Beware Contracts Race when Buying Property
The process of buying a house (or flat), or more specifically buying land, is unlike the process of buying any other item. When it comes to any other item, even a very expensive one, the process is extremely straightforward. Seller and buyer agree a price and once agreement is reached a contract is created, which is legally binding and can be enforced through the courts if necessary.
The contract does not even need to be in writing (and frequently it isn’t). Take for example a market stall. You see an item you want, ask the price and if you agree with it and you say so, a contract is created. Even if you immediately change your mind, it may be too late and you may be bound.
A land transaction is different. Even after a price is agreed, it is usually several weeks before contracts are exchanged and both buyer and seller become legally bound to complete. This can lead to the possibility of the seller finding another potential buyer before the critical point is reached. If this happens, the seller may withdraw the contract from you or may opt to keep hold of both potential buyers and start a contract race.
What is a Contract Race?
It is entirely legal for a seller to agree a price with two or even more buyers for the same property at the same time, provided he only exchanges contracts with one of them. The buyers are therefore competing with each other to become the first to exchange contracts with the seller, hence the term “contract race”.
Advantages and Disadvantages of a Contract Race
A contract race only benefits the seller. The risk to the potential buyers is that whoever loses the race will lose any money spent on searches and surveys and potentially legal fees. Even property conveyancers who normally work on a “no exchange, no fee” basis are likely to charge something irrespective of whether the transaction proceeds given the increased risk that it will not.
From a seller’s point of view, there are two main advantages. First, exchange of contracts and therefore completion is likely to come around much more quickly as the competing buyers pull out all the stops and second, there is a reduced risk of “gazundering”, the practice of a buyer reaching the point of exchange and then asking for a last minute price reduction, leaving the seller with no choice but to agree or to start the process from scratch. It also shows that both buyers are genuinely committed to the purchase.
The risk from the seller’s point of view is that both potential buyers might be put off by the idea of a contract race and he might be left with no buyer at all.
Rules Relating to a Contract Race
Where a seller issues a contract to (i.e. agrees to sell to) more than one buyer, he may be guilty of misrepresentation if he does not disclose the fact to all of the potential buyers, since a potential buyer might reasonably withdraw his interest if informed and the seller’s failure to disclose robs him of that opportunity.
If the seller is acting through a solicitor then the solicitor is bound by rule 11.3 of the Code of Conduct for Solicitors 2011 to inform all of the potential buyers that a contract has been issued to another buyer or buyers. He must do this in writing but should also telephone each one (or more usually, their solicitors). Before making the disclosure however he must obtain his client’s consent. He must advise his client that if he does not consent to the disclosure then he (the solicitor) will no longer be able to act for him.
If the seller does consent and the transactions progress then as far as is reasonably possible the seller’s solicitor must treat each buyer equally, i.e. by issuing each with an identical contract pack on the same day and dealing with any enquiries from each buyer within the same time periods. Once contracts are exchanged with one buyer the other buyer or buyers must be informed immediately.
Whilst it is acceptable in limited circumstances for the same solicitor to act for both seller and buyer, this can never happen where this is a contract race, because the risk of a conflict of interest arising between his seller client (who may want to sell to the buyer for whom the solicitor is not acting) and his buyer client (who of course wishes to win the race) is too great.
Contrary to popular belief, the seller is not obliged to exchange contracts with the first buyer who declares that he is in a position to exchange, though in practice he usually will.
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