What You Need to Know About Conveyancing Contracts
The conveyancing contract (sometimes referred to as the agreement) is a document which contains all of the terms and conditions to which a conveyancing transaction is subject. Once contracts are exchanged those terms become legally binding on all parties.
For most of us, the contract to purchase a property is by far the most valuable contract we’ll ever enter, with the most serious financial consequences should we breach it, so even though it may seem complicated with lots of legal jargon, it is important to understand the salient points.
What is a Contract?
The first question is, never mind conveyancing contracts, what is a contract in general? What effect does it have? Put simply, a contract is an agreement between two or more parties which creates legal rights and obligations that bind those parties.
There are four essential elements to a contract which are offer, acceptance, consideration and an intention to create legal relations. If any of these are missing then no contract exists (though with the exception of consideration they can be implied). Consideration means payment in return for a promise. If for example I offer to give you £100 as a gift and you accept but then later I fail to give the gift, I am not bound by contract because you have not offered me anything in return for my promise, so there is no consideration, even I say to you that if I intend my offer to be legally binding.
If on the other hand I offer to give you £100 in return for a scrap of paper and you accept and provide the scrap, then a binding contract may be formed. It does not matter that the consideration you are providing (the scrap of paper) is worthless.
The offer needs to be on certain terms – “I offer to sell you a book” is not a valid offer since the specific book is not specified and nor is the price, and that offer needs to be accepted by the other party. Most contracts do not have to be written and can be verbal, or can even be implied by the parties’ actions. For example when you buy something in a shop a contract will be formed between you and the proprietor of the shop, even though you may not exchange any words with the shop assistant. By taking an item from a shelf and placing it on the counter you are making an offer to purchase, which the assistant then accepts by taking your money. The consideration is the money you pay and the item you receive in return and an intention to create legal relations is implied by law since it is accepted that these types of transactions do create such relations.
Special Provisions Relating to Conveyancing Contracts
As mentioned above most types of contract do not have to be written down to be binding however contracts for the sale of land are the exception thanks to a piece of legislation called the Law of Property (Miscellaneous Provisions) Act 1989. Section 2 of the Act states that a contract for the sale of land must be in writing, must incorporate all of the terms in one document and must be signed by all parties.
This is why it is important that the contract is correct and is understood. A buyer cannot sue a seller for breach of contract as a result of something, such as an oral statement made in respect of the property which turns out to be false, that is not incorporated into the contract itself, though he may still have an action in tort.
The Particulars of the Conveyancing Contract
The first page the contract will generally contain the particulars, i.e. the parties, price, deposit, completion date etc. This will usually also be the page that you sign. You need to check that the details have been completed correctly, i.e. that the purchase price, buyers’ and sellers’ names, property address, title number and tenure (freehold or leasehold) are correct.
The title guarantee will usually be “full”, however if the seller is a mortgagee in possession, trustee, executor or administrator he will usually only be prepared to offer limited title guarantee.
There will be a “contract rate”. This is the daily rate of interest which the buyer must pay to the seller if he fails to complete on the Completion Date, which will be entered on exchange of contracts. The Law Society Rate is often used, which is 4% above the Bank of England Base Rate, so the daily interest is calculated as follows: ((purchase price – deposit actually paid) /100 * interest rate) / 365.
The deposit will generally be 10% of the purchase price though if there is a chain it is usual for the buyer to use the deposit on his own sale as the deposit on his purchase. If the price of the property he is selling is less than the one he is buying, as is usually the case, then he will not have 10% of the purchase price and so a lesser amount may be entered into the contract. Whatever amount is entered here, he will still be liable for 10% if he fails to complete.
There will usually be a “chattels” section. Chattels are fixtures and fittings for which the buyer is paying money in addition to the purchase price of the property and the amount to be paid is entered here.
The contract does need to be signed however as it is not a deed; it does not need to be witnessed. Generally the seller will sign one copy and the buyer will sign another, identical, copy.
The Standard Conditions of Sale
A conveyancing contract will usually be subject to the Standard Conditions of Sale 4th Edition and if so this will be indicated on the contract. There are earlier additions which can be used but it is quite rare that they are. These conditions set out such things as how and when the deposit should be paid, what happens in the event that either party fails to complete, who is responsible for the property between exchange and completion and a number of other matters. Your conveyancer will be able to supply you with a copy on request though they will not generally be supplied automatically.
The Special Conditions of the Conveyancing Contract
The special conditions is the name given to any additional terms which the parties agree to add which either supplement the standard conditions or amend/replace certain standard conditions. They will be printed on either on a separate page to the particulars or on the reverse. These can cover any number of situations which might be specific to a particular transaction but there are some important ones to look out for, such as is the property sold with vacant possession or is it subject to a lease or tenancy? Whichever is the case should be stated in a special condition.
Sellers’ conveyancers often try to amend standard conditions 5.1.1 and 5.1.2. These standard conditions have the effect of making the property the responsibility of the seller between exchange and completion and it is quite common to find a special condition which reverses that effect. This can be a problem for the buyer because he will not generally have any control over the property during that period and so he is at the mercy of any negligence by the seller. A buyer should therefore attempt to convince a seller to remove such a condition.
When a buyer pays a deposit on exchange it is, according to the standard conditions, held by the seller’s conveyancer as “stakeholder”. This means that, although it can be used as a deposit on the seller’s onward purchase if he has one, it cannot be released to the seller and he cannot use it for any other purpose until completion, so if the seller fails to complete it should be simple for the buyer to recover his deposit. Another way to hold the deposit however is an “agents”. This means that it can be paid to the seller and he can use it before exchange and the standard conditions are sometimes varied in this manner. This should only be accepted (and is common practice) where the seller is a developer and the property is covered by an NHBC guarantee, and that’s because NHBC then insure the deposit in the event that the builder goes bust and doesn’t finish the development or return the deposit.
Is There a Fixtures, Fittings & Contents Form Attached to the Contract?
With the exception of sales by mortgagees in possession there should always be a fixtures, fittings and contents form attached to the contract. This form lists all of the items the seller will be leaving at the property, all he will be removing and all (if any) that he is offering to sell. Both buyer and seller should check this form carefully to ensure that it accords with any agreements they have reached and if there are any items offered for sale an agreement should be reached on this prior to exchange and the total price to be paid for them should be entered into the chattels section of the particulars of the contract. If there are any items which the seller offers to sell but the buyer do not want to buy, the fixtures, fittings and contents form should be amended to reflect that they are either to be removed or that they are to remain and be included in the sale price, as agreed.
Signing the Contract
The contract needs to be signed by all parties to it. Usually the seller and buyer will each have an identical copy and will sign their own copy. It isn’t a deed so it doesn’t have to witnessed. In fact you can instruct your conveyancer to sign the contract on your behalf.
If there is anyone in occupation of the property who is not a joint owner or tenant and who is over the age of 17 (such as a partner or spouse, lodger or adult child) he or she will need to sign the contract giving their agreement to vacate and there should be a separate “adult occupier declaration” to sign. He or she will only need to sign the seller’s copy of the contract.
The act of signing the contract does not make it binding, which only happens when contracts are exchanged.
Exchanging Contracts
Contracts will be exchanged between the buyers’ and the sellers’ conveyancers, usually in a telephone call. Having already had instructions from their clients on the date that has been agreed for completion they will go through the contract and make sure both copies are identical before dating and timing it. At that point the contract is effectively binding, though they most each post their copy to the other that day, unless they agree that they will not post it that day which might happen where the exchange is done after the last post collection in which case it must be posted on the next working day, to formalise the contract and failure to deliver it may give either party the option to rescind.
You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
