Contracts for Conveyancing

Warning: Before using this service please refer to the disclaimer at the foot of this page

What is the contract?

The contract, or agreement, is the legal agreement between the buyer and seller for the purchase/sale of the property. It contains the terms of the agreement, such as the price, the completion date, the amount of deposit paid etc. as well as any conditions to which it is subject. It is a legal document and once the contract is exchanged  it is legal binding on all parties.

Drafting the contract

The contract is prepared by the seller's solicitors and then submitted to the buyer's solicitors for approval/amendment. Each firm will have its own standard form of contract. For an example contract click here. I'll go through the example contract step by step.

The Standard Conditions of Sale

The first thing we see is that this contract incorporates by the Standard Conditions of Sale (4th Edition). All conveyancing contracts are governed by a set of standard conditions. The 4th edition is the most recent version, however some firms are still using the 3rd edition and a few even use the National Conditions of Sale (20th Edition). For a full tutorial on the various versions of the conditions of sale, where I will go through them clause by clause, go to Standard Conditions of Sale. If a contract is received which uses anything other than the 4th edition standard conditions then you should initially ask that it be amended to incorporate the 4th edition, however this request will often be refused, in which case you must be wary of the differences between the different formats. I have tried to point out the major difference in the above tutorial.

The Contract Particulars

Next come the particulars of sale, starting with date of the contract (which is the date of exchange). This will be left blank when the contract is drafted as the date will not be known at this stage. We then have the seller's and buyer's full names and addresses followed by the property address. In the majority of cases the seller will be the person named in the Official Copies as the Registered Proprietor, however there are occasions when this will not be the case, such as:-

• Sale by Attorney - if the seller has given someone a Power of Attorney to deal with the sale, then the Attorney must be named. The wording would be something like "[proprietor] acting by his attorney [attorney]". If acting in a transaction where an attorney is involved you should read the following notes - Powers of Attorney
• Sale by Executor - if the proprietor is deceased and the property is sold by the executor/s of his estate then the contracting party will be the executor/s. You may add the words "as executors of the estate of the late [proprietor] deceased", though this not necessary. 
• Sale by Mortgagee in Possession - if the property has been repossessed by the holder of a charge on the property then the seller will be the charge holder. 

If the buyer has given someone Power of Attorney to act on his behalf in the purchase then the attorney should be named in the contract, using the following wording:- "[Buyer] acting by his attorney {Attorney]". If acting for a buyer via his attorney you should read the following notes - Powers of Attorney You will see that our example is a contract for freehold property, the word "freehold" would obviously have to be replaced with "leasehold" if selling leasehold land.

Incumbrances

Incumbrances are interests which others have in property, such as rights of way, covenants etc. See the section on Official Copies for more information. You will see that in our example contract we state that the sale is subject to the matters contained in the Property and Charges registers, but not the Proprietorship register. The only third party interests in the Proprietorship register will be interests in the equity of the property, or notices of interests, and as such the purchaser's solicitor must ensure that the seller is obliged to remove them. You will also see that we have excluded financial charges, since clearly any mortgages or loans secured on the property must be repaid and the charges removed by the seller, so that the buyer cannot be liable for their repayment. Care should be taken as some firms' standard contracts will not exclude financial charges. If this is the case they must be amended. Either if there are no charges on the property at the beginning of the transaction, when the official copies are first inspected, it should be borne in mind that a charge could be added at anytime up to, and even beyond, exchange.

Next we insert the title number.

Title Guarantee

This will usually be full, but can also be either limited or even none. The level of guarantee determines what "covenants for title" are implied into the sale. I do not propose going into any great detail on this subject in this chapter, but suffice it to say that full title guarantee should be offered in the vast majority of cases, except where the seller has limited or no knowledge of the property (for example an executor selling under probate, because they have never owned the property, but not a landlord who owns the property but has never lived there) in which case limited guarantee may be offered. Only in cases where the seller is acting in his own right (not as personal representative of a deceased's estate) and has never owned the property, would no title guarantee be acceptable. This would usually only occur where for example the seller annexed a piece of land adjoining his own to increase the size of his garden and is transferring it along with the property. In this case the annexed land could be sold with no title guarantee but the remainder should still be sold full title guarantee. Details of the covenants implied by giving a title guarantee are set out in the Law of Property (Miscellaneous Provisions) Act 1994.

Completion Date

In the majority of cases a completion date is agreed prior to contracts being exchanged, and is then inserted into the contract. This is the moving date. In some cases, such as when buying a property "off plan", where at the time of exchange it is not yet constructed, completion will be "on notice". This means that it will take place x many days following a certain condition or conditions being met. In the case of a new build this might be the NHBC final notice. A contract might also be made conditional on the completion of some repairs, or on the issue of a mortgage offer. You should beware a conditional contract which gives either party the option to delay indefinitely, or to withdraw without penalty. Where possible a long stop date should be added whereby if completion has not taken place after a given amount of time has elapsed since exchange then the non-defaulting party (i.e. the person who is waiting for the other to complete his obligations) may withdraw without penalty. the time period would depend on what needed to be done in order to satisfy the condition, for example in the case of a property bought off plan the long stop date might be 12 months in the future, however if the condition is the installation of a damp course, it might only be a few weeks.

If completion is to be on notice then the "Completion Date" section in the contract should read something like "On notice as per special condition x", where x is the number of the special condition, which will be attached to the contract, that deals with when Notice to Complete (i.e. notice that the condition/s have/has been satisfied) can be served.

Contract Rate

Once contracts are exchanged, should either party fail to complete on the completion date, then the non-defaulting party is entitled to claim interest from the defaulting party for every day (including non-working days) that completion delayed, at the contract rate. This rate is generally between 4% and 5% above the base lending rate of the seller's solicitors bankers. A rate any higher than this should not be accepted. The daily rate of interest is calculated using the following formula :- ((sale price/100)*contract rate)/365.

Purchase Price

This is the amount which will be recorded as being the purchase price. It may not necessarily be the actual price paid (although it will in most cases) but it will be the amount recorded in the registers of title on the amount on which the stamp duty liability is assessed.

Deposit

On exchange of contracts an amount of money is paid over by the buyer's solicitor to the seller's solicitor to secure the contract - this is the deposit. This money must be collected by the buyer's solicitor from his client prior to exchange. If the buyer then fails to complete the contract on the completion date, the seller's solicitor will serve a Notice to Complete, requiring the buyer to complete within 10 working days (this is the notice period according to the standard conditions of sale - it may be varied in individual contracts). If the buyer fails to complete prior to expiry of the notice period then the seller may rescind the contract and retain the buyer's deposit. According to the standard conditions of sale (and in this respect they are rarely, if ever, varied), the deposit should be equal to 10% of the purchase price (and if using the 4th edition standard conditions, 10% of any amount paid for chattels also). The seller should insist that a full 10% is actually paid over on exchange where possible, however in practice the full amount will not always be available, for example where the buyer is borrowing more than 90% of the purchase price by way of a mortgage, or he is using the deposit from a linked sale property as the deposit on his purchase and is buying for a higher price than he is selling for (therefore 10% of the sale price will not equal 10% of the onward purchase price). Where a full 10% is not available on exchange, the buyer is still liable to the seller for a full 10% in the event that the buyer fails to complete, however the seller will usually have to sue the buyer for the difference between 10% and the amount actually paid over on exchange, since this difference will not be held by either party's solicitor.

There are two ways in which the seller's solicitors can hold a deposit - as stakeholders or as agents. The former is by far the most common, and means that the deposit must be held by the seller's solicitors until completion or until the seller rescinds the contract as a result of the buyer's failure to complete. If the deposit is paid to the seller's solicitor as agents then they are entitled to release it to the seller prior to completion. This is generally unacceptable since if the seller were to take the deposit then fail to complete, the buyer may find it difficult to recover it. The deposit will normally only be paid over agents if the seller is developer who is a member of the NHBC  and the funds are required to paid for the work required to complete the development. If the developer is registered with NHBC then the deposit is insured in the event that the developer becomes insolvent prior to completion.

Allowance

Sometimes an amount will be held back from the purchase price by the buyer to pay for, amongst other things, some repair work that is required to the property, as an alternative to having the seller carry out the work. This has the same effect in terms of what is actually paid as reducing the price would have, however reducing the price would affect the amount of stamp duty paid, and could be seen as an attempt at tax fraud, whereas an allowance would not. Another reason for agreeing an allowance as opposed to a price reduction is that if the purchaser is buying with a mortgage then price changes will usually need to be reported to the lender, which takes time, however allowances sometimes do not. Unless some statement is made in the mortgage offer on the subject then as a rule of thumb I would say that allowances of less than £1,000 do not need to be reported. 

Allowances do have to be justified and realistic. If for example a seller at the last minute decides to give the buyer an allowance of £10,000 for cosmetic redecoration for example, then you would have two concerns. Firstly, are the seller and buyer conspiring to deceive the mortgage lender as to the true value of the property, so as to encourage the lender to lend more than it otherwise would against the property, and secondly is the £10,000 being paid in some other way, like with illicit goods. If you are unsure as to whether the allowance is a fair reflection of the cost of whatever it is being given for then you should asks to see quotes for works etc.

Chattels

These are additional items which are to be left at the property on completion but for which the buyer is paying additional monies to the sale price. The price being paid is placed in this section. Note that according to the 4th edition of the standards conditions of sale for the purpose of calculating the deposit payable on exchange the chattels price should be added to the sale price. As with allowances, the price paid for chattels must be realistic. Furthermore, an item cannot be considered as a "chattel" if it forms part of the fabric or character of the property, or if it is sufficiently annexed (affixed) to the property. There many differing views on what does or does not make an item a chattel, but a good test is to consider what affect the removal of an item would have on its value, for example to remove a Picasso from a property would not cause it to depreciate and it can therefore be considered a chattel whereas a central heating system if removed would be all but worthless therefore it cannot. This test does not work for everything - a carpet is generally considered a chattel for example, but it does work for most items.

A buyer will often attempt to class certain items as chattels which are not, in an effort to reduce the purchase price, and so the amount payable for stamp duty. The Inland Revenue are now looking more closely at such cases, and a solicitor should not act for a buyer who insists on doing this. Also, when assessing the value of an item, it should be based on its resale value, not its original cost.

Balance

This is the amount to be paid on completion, having take account of any deposit paid, chattels, allowances etc.

Contract Special Conditions

Next we find the special conditions, which are particular to each contract depending on the nature of the transaction, and which supplement the standard conditions.

Most solicitors' firms will have their own standard form of contract which they will vary where necessary. Our example is a particularly aggressive contract, however it does serve to highlight some of the clauses that a buyer should be wary of.

Adult Occupier Declaration

Should there be anyone in occupation of the property prior to completion who is not a joint owner and therefore not one of the sellers, that person may have accrued rights of occupation (for example a spouse of the seller). All occupiers must therefore sign the contract as evidence of their agreement to vacate and give up any rights that may have accrued to them. Since a person under 18 cannot own a legal interest in land, only occupiers who are 17 and above (17 because they may become 18 prior to completion) should be asked to sign.

1. References to Standard Conditions

Clause 1 merely sets out that the contract is subject to the Standard Conditions (4th Edition), that the seller's solicitor is holding a copy of them, and that if there is a conflict between the contract and the standard conditions, the contract is correct and the standard conditions are deemed to be varied. Such a clause is common to most contracts.

2. Vacant Possession Clause

Unless the property is a buy to let, and is sold with a sitting tenant, then the contract must contain a clause similar to this. Its affect is to ensure that the seller, together with ant other occupants, is bound to vacate the property on or before completion. By agreeing to give vacant possession the seller is stating that he will remove from the property all items of his property (including rubbish) other than those listed in the Fixtures, Fittings and Contents list as being included in the sale.

3. Overriding Interests

An overriding interest is an interest in land which exists despite the fact that it is not registered - so that it overrides the need for registration. We will cover this topic in a little more detail in another chapter, but some examples of these interests are legal rights which have never been registered, prescriptive rights (right that are implied through long term use) tenancies, leases-for-life, rights of common etc. The seller should be asked to complete a "Disclosable Overriding Interests form " prior to exchange so that the buyer will be aware of all such interests (other than any of which the seller is not aware) and can ask the seller to deal with any that should not remain following completion. This contract clause then protects the seller from any liability which might otherwise result from any interests which are revealed following completion. This clause is common to most contracts, and should be so since it is not fair for the seller to be liable after he has parted with the property, however in the vast majority of cases there will not be any unknown overriding interests and so it will rarely be an issue.

4. Chattels to be Included in the Sale

This clause is referring to the Fixtures, Fittings and Contents list, which should be attached to the contract, and it confirms that any items marked as included will, and must, be left at the property following completion and be included in this sale price. Note that the seller is not deemed to imply any warranty as to the state of repair or usefulness of any item included in the sale. It is for the buyer to make his own inspection.

5. Latest Time for Completion

Also known as the "contract time", this is the latest time by which the seller must have vacated the property and by which the purchase monies must have reached the seller's solicitor's account on the day of completion. The method used for transferring the funds is CHAPS, and although this is a guaranteed same day payment (provided it is made before a certain cut off time) it is not instant, therefore there is no guarantee as to how long funds will take to transfer. This actually means that there is always a risk that funds will reach their destination late, however the earlier the completion time the greater the risk. The completion time according to the standard conditions is 2pm, and if there is no chain then no variation to this should be agreed. If, however, the seller is dependent on the purchase of another property which is to complete on the same day then he should ask for an earlier time in his sale contract. This because he will be relying on the sale proceeds reaching his solicitors in time for them to be forwarded to the solicitors acting for his seller so that they arrive there before the completion time on that contract, which will be 2pm at the latest. That is what is happening with our example contract. In long chains a certain amount of risk has to be accepted.

6. Full 10% Deposit Remains Due

Under the contract standard conditions of sale the seller is entitled to compensation amounting to 10% of the sale price of the property in the event that the buyer reneges on the contract following exchange, and this sum should be paid to the seller's solicitor on exchange by way of a deposit. In practice however a buyer will not always have a 10% available on exchange. It may be that he is borrowing more than 90% of the purchase price by way of a mortgage (and the mortgage funds cannot be used toward the deposit since if the matter does not reach completion the mortgage funds must of course be returned to the lender in full) or that he is using the deposit from a dependent sale property (which will usually be less than 10% of the price of the property he is buying since it is far more common to upsize than to downsize). This is where this clause comes into effect, since it clarifies that although the seller has agreed to exchange with a lesser deposit, the balance required to make it up to 10% is still due as a debt from the buyer should he refuse to complete. Since his solicitor will not be actually holding the balance however, the seller would have to sue the buyer for it. The presence of this clause therefore should not encourage the seller to accept a lesser deposit where a full 10% could be offered, or to agree to exchange with no deposit whatsoever. Where the buyer has no deposit to offer exchange and completion will normally take place on the same day (this is known as simultaneous exchange and completion).

7. No Reliance on Representations by Seller

This clause is very onerous should not be accepted by the buyer as it appears in our example. It is saying that the buyer is not entitled to rely on any representations made by or on behalf of the seller whatsoever and can only rely on something which is a term of the contract. This means the buyer would not be able to rely upon the seller's answers to the Property Information Form, nor the seller's solicitors' replies to enquiries raised by the buyer's solicitors. As an example, there is a section in the Property Information Form which asks the seller whether he is aware of any disputes with his neighbours. By including this clause he could answer no, even if he in fact had the proverbial "neighbours from hell" and not be liable. Clearly this is not acceptable. There is a need to limit what the buyer is entitled to rely on, and this clause can be made fair by inserting the words "save as are contained in any written correspondence passing from the Seller's Conveyancer to the Buyer's Conveyancer which for the avoidance of doubt shall include (but not be limited to) the Property Information Form completed by the Seller" after the words "Seller's Agents". A clause in this form is perfectly acceptable and is quite common. A seller should always look to place this in the contract. It is fair to exclude representations made by the selling agents from the contract since the seller will not always be in control of what the agents say and the buyer should accept that if he needs to rely on the reply to any enquiry it must be raised via his solicitor and not directly with the seller.

8. Fee for Notice to Complete

This is a very common clause. The standard conditions of sale give the non-defaulting party the right to claim compensation from the defaulting for losses suffered (in addition to the interest at the Contract Rate (see above))as a result of completion not taking place on time, however this is non-specific and would be a matter for litigation. In the meantime a delayed completion creates additional work for the solicitors, for which they are quite entitled to charge. This clause simply makes the costs of the non-defaulting party's solicitors the responsibility of the defaulting party, rather than their own client. The Notice to Complete is a notice which is served to say that, in accordance with the standard conditions, the defaulting party has 10 working days in which to complete or else the non-defaulting party may rescind (withdraw) the contract. The amount that is payable in costs will vary from contract to contract. A solicitor acting for a client who is both buying and selling should check that the figure is the same in both the sale and the purchase contracts (or else that one of the contracts does not contain such a clause).

9. Power for Seller to Retain Deeds

This clause would be most likely to come into effect where completion took place late through the default of the buyer and when the purchase monies were eventually paid to the seller's solicitors the late completion interest or any other compensation was not included. What this clause means is that although both parties might agree that completion can take place, so that the buyer can take up occupation of the property and the seller can use the purchase monies, the seller's solicitors do not have to hand over the deeds (for the case of registered property this will be the transfer deed). This is quite onerous on the buyer, since his ownership cannot be registered without the deeds. This clause should never be accepted where part of the purchase monies are coming from a mortgage, since the buyer's solicitor is only allowed to use the lender's money to complete the purchase if he either has all funds and documents in his possession which are necessary to complete the purchase or else a solicitor's undertaking that the outstanding documents (i.e. the deeds) will be forwarded immediately. Such an undertaking is given by the seller's solicitor in Replies to Requisitions on Title, however it would be negated if this contract clause came into effect. The only alternative in this instance would be to delay completion until all outstanding were paid. If the buyer is a cash buyer then it is his choice, however it should be made clear to him that he will not be entitled to be registered as owner, and will not therefore legally be the owner, until all outstanding monies are paid.

10. Compensation for Late Completion

There are differing views on whether a clause such as this should or should not be accepted. My own view is that the standard conditions of sale deal adequately with the issue of compensation. The actual sum to be paid ought to be a matter that is either resolved amicably or else by litigation. Whilst this clause would offer the seller some peace of mind, it may also encourage him to perform certain actions believing he will not be obliged to bear the expense. Ultimately it is not for us as conveyancers to make a judgement on what the outcome might be of a litigation case therefore to commit a buyer in this manner is, in my view, negligent.

The remaining clauses apply only to leasehold transactions:-

11. Breach of Lease Covenants

Section 4.1(b) The Law of Property (Miscellaneous Provisions) Act 1994 states that in every transfer of a lease with full title guarantee there is an implied covenant by the seller that the covenants in the lease have not been breached. This variation is fairly common and simply means that the statement does not apply to the covenant to keep the property decorated and in good repair. This prevents the buyer from going back to the seller after completion and insisting that he make certain repairs which if left would represent a breach of covenant.

12. Deed of Covenant

Where the Lease contains a covenant that the purchaser (or assignee) has to enter into a deed of covenant with the landlord on completion of his purchase then it will often state that the seller is responsible for ensuring that this is done. This clause ensures that the buyer must enter into the deed and pay any associated costs.

13. Notice of Assignment 

Most leases will contain a covenant by the purchaser (assignee) to serve a notice on the landlord of the change of ownership, called a Notice of Assignment. The purpose of this clause is to ensure that the purchaser does so. Until a notice of assignment has been served the landlord will continue to invoice the seller for rent and service charge.

14. Licence to Assign

Some leases require the seller to obtain permission from the landlord to assign the lease, called a Licence to Assign. This must be obtained before completion. Without it the assignment of the lease is not valid and the lease may be forfeit.

Regards

Free Conveyancing Advice

Visitors so far