Exchanging Contracts in Property Conveyancing Process
A contract for the sale of goods does not have to be in writing. It can be verbal or it can even be implied by the actions of the parties. For example when you go into a shop you might not speak to the assistant but by you handing over money and him/her handing over the goods the law assumes that a contract was intended and the terms of that contract are implied by certain statutory rules.
A contract for the sale of land however follows a different set of rules, set out in the Law of Property (Miscellaneous Provisions) Act 1989. These rules state that it must be in writing, be signed by all of the parties to it and must contain all of the terms within one document. For this reason, a contact for the sale of land cannot be created verbally and the seller’s acceptance of a buyer’s offer is not enough to form a contract and make a land transaction binding. Instead, neither seller not buyer are obliged to proceed, and therefore neither has any legal liability to the other, until exchange of contracts.
When are Contracts Exchanged?
Whether you are a buyer or a seller, you will usually want to get to exchange of contracts as quickly as possible so that everyone is committed because you don’t want the other party to have a change of circumstances or a change of heart and the whole thing fall through.
From the buyer’s point of view however it is essential that all of the necessary investigations are completed and that finance is in place before exchange. There are potentially very serious financial liabilities attached to failing to complete on time once contracts are exchanged and there are serious risks associated with not carrying out the necessary investigations. As a result, contracts should not be exchanged until:
- All search results have been obtained, checked and if necessary any further enquiries have been made and satisfied;
- All enquiries of the seller have been satisfactorily answered;
- A valid mortgage offer is in place, or if the buyer does not require a mortgage, any alternative source of finance is available
In addition, the seller should not agree to exchange until he is confident he will be able to vacate the property on the completion date (which will be fixed in the contract).
Preparing for Exchange of Contracts
Once all of the searches and enquiries are dealt with and the buyer’s conveyancer is holding a contract signed by the buyer he should check if the seller’s conveyancer is also ready to exchange. If so he will ask the buyer to pay the deposit to him. This is an amount equal to 10% of the purchase price (he will probably also ask for any remaining balance being paid by the buyer rather than a lender to be paid to him at the same time). The deposit acts as security for the contract and must be in the possession of the buyer’s solicitor before exchange can take place.
Next a completion date has to be agreed. Both buyer and seller (and if there is a chain, the whole of the chain) must agree to the same completion date. From the conveyancers’ point of view in most cases, the only requirement is that there is sufficient time to draw down funds from any mortgage lender, obtain final statements in respect of any mortgages that are being repaid and if the property is subject to the payment of rent and service charge, obtain statements from the landlord and calculate and collect any apportionments. Generally a week is enough and the gap can even be less, particularly if the conveyancers are forewarned.
How Does Exchange of Contracts Take Place?
Once the deposit is paid and the completion date is agreed then contracts are exchanged using one of the Law Society’s formulae for exchange. As this is the point of no return so to speak, both the seller’s conveyancer and the buyer’s conveyancer should telephone their respective clients and obtain authority to proceed, checking with them the completion date, property address and purchase price and asking them to confirm that they understand that the transaction will become legally binding following exchange and the consequences that will flow from a breach. They should do this on the day of exchange, even if they are repeating a conversation that has taken place on a previous day (it is not uncommon for there to be several failed attempts to exchange) because things can and sometimes do change overnight.
Methods of Exchange of Contracts
Originally solicitors would exchange contracts in person. They would meet at each other’s offices armed with their own client’s signed part contract and they would exchange these, with the buyer’s solicitor handing over a solicitor client account cheque for the deposit. These days that method is rarely practical and so instead one of the Law Society’s formulae for exchange are used.
Law Society Formula A Exchange
This is less common of the two methods. It involves the buyer’s conveyancer posting his client’s part contract and a cheque for the deposit drawn on his firm’s account to the seller’s conveyancer. The seller’s conveyancer will then telephone him to confirm that both parts of the contract are identical and to affect exchange. He is then under a duty to post the part contract signed by the seller to the buyer’s conveyancer that day. Provided he does so then contracts are exchanged at the end of the phone call.
Law Society Formula B Exchange
This is much more common than formula A and involves both conveyancers holding the part contract signed by their client. One will telephone the other and they will go through all of the terms to ensure they are identical on both parts. If they are then contracts are exchanged, though to complete the formalities each must post his client’s part contract to the other that day and the buyer’s conveyancer must in addition post a deposit cheque drawn on his firm’s client account unless the deposit is “held to order”, which in practice where there is a short gap between exchange and completion it often is. This means the buyer’s conveyancer holds the deposit but must not release it to anyone other than the seller’s conveyancer.
Exchanging Contracts When There is a Chain
If a person is both selling and buying it is usually essential that both transactions complete together. This can only be guaranteed if the exchanges are somehow inter-linked. If contracts are exchanged on the purchase but not on the sale then the client will have no money to complete the purchase (because he is relying on the sale proceeds) and so will have no choice but to breach the contract. If contracts are exchanged on the sale but not the purchase the client could end up with nowhere to live.
To get around this the Law Society came up with a formula C release. The buyer’s conveyancer at the bottom of the chain will telephone his client’s seller’s conveyancer and go through the contracts as normal but instead of finalising the exchange there and then, he will allow the seller’s conveyancer until an agreed time that day, say four O’clock, to come back and confirm the exchange. Provided the seller’s conveyancer does confirm before the agreed time then the buyer’s conveyancer has to honour the exchange but if he does not then the exchange is not completed. This is known as the buyer’s conveyancer giving a release of the contract to the seller’s conveyancer.
During this period the seller’s conveyancer will contact the seller’s conveyancer on his client’s purchase and either exchange as normal under formula B or else, if there is a further chain beyond, give a release himself. If he gives a release the “release time” should be at least 15 minutes before his own release expires. This is so that, if the solicitor who he has released to comes back to him right on the deadline, so say at quarter to four, he still has 15 minutes to get hold of his client’s buyer’s conveyancer before that release expires. Failure to confirm exchange prior to the release time having confirmed exchange on the other transaction will lead to exchanging on the sale and not the purchase and a potentially hefty claim for negligence!
What is the Effect of Exchanging Contracts?
Once contracts are exchanged both buyer and seller are legally bound to complete on the completion date. If there are any delays then the non-defaulting party can serve a “notice to complete” on the defaulting party. This gives the defaulting party 10 working days (unless the standard conditions of sale are varied) in which to achieve completion or else the non-defaulting party has the right to rescind the contract, that is, to terminate it.
Once a notice is served then the server is entitled to claim against the other party for any losses suffered as a result of late completion. This can include interest on a mortgage that was to be repaid from the sale proceeds, the cost of removal vans, storage, bridging finance – basically any reasonable loss flowing directly from the other party’s failure to complete on time (subject to assessment by the Court).
If it is the buyer who defaults ten in addition to any other compensation the seller is entitled on rescission to receive the buyer’s 10% deposit and is able to sell the property from the buyer’s interest.
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