The contract and exchange Flashcards
1
Q
Will a lender have the same leeway as a buyer in accepting (title) risks?
A
No - lender’s only interest is whether property has sufficient value/marketability to repay loan - little leeway in accepting risk
2
Q
How can a solicitor act for both buyer and lender in residential transactions without there being a conflict of interest?
A
- They have a substantially common interest: want property that is worth what buyer has paid, is suitable for purpose and easy to (repossess and) sell
- High street lenders usually have non-negotiable mortgage terms and prescribed documents
No conflict!
3
Q
Will lenders and buyers in commercial transactions also have a substantially common interest?
A
No! Much more negotiation
4
Q
What will the lender’s solicitor request about enquiries?
A
Specify what (additional) enquiries and searches are needed (and ask copies from buyer’s solicitor)
5
Q
What documents will be drafted by the lender’s solicitor?
A
- The legal charge/other security documents
- The certificate of title (unless buyer’s solicitor is asked to provide it)
6
Q
What is the difference between a mortgage offer and facility letter?
A
- Mortgage offer = formal offer by lender to lend (subject to satisfaction w property)
- Facility letter = (roughly) commercial equivalent of a mortgage offer; sets out T&Cs of loan
Facility for commercial because companies provide facilities
7
Q
What does the legal charge (/mortgage deed) do? Where is it registered?
A
- Creates the security interest giving lender the right to repossess
- Registered at LR
8
Q
What is the certificate of title?
A
The document in which a solicitor certifies that title to the property is satisfactory for lending purposes
9
Q
What is the difference between report on title and certificate of title in terms of…
- Format
- Who drafts it
- Who it is sent to
- Timing
A
- COT is in standard form (ROT not)
- Both drafted by buyer’s solicitor (COT can be drafted by lender’s)
- ROT sent to buyer client, COT sent to lender’s solicitor
- ROT sent before exchange, COT sent before completion (but usually agreed before exchange)
10
Q
As the format of a certificate of title has a set format, what is the industry standard?
A
City of London Law Society (CLLS) Certificate of Title
11
Q
How is the CCLS Certificate of Title laid out? How is this completed by solicitor?
A
As a series of statements that would be given if property title is in perfect order - solicitor completes by giving disclosure after a statement if it is incorrect
Example: Paragraph 3.2 of Schedule 3 states that the land abuts publicly adopted highway. If right of way is across private land, then a disclosure to this effect would need to appear beneath that statement
12
Q
What can a lender do if there are any material errors or omissions in a certificate of title (post-completion)?
A
Sue the solicitor (as they rely on the solicitor’s certificate)
13
Q
What are the requirements for a contract for land? What can such a contract not do?
A
- Be in writing, incorporate all terms which parties expressly agree, be signed by/on behalf of each party to contract
- Cannot transfer land as it is not a deed
14
Q
Why use a property contract if it cannot transfer land? When is it unnecessary to use?
A
- Fix completion date
- Tie related transactions (e.g. using money to buy another property)
- Set out related obligations (e.g. buying furniture)
- Include conditions (e.g. obtain planning permission)
Unnecessary for gift of property or land of low value
15
Q
What does the standard contract for a residential and commercial transaction incorporate?
A
- Standard for residential transactions = Standard Conditions of Sale (SCS)
- Standard for commercial transactions = Standard Commercial Property Conditions (SCPC)
SCPC covers more detail on areas of relevance to commercial property, such as taxation and occupational leases
16
Q
Will commercial transactions always use the SCPC?
A
No - contracts can be tailor-made (i.e. firm’s precedent bank, Practical Law etc.) and will incorporate and amend as required the SCPC
They may be weighted in favour of the seller in the expectation that the buyer’s solicitor will negotiate the terms
17
Q
Will SCS always be used for residential transactions?
A
If parties are adopting the Law Society Conveyancing Protocol, it is obligatory
18
Q
How are special conditions used? Are they included in the standard form?
A
- SCS can be amended, excluded or supplemented with special conditions
- Standard form includes some special conditions with tick boxes; can be chosen as appropriate
e.g. the Standard Conditions of Sale state that a 10% deposit is payable on exchange. If the parties agree that only 5% is payable, then an appropriate special condition should be drafted to allow for this
19
Q
If the seller’s solicitor is following the Law Society Conveyancing Protocol, can they add other special conditions aside from those check-able in the standard form?
A
Only if they are absolutely necessary for the purposes of the transaction
20
Q
What conditions will be included in a contract?
A
- Specified incumbrances
- Title guarantee
- Completion date (and time)
- Contract rate
- Deposit
- Value Added Tax (VAT)
- Risk and insurance
- Indemnity covenant
21
Q
Recall - despite caveat emptor, what 2 things must the seller disclose and what are these?
A
- Latent incumbrances - rights burdening the property not apparent on inspection (covenants, easements etc.)
- Defects in title - issues casting doubt on seller’s ownership e.g. deed containing covenants has been lost
22
Q
Which encumbrances does the SCS/SCPC set out which the seller need not disclose?
Amend the duty of the seller
A
- those specified in the contract
- those discoverable by inspection of the property before the date of this contract
- those the seller does not and could not reasonably know about
Next card is more important…
23
Q
What is the difference between SCS and SCPC in terms of what the seller needs to disclose?
How is the onus different?
A
- SCS = seller needs to disclose any encumbrances registered at LR, Land Charges Registry (for unreg land) and Companies House
- SCPC = buyer deemed to buy property subject to any encumbrances which would be revealed by a prudent buyer’s search and enquiries
I.e. commercial - onus on buyer to carry out relevant enquiries/searches
24
Q
What 2 types of title guarantee can the seller offer, either of which will confirm seller has right to property? What do they mean and when will each be given?
Exception to caveat emptor!
A
- Limited title guarantee - means no encumbrances have been created over property during seller’s period of ownership - may be given by sellers with little knowledge of property (e.g. executor)
- Full title guarantee - means property free of all encumbrances other than those disclosed in contract and those it did not and could not have reasonably known about
25
Which title guarantee is the default in SCS and SCPC?
Full title guarantee
26
What does it mean if the seller gives no title guarantee?
The seller **does not guarantee the seller's right to sell or that property is free of encumbrances** - buyer has no remedy against seller if a title issue arises after completion
## Footnote
Administrator/liquidator selling property may offer no title guarantee
27
What is the completion date and time under the SCS and SCPC?
* Completion date = 20 days after date of contract (but rarely used and parties usually fix themselves)
* Time = 2pm; so money must be received by seller's solicitor before 2pm
28
With regards to time, what should the buyer's solicitor do if the buyer is using money from related sale to buy property?
Ensure there is sufficient time to receive/forward funds
## Footnote
Example: Buyer is buying a house for £150,000, with £100,000 to come from the sale of Buyer’s flat. If the contract for the sale of the flat has a completion time of 2 pm, then the contract for the purchase of the house should be at least 2.30 pm, or preferably 3 pm.
29
What is the standard position on essence of time with both SCS and SCPC and what does it mean?
SCS and SCPC both state that 'time is not of the essence until a notice to complete is served'
30
When 'time is not of the essence until a notice to complete is served', what can the non-defaulting party do if the defaulting party fails to complete by the specified completion date and time?
Claim damages for breach, but not yet walk away from transaction
31
Where the party serves a notice to complete, making time of the essence, what must happen?
Contract must be performed by specified time otherwise non-defaulting party can walk away from contract and claim damages for breach
32
What deposit is required by both SCS and SCPC on exchange of contracts? Must it be this?
10% - but can be varied by special condition
33
If parties agree lower deposit than 10%, what is the effect if the buyer does not complete on time and seller serves a notice to complete?
Buyer must **immediately** pay balance of 10% deposit (unless amended by special condition)
34
Must the deposit always be paid electronically? Can it be paid directly from buyer?
* SCS - either cheque from buyer's solicitor's client account or electronically
* SCPC - must be electronically
35
What is the difference between the seller's solicitor holding the deposit as stakeholder and agent? What is the position of the SCPC?
* Stakeholder (**SCS and SCPC**) - seller's solicitor keeps deposit and does not pay to seller until completion
* Agent - seller can demand deposit immediately after exchange
36
What happens if the seller's solicitor is holding as stakeholder but the deposit is needed for a related transaction in a residential sale?
SCS provides that all/part of deposit can be used for deposit on **that transaction** and remainder will be held by stakeholder
37
Is VAT considered with **residential** property?
Usually will be an exempt supply/zero-rated supply so no VAT is payable by buyer
| SCS - purchase price inclusive of VAT
38
What is the position of SCPC on VAT?
Property is a standard rated supply = VAT payable at normal rate (20%) on top of purchase price
| Subject to exceptions
39
Under the SCS and SCPC, when does the risk pass to the buyer? What is the effect of this on damage/destruction?
* Risk passes to buyer once contracts are exchanged
* If property is damaged/destroyed between exchange and completion, **buyer must still complete**
40
When should buyer insure property from?
From the date of exchange as this is when risk passes
| Lender may also want confirmation of this
41
Will seller ever want to keep their insurance policy going?
Yes (e.g. when building still under construction) - here a special condition is needed
42
How will an indemnity covenant be included in a contract?
Set out as a special condition
43
How are both SCS and SCPC amended, excluded, or supplemented?
With special conditions
## Footnote
The standard form of residential draft contract provides a **set of seven pre-written special conditions** that can be used for the most common amendments.
The commercial standard contract is similar, but has nine special conditions.
44
What are the 7 pre-written special conditions in a standard residential contract?
1. Tie contract to SCS
2. Amend title guarantee from full (default) to limited
3. Specify included and excluded contents (chattels/fixtures) on attached list
4. Sold with vacant possession (no occupiers) or subject to leases and tenancies
5. Agree a different time by which completion must have taken place
6. Limit liability to written statements (but not fraudulent/reckless misrepresentations)
7. Occupiers other than seller consent
## Footnote
For 7 - concern is that occupier may have overriding right to occupation and refuse to leave; occupiers give buyer comfort by signing contract
45
Regarding representations limiting liability to written statements (special condition 7), what does this mean?
Either party may rely upon any representations made by other **provided they were made in writing**
46
Regarding occupier's consent (special condition 7), can the seller's solicitor provide legal advise to the (non-)consenting occupier? What must that occupier do if they do consent?
* No - conflict of interest!
* If they do consent = sign contract to agree to release all rights she may have in property and vacate on completion
47
How are the special conditions different in the standard form commercial contract?
| Cf to 7 pre-written in standard form residential contract
* SC 8 - space for **specific terms of transfer** (e.g. seller wishes to reserve rights e.g. easement)
* SC 6 - parties specify deposit and balance of purchase price will **come from account other than the buyer's solicitor** (e.g. financial institution)
* SC 9 - options to tick for **VAT treatment**, capital allowances and rights of residential tenants in property with long leases
48
Is there a limit to what might be covered in the special conditions?
No, e.g.
1) The Seller agrees to pay the Buyer £80 for a **chancel repair indemnity policy**, a draft of which is attached. (simple contribution to title insurance policy)
2) The Seller and the Buyer agree that **neither of them shall disclose to any third person any details of this agreement**, any documents supplied to the Buyer or the Buyer’s advisors in connection with this agreement or the transfer made under this agreement. (agreement to be kept confidential, adapted from Encyclopaedia of Forms and Precedents)
## Footnote
Note the Law Society Conveyancing Protocol restriction for residential sales (only if absolutely necessary)
49
VAT is charged on any taxable supply - what is a taxable supply?
Supply of certain goods or services by a taxable person in the course of business
50
Who is a taxable person?
A VAT registered business i.e. when it supplies certain goods/services it must charge VAT on sale price
51
When must VAT-registered business pay their collected VAT to HMRC?
Every 3 months (because there are 3 letters in VAT)
## Footnote
E.g. a company manufactures cars, which they sell for £10,000 each plus VAT @20% = £2,000. Over three months they sell 100 cars. They therefore have to account for the £200,000 they have collected to HM Revenue & Customs.
52
What is the difference between output tax and input tax? What can be done with input tax?
* Output tax is the VAT charged to buyers, input tax is the VAT that the business has paid
* The business can offset the input tax it has paid against the output tax it has collected
## Footnote
E.g. continuing the previous example, the car manufacturer has output tax of £200,000 for the three months’ sales. In the same period, it has spent £150,000 of VAT on goods and services for the manufacture of the cars. It will only need to pay £200,000 - £150,000 = £50,000 VAT to HM Revenue & Customs.
53
Must a business always register for VAT?
* If a VAT taxable turnover of more than £85,000 each year = **must register for VAT**
* If turnover less than this = **can voluntarily register**
## Footnote
Advantage of registration = business will be able to offset the input tax it has paid to suppliers against the output tax it charges its customers
54
What does it mean if a business only makes exempt supplies and what does this mean they cannot do?
* Exempt supplies are not taxable for VAT (VAT not charged)
* They therefore cannot recover input tax (have not collected output tax to offset and input tax is additional cost)
## Footnote
E.g. a bank provides banking services: VAT exempt supplies.
If the bank pays input tax on stationery, office furniture, etc, it has no output tax to offset, and the input tax is an additional cost to the bank.
55
Ifa VAT registered business is selling property that is **standard-rated supply**, what must it charge and how can it be offset?
## Footnote
E.g. standard-rated meaning under 3 years old or over and opted to tax (this will not apply if the commercial property is over and not opted to tax)
* Must charge VAT on purchase price for land it sells (output tax)
* If business pays VAT **in connection with the property**, it can offset that input tax against the output tax
## Footnote
E.g. A development company pays a construction company £1 million plus £200,000 VAT to build a warehouse. It sells the warehouse to an investor for £1.5 million plus £300,000 VAT. The development company pay HM Revenue & Customs £300,000 output tax - £200,000 input tax = £100,000.
56
What are the 3 different VAT treatment types of property?
1. Exempt supplies
2. Zero-rated supplies
3. Standard rated supplies (20%)
57
What property comes under exempt supplies?
* Residential property, except for newly constructed property
* Commercial property over 3 years old and owner has not opted to tax
58
What property comes under zero rated supplies?
Newly constructed residential property
## Footnote
Is rational - building company will reclaim input tax. After this residential property is exempt because home owners will not pay VAT between each other
59
As the buyer does not pay VAT for a zero-rated supply, can the seller not recover input tax?
Because the output is taxable, the seller **can** recover input tax from HMRC
60
What property comes under standard-rated supplies?
* Newly constructed commercial property under 3 years old
* Older commercial property (over 3 years old) if seller has opted to tax
61
If the seller opts to tax property over 3 years old, what is the effect?
* Subsequent sale of property is standard-rated
* Any tenants would have to pay VAT on rent
62
With commercial buildings over 3 years old, what does whether the property is exempt or standard rated depend on?
The option to tax
## Footnote
Same as above lol
63
How does the buyer know whether an option to tax has been made, and what must the seller provide if it is?
* Enquiry in CSPE1 asks seller
* Seller should provide copy of option and related correspondence
64
Why would whether VAT being payable or not be a particular concern for the buyer?
If the buyer is not able to recover VAT e.g. a bank or building society providing exempt supplies - VAT is otherwise a 20% increase in the price
65
Is the option to tax personal?
Yes e.g. investor wants to charge tenants VAT on rent
66
What does SCPC provide on VAT by default?
That property is standard-rated (condition 2)
## Footnote
Seller warrants that property is standard-rated supply
Buyer agrees to pay VAT over purchase price in exchange for VAT invoice from seller
67
What are the special conditions in the SCPC regarding VAT?
* Tickbox A1 - overrides condition 2 for properties exempt from VAT (seller agrees not to exercise option to tax)
* Tickbox A2 - overrides condition 2 for transactions that are treated as a transfer of a going concern (TOGC)
## Footnote
A1 = I won't = I won't charge VAT
The first provision of both the A1 conditions and the A2 conditions is that standard condition 2 does not apply; the A1 and A2 conditions only apply if the relevant tick box is ticked.
68
What is a transfer of going concern? Is it a taxable supply?
* A transaction where seller uses the property for the business of letting to produce rental income
* Is not a taxable supply for VAT
69
Who prepares the draft contract?
The seller will prepare the draft contract
70
Where the Law Society Conveyancing Protocol is adopted, what should the contract be in and what must be sent to the buyer's solicitor at the same time as contract?
* Contract in standard form
* Official copies and protocol forms sent to buyer's solicitor at same time (**contract bundle**)
71
What will the buyer's solicitor check the contract against? Why would it want to amend?
* Will check contract against heads of terms and buyer's instructions
* May want to amend if contract is weighted towards seller / take account of matters arising from investigations
## Footnote
In a commercial transaction, the contract may go back and forth between the seller’s solicitor and the buyer’s solicitor until the contract terms are agreed.
72
What are parties losses limited to before and after exchange?
* Before exchange = whatever expenses they have incurred in expectation of selling/buying property
* After exchange = significant financial loss as parties are committed
73
What must the buyer's solicitor do before exchange?
* Received all search reulsts and replies to enquiries
* Check buyer is satisfied with survey
* Advise buyer that insurance must be in place from exchange
* Check deposit funds have been cleared
* Ensure lender's solicitor has approved draft certificate of title (commercial transac)
* Reported fully to buy on title issues
* Sent contract to buyer for signature
* Obtain instructions on proposed completion date
* Obtain authority of buyer to exchange contracts
74
What must the seller's solicitor do before exchange?
* Obtain redemption figure (amount needed to pay off loan) from lender to check proceeds of sale cover it
* Reply to outstanding (additional) enquiries
* Prepare engrossments and send one copy to seller and other to buyer's solicitor
* Obtain seller's authority to exchange contracts
75
Will signed contract be automatic authority from buyer or seller to exchange?
No! Necessary for solicitors of both sides to check again just before exchange
## Footnote
Example: you receive a signed contract and authority to exchange from your client (the seller). The buyer is not ready to exchange until two weeks later. You check with the seller, who tells you not to exchange, because it has that morning come to light that the buyer intends to let the property to a direct competitor of the seller.
76
What is an engrossment?
Final version of the contract
77
What do parties enter on exchange of contracts and how is exchange carried out?
* Parties enter into a binding contract
* Carry out exchange according to Law Society Formula B (telephone)
78
What must either solicitor have received before they can exchange?
Respective client's signed contracts
79
What is dealt with in exchange conversation?
* Wording/figures agreed or inserted for remaining blanks
* Handwritten amendments or special conditions are agreed
* Write in agreed completion date
80
What happens once the solicitors are happy that contracts are complete/identical?
* Agree to exchange contracts under Law Society Formula B
* Agree date and time of exchange
* Give each other their names to write on contract
**Contract is then exchanged and parties are legally obliged to complete**
81
Re undertakings imposed on the solicitors by Law Society Formula B:
* How do solicitors hold signed contract?
* When must they send to other solicitor and how?
* Hold signed contract **to other solicitor's order** (buyer's signed part belongs to seller and vice versa)
* Post signed contract to other solicitor **that day by first class post/DC or by hand delivery**
82
What undertakings does LSFB impose specifically on the buyer's solicitor?
To send the deposit in the form of payment specified by the contract (solicitor's client account cheque in first class post or same day electronic)
83
When will Formula A and Formula C be used?
* A = when same solicitor holds contracts by both seller and buyer (e.g. one of them abroad)
* C = chain transactions (money from one property used to buy next; 2 or more properties)
## Footnote
A = abroad/solicitor away
C = chain
84
What happens during Formula A?
Solicitors have similar telephone conversation in Formula B, but solicitor who holds both parts undertakes just to send client's signed contract to other solicitor
85
Will Formula C always be used for chain transactions?
No as it is complex - B is used but care taken to tie transactions together
86
Is a client's consent needed to exchange using Formula C?
Yes, their irrevocable consent is needed
87
For related sales and purchases, is it possible to exchange one and then run with the hope that the other can be exchanged?
No - related sales/purchases must be tied together (risk that second exchange might fall through)
88
How are related sales tied together?
Solicitor 'releases' contract to the solicitor dealing with related transaction = if solicitor manages to exchange on related transaction by agreed time, the first contract is treated as exchanged, but if not the exchange is cancelled
| Will be adopted and applied to Formula B
## Footnote
Example: your client is selling a flat to buy a house. You telephone the buyer’s solicitor on the flat, and agree to exchange with a release until 3 pm. At 2 pm, you telephone the seller’s solicitor on the house and exchange. You can then go back to the buyer’s solicitor on the flat and confirm the exchange – as long as this happens before 3 pm, the buyer’s solicitor cannot refuse to exchange
89
What should be prepared by each parties' solicitor after exchange?
Memorandum of exchange with key contract terms for the file
## Footnote
Also wise to keep a copy of the signed contract in case the original is lost in the post to the other solicitor.
90
What interest does the buyer hold on exchange?
An equitable interest in the property i.e. seller is holding on trust for the buyer, and the buyer is the beneficial owner
91
Need this equitable interest be protected by a **notice on the register** (registered land) or a **class c(iv) land charge** (unregistered land)?
Only if there is going to be a long time until completion (e.g. completion dependent upon property being built)
92
Will buyer **submit** certificate of title to lender before or after exchange?
After - to request mortgage funds in time for completion date
## Footnote
Lender will have **approved** before exchange, but now officially sending it
93
What is the effect on a buyer of a seller being made bankrupt/dying after exchange?
* Bankrupt = contract binding on T in bankruptcy and on completion the buyer should take a transfer of property from T
* Death = contract remains valid and is binding upon seller's PRs
94
If effected by post, what stage will the contract become legally binding?
When the seller's contract is posted to the buyer's solicitor
95
What is the deemed date of disposal for CGT purposes?
Exchange of contracts
96
What is best practice in a 'contract race'?
## Footnote
Contract race = issuing several draft contracts to multiple prospective buyers
All buyers are immediately informed that there is a contract race (and seller client gives consent to this disclosure)
