the two?

Answer 31

Stakeholder and agent

Stakeholder: seller may agree to accept a reduced deposit. Special condition requiring buyer to top up deposit if this is delayed.

Agent: means the deposit can be released to the seller IMMEDIATELY after exchange, and can be used by the seller for any purpose whatsoever. This is a risk for the buyer.

Question 32

Which section of SC and SCPC is insurance included?

Answer 32

5.1.1 SC

8.1 SCPC

Question 33

Is insurance of the property a standard or special condition>

Answer 33

It is a special condition - it doesn’t have to be included.

Question 34

When will VAT be added on top? SCPC 2

Answer 34

Commercial building within 3 years of construction where seller has no choice but to charge VAT.

Question 35

When will VAT be inclusive in purchase price/ cannot be added on top? SC 1.4

Answer 35

If supply is standard rated. Supplier will have to account t HMRC for the VAT t of the purchase price.

Old commercial building, where the seller does not have input tax to recover, and therefore has no reason to opt to tax.

This is popular with VAT-sensitive buyers, who cannot recover VAT paid on the purchase price.

Question 36

When will the purchase price be exclusive of VAt, and VAT can be added on top if the law changes between exchange of contracts and completion?

Answer 36

SCPC Part 2, condition A1

This is appropriate for an old commercial building, where they don’t HAVE input VAT to recover, but is not willing to take the risk taht there will be a change in the tax regime.

Buyer will be VAT sensitive/rather not pay VAT as there will be a cash-flow delay in recovering VAT.