#4825 - Drafting And Exchange Of Contracts - Property Law and Practice

1. It is the seller’s solicitor who drafts the contract.

2. The buyer’s solicitor then checks the contract and returns to seller’s solicitor with any amendments.

3. Once the contract is agreed the parties will sign.

4. When both parties are read to proceed, the contract will be exchanged, at which point the date for completion of purchase is fixed and the parties have a legally binding agreement.

There are standard form contracts for residential and commercial transactions. These both contain ‘Standard Conditions’ and ‘Special Conditions’. Standard contracts are generally for residential transactions. The Special conditions are used to amend standard conditions and can also be used to incorporate specific conditions.

Drafting the Contract

NB: beware of drafting errors (e.g. misspelt or incorrect parties/incorrectly named property)

• Property: requires a clear description of the land. State whether it is freehold/leasehold and register/unregistered.

  • If a sale of part then include a plan.

• Specified Incumbrances: allows seller to discharge duty of disclosure. There is no duty to disclose patent incumbrances (i.e. those obvious on inspection) or physical defects but MUST disclose:

  • Latent incumbrances: something which burdens the land and restricts the owner in some way. This includes easements and existing mortgages. The best way to disclose is to refer to the entries in the Charges Register.

  • Defects in title: these are matters bringing into question the seller’s ownership of the property. If it isn't possible to remedy the defect, the seller should include a special condition revealing the nature of the defect and that the buyer accepts it (known as a Faruqi clause).

NB: if a residential transaction, any incumbrances revealed by the Land Registry or by normal searches must be expressly disclosed in the contract or the seller will be liable for breach.

• Title guarantee – ss.2-3 LP(MP)A – the guarantee of the seller’s quality of title to the property. DO NOT CONFUSE with class of title:

  • Full title guarantee – expect this – a GUARANTEE that the seller has the right to sell the property and that the property is free from charges/incumbrances OTHER THAN those disclosed in the contract (s.6(1) LP(MP)A) or those the seller couldn't have reasonably known about (s.3(1) LP(MP)A).

  • Limited title guarantee – there is no guarantee property free from all 3^rd party incumbrances. Instead, there is a guarantee the seller hasn't created any incumbrances since the last sale and is unaware anyone else has. This should be used if seller has limited knowledge of the property.

NB: unless the contract says otherwise, SCS 4.6.2 states the seller has full title guarantee. Same under SCPC 6.6.2 except there is no pre-printed provision on the front.

• Deposit – SCS 2.2.1 and SCPC 2.2.1 say this is 10% purchase price. SCS 6.8.3 if a lesser deposit has been accepted and the buyer fails to complete, he must pay the full 10%. It may include chattel payment.

  • SCS 2.2 and SCPC 2.2 state the deposit must be paid to the seller’s solicitor as stakeholder. He may also hold as agent for the seller.

  • Under SCS 2.2.5 (not SCPC) if the seller is buying another house he may use the deposit money to fund the purchase.

• Contract Rate – should be about 3-5% per annum

• Purchase Price – the agreed amount for the property.

  • SDLT rates apply to this:

• Contents Price and Chattels

NB: with all special conditions:

1. State who (buyer or seller)

2. Is to do what (e.g. provide document or deal with issue)

3. And by when (e.g. “on or before Completion”)

4. And relevant information on how it will be done

• Vacant Possession: pre-printed special condition (SCS 6.1.3(a))

• Contents or chattels included and fixtures removed

• Time for completion.

• VAT – not payable by the buyer in addition to the purchase price (SCS 1.4, SCPC 1.4) UNLESS:

  • New commercial building OR seller elects to charge VAT and

  • Pt. 2 Condition A1 expressly incorporated (SCPC 1.1.4(b)) OR contract specifically confirms VAT payable (SCS)

• Non-legal owners: these are occupiers other than sellers – this is a pre-printed special condition in the SCS. If there is another occupier in the property, as special contract should be prepared by the occupier agreeing to waive interest in the property and vacate upon completion. You could also draft a special condition into the contract stating this.

  • see back page of handbook – ‘occupier’s consent’ clause

• Indemnity covenant from buyer to seller – SCS 4.6.4/SCPC 6.6.4

• Exclude Contracts (Rights of Third Parties) Act 1999 – SCS 1.6 covers this

• Conditional clauses:

  • e.g. restrictive covenant indemnity policy to be purchased before completion by the seller

  • Seller to obtain planning permission/building regulation certificate by completion

“This contract is conditional upon the grant of a planning permission relating to the change of use of the Property from Class D1 to Class C2 as defined in [X] from [X council] with any such conditions attached to that permission to be reasonably acceptable to the Buyer (the “Permission”) and in relation to the application for the Permission the following provisions shall apply:

As soon as practicable after the date of this Agreement, the Buyer shall at its own expense make an application for the Permission;

…”

• Sale of part considerations:

  • Express easements to benefit or burden

  • Express covenants to impose on the buyer

Exchange of Contracts

* funds will have been requested from the lender by providing a certificate on title. In the case of a commercial property, this is a CLLS certificate of title.