Property Practice 3 Flashcards
(28 cards)
Purpose of the contract
Merely to agree to transfer the land at a later date.
A deed is required to exchange land.
Exchanging contracts makes the parties bound to it and fixes the price. Provides certainty.
Conditions like an obligation for the S to do some building work prior to completion become enforceable when the contract is made.
Standard Conditions of Sale and Standard Commercial Property Conditions
Standard Conditions of Sale (5th Edn, 2018) used for all residential transactions and some simple commercial transactions.
Standard Commercial Property Conditions (3rd Edn, 2018) used for high value commercial properties and contains more detailed provisions for the management of occupational leases with which the property is being sold.
SCPC has 2 parts - the first part will be included unless excluded and the second part will be excluded unless included.
First page of contract - particulars of sale
For a registered property, will need to state the title number and the class of title.
Specified incumbrances
Must be specified in the contract and refers to all burdens on the property - restrictive covenants, easements and obligations to contribute to shared facilities.
If not specified, the S could be in breach of SC 3.1.1 which says that the S must sell the property free of all incumbrances not specified in the contract or of a type listed in 3.1.2.
SC 3.1.2 says property sold is burdened by the following incumbrances
- Those specified in the contract
- Those divisible by inspection before the date of the contract
- Those the S does not and could not reasonably know about
- Public requirements
- Those, other than mortgages, that the B knows about
- Entries made before the date of the contract in any public register, except for those maintained by the Land Registry, the Land Charges Department and Companies House.
SCPC 4.1.2 says property sold is burdened by the following incumbrances
- Those specified in the contract
- Those divisible by inspection before the date of the contract
- Those the S does not and could not reasonably know about
- Public requirements
- Matters, other than mortgages, disclosed or which would have been disclosed by the searches and enquiries of a prudent B prior to entering the contract.
What if the S fails to disclose an incumbrance in the contract?
Non-disclosure of an incumbrance burdening the property might result in the B having the right to rescind and / or claim for damages.
Title guarantee
S can sell with either full or limited title guarantee.
Should sell with full title guarantee if they own the entire legal and equitable title to the property.
Limited title guarantee is where they have limited knowledge of the property.
Implied covenants in the transfer when there is full or limited title guarantee:
- they have the right to dispose of the land
- they will do all that they can to transfer the title
- 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.
The implied covenant that only applies in a transfer with full title gurarantee
The land is disposed free from incumbrances other than those the S does not know about and could not reasonably know about.
This covenant is limited by s6 LP (MP) A 1994 to exclude matters which the disposition is made expressly subject, matters that the B knows about and matters which were entered on the registers of title.
Standard conditions on title guarantee
Both sets of standard state that the seller will sell with full title guarantee, therefore a special condition amending this will be required if not sold with full title guarantee.
Contract rate
This is the Law Society’s interest rate - this is 4% above the Barclays Bank base rate.
If the S defaults, then the interest rate is charged on the purchase price.
If the B defaults, the the interest rate is charged on the purchase price less the deposit as this has already been paid.
Deposit
According to both sets of standard, 10% of the purchase price is paid to the S’s solicitor as stakeholder (this means that the S’s solicitor cannot hand it over to the S until completion).
They can make their own arrangements e.g. to deviate from 10% or for the S’s solicitor to hold the deposit as an agent however a special condition would be required to amend the standard conditions.
The SCPC provides for payment to be by electronic means only.
Special conditions
No need to have a special condition regarding positive covenants as covered in SC and SCPC.
Insurance and risk
Under both sets of standard conditions, the risk of damage to the property passes to the B after exchange of contracts.
B should be given prior warning of this so that insurance arrangements can be made and put in place for the moment of exchange.
The B and the lender both need to be satisfied that any insurance is adequate in terms of the value of the property, the estimated cost of reinstatement and the type of risk covered.
Sometimes the lender may insure the property but if not the B will need to take out a new insurance policy.
Bs with multiple policies may have a block policy which the property can be added to.
Both SC and SCPC state that a S is not obligated to insure a freehold property unless required to do so by a special condition in the contract.
If the parties agree for risk to stay with the S then both sets of standard conditions provide that the S will have to maintain a policy and if the property suffers damage, to hand the insurance proceeds or the rights to the policy to the B.
Practically, a S may maintain their policy even if risk passes to the B. In this case, both standard conditions state that if the B is unable to recover the full proceeds (due to their being 2 policies) the purchase price be reduced accordingly.
VAT in contracts
VAT not normally chargeable in residential transactions - S’s solicitor will usually incorporate SC which states that purchase price and contents price are inclusive of any VAT (as VAT not expected).
VAT is payable for new commercial property (less than 3 years old).
VAT can be payable on old commercial property (older than 3 years old) when the S has exercised their option to tax.
3 possibilities in relation to paying VAT
- the purchase price is exclusive of VAT and VAT is paid on top.
SCPC 2 - appropriate where the commercial property is less than 3 years old or where S has exercised option to tax, and the B is not VAT-sensitive i.e. the B can recover their input tax from their output tax. - the purchase price is inclusive of VAT and so VAT is not added on top.
SCPC 1.4 - if supply is standard rated, the supplier will have to account to HMRC for the VAT out of the purchase price. Not appropriate for sale of new building or where the S has exercised option to tax. Might be appropriate for sale of old commercial property where the S does not have input tax to recover and so no reason to exercise option to tax.
Still a risk to the S because the law may change so that land that was exempt is now standard rated and the S would have to take the VAT out of the agreed purchase price. - the purchase price is exclusive of VAT so that if the law changes a previously exempt supply into a standard rate chargeable supply then the B pays VAT on top, but the S is contractually obliged not to opt to tax.
SCPC Part 2, Condition A1.
Appropriate where a S who does not need to recover input tax is selling an old commercial property, but not willing to take the risk of the law changing between exchange and completion and them having to pay VAT.
The lender will make a mortgage offer when it is satisfied that the property is good security and the buyer is creditworthy.
Mortgage offer sets out the terms of the loan. This is offered for residential and simple commercial loans.
A commitment letter (with a term sheet attached and later a facility agreement) is given for more complex commercial loans.
A solicitor acting for the B must make sure that the B has received, understood and (if required by the lender) accepted the mortgage offer prior to exchange of contracts.
Acting for the lender
Even when separately represented, the B’s solicitor will often report to the lender with the results of the title investigation and pre-contract searches and enquiries.
B’s solicitor will be asked to prepare a certificate of title to disclose to the lender any problems with the property.
Lender’s solicitor and lender will then discuss any action it wants to take in relation to them issues.
Lender’s requirements must be met before the conveyancer will be in a position to request the release of the mortgage funds and this will be the case irrespective of whether the B wishes to proceed to complete.
Certificate of title to the lender
Lender wants this from the B’s solicitor to show the property has good and marketable title.
It confirms to the lender:
- there are no legal problems with the property (good and marketable title) so the lender can safely lend against it
- who will own the property once sale is complete
- the completion date when the funds are needed.
In commercial transactions, lender likely to need a more detailed certificate of title like the one produced by the City of London Law Society.
Series of statements about the property that the B’s solicitor has found out through due diligence.
If information is wrong, the lender can sue the firm that gave them it.
Certificate is given immediately before completion of the loan.
Drafts given to the advisers of the B and L so they have early warning of major issues.
B’s solicitor will not exchange contracts until they are certain that the lender is satisfied with the certificate and any disclosures.
Reporting to the B before exchange
B’s solicitor reports to the B with a pre-contract report summarising the results of the pre-contract searches and enquiries and the investigation of title. Report will also include some disclaimers.
Also usually explains the terms of the contract and the mortgage offer.
Steps in preparation of exchange of contracts
- Report to client - pre-contract report
- Report to lender - certificate of title - need to know they are satisfied that the property is good security for the loan and good and marketable title.
- Ensure the deposit funds are available - should be ready in cleared funds to send to the S’s solicitor at exchange.
- Check the mortgage offer is in place and that the client has sufficient funds to complete - B needs mortgage offer in place (and accepted it) and to have complied with conditions attached to mortgage offer (or be able to do so).
- Ensure arrangements are in place for insurance immediately after exchange.
- Contract signed - solicitors can do so with express permission from client.
- Completion date - discussed in advance of exchange.
Authority to exchange
Solicitors require client’s authority - should be in writing and a note made on the file.
If solicitor does exchange without client’s express or implied authority, the solicitor is liable in negligence.
Clients should be aware of the consequences of exchange.
Requirements for binding contract are within 1989 Act
Must be in writing, must incorporate all agreed terms, must be contained in one document or where contracts are exchanged in each copy of the contract and finally the contract must be signed by the parties.
