#10229 - Scpc V Sc Table Ws 4 Itutorial - Property Law and Practice

i-tutorial The Contract

Prior to exchange of contract, there is no binding commitment. Exchange of contracts is a stressful time and excitement as it is the point of no return as neither can change the terms of the deal without the cooperation of the other. The contract must reflect the agreed terms.

Why do we need a contract
Types of contracts
How a typical contract is structured
How to draft a contract for the sale of registered freehold property

1. Why do we need a contract?

You don’t need a contract for every property transaction. After all, the contract can’t transfer the land. You need a deed to do that, the contract is just an agreement to transfer the land at a later stage. But why would you want to have a contract? For a variety of reasons:

Timing – to lock the parties in while finance or removal arrangements are put in place
Conditionality – there may be an important matter to deal with (e.g. while a planning permission is obtain or building work is completed, planning authorization for the change of use) before the buyer is willing to proceed.
Non-land issues e.g. chattels, supply contracts
There is a chain transaction – one party is awaiting to finalise another sale in order to continue with the following and therefore needs a contract to ensure completion is synchronised.

In all these situations in order to prevent either party to back out the parties need a contract. The contract thus provides parties with certainty regarding:

The nature and extent of the property
The financial terms
The timetable for completion
Either party withdrawing from the transaction

Once contracts have been exchanged the parties are locked in.

2. The form of contract (types of contract)

The seller’s solicitor is in charge of drafting the first draft of the contract; he may use:

A pre-printed version
A firm-specific version (a pre-contract version issued by his firm)

Either way, you may include specific conditions. Moreover, either way a set of standard conditions have to be included in the contract. These standard conditions have been developed by the profession:

The standard conditions of sale (5^th edition) (is designed for use in residential conveyancing transactions and some very simple (a straightforward title and a low value) commercial transactions.
Standard commercial property conditions (SCPC)(2^nd edition) (to be incorporated into a contract for sale of commercial property or a contract for the grant of a lease of commercial property)

3. The Structure of the Contract

The Standard contracts are divided into three parts:

On the front page are descriptions of the property and the sale. These are particular to the transaction
The second part includes (the middle of both versions) are the “standard conditions” of sale or the SCPC. The detail is included in this section and there are some differences between the two. The terms of the transaction.
Finally the “Special conditions” Section is found in the back of the Standard conditions, these is an area to tailor the transaction to specific requirements. There are some pre-printed suggestions and a section where specific requirements can be inserted.

The front page of the Contract

FOR REVISION:

1. Read the SCPC

2. Title + Heads of Title are needed to amend the contract

3. Formulas (A/B/C)

You need the two contracts from WS4 to COMPARE and see where these notes apply. We are assessed on the application of the SCPC in the Contract. Thus, if asked to revise a drafted contract you need to note that where the contract is silent the SCPC will apply. This means that if the contract includes info about say, VAT, Deposit or Purchase Price, it is inserting a clause different to that in the SCPC. Similarly, if the contract states that “Conditions XX and X are varied by the…” then the SCPC is being changed and you will not want to agree on that change. You need to verify that that clause matches what was agreed between the buyer and seller which is stated in the “Heads of Terms” and that it does not compromise the clients position. Finally, see the Drafting Special Conditions below.

Cover Page

Check that Exchange of contract Box is included on the top right hand side

Contents

Delete any sections from the Contents that you might have deleted inside the Contract

Information about the property, seller buyer

Price, the deposit and the chattels

Usually obtained by way of interview with client or memo in written form from client or estate agent.

FUNDAMENTAL Cross check the information contained in the “Official Copies” (i.e. registry doc) against the “Head of Terms” and against the “Actual Contract”. Names, addresses, purchase value, title number etc.

Contract Rate

SCPC 9.3

SCPC 1.1.1(e)

The contract rate is the rate of interest that will be charged on the purchase price less deposit if the buyer is late on completing under SCPC 9.3 The rate must be high enough to hurt the defaulting party and provide an incentive to complete on time. SCPC 1.1.1(e) indicates that the contract rate is the Law Society’s interest rate from time to time in force (Currently at 4.5 %). If the contract rate on the front page is blank, it is inferred that SCPC 1.1.1(e) applies. (See Revision Contracts)

Deposit

SCPC 2.2

A deposit is a prepayment of part of the purchase price made by the buyer to the seller. It is evidence of the buyer’s commitment to the transaction. Thus buyer is subject to SCPC 9.5.2.(failure to comply). SCPC 2.2 states that the deposit is 10%. The deposit may be lower as agreed by the parties. If you are acting for the seller and agree a lower deposit then it would be good to incorporate a clause in the contract for the remaining % in case of the buyer defaulting. In major transactions there may be no deposit at all due to the buyer’s financial state and good reputation. If deposit is blank then it is inferred that SCPC 2.2 applies. Deposit to be held as Stakeholder under SCPC

Title Guarantee

SCPC 6.6.2 P.191

SCPC 6.6.2 states that the seller is to transfer the property with full title. Confirm that this is so in the contract. (See Revision Contracts)

Check Class of Title

Found on the Proprietorship Register of Official Copies. Include the Title number and the Class of Title

Incumbrances

SCPC 3

Third party rights which will survive the transfer from the seller to the buyer such as restrictive covenants easements and obligations to contribute to shared facilities. If the seller does not disclose any incumbrances it will be in breach of SCPC 3.1.1 which says that the seller sells free of all incumbrances other than those listed in the contract or of the type listed in 3.1.2. Incumbrances are found in the Charges Register of the Official Copies. The property register should also be checked.

DO NOT include Seller’s Mortgage

Check the Charges Register in the Official Copies. If there is a Mortgage Charge, make sure that it does not show in the contract as it will bind the Buyer. But make sure that the seller’s mortgage is discharged before completion. (See Incumbrances in Revision Contracts)

Special Condition 2

Chose the relevant 2 that applies and delete the other

Drafting the Contract (Pre-printed Special Conditions)

Special Condition 3

If no Chattels delete them, or include a list and put the price assigned to the chattels.

Special condition 4

Special Condition 4 gives you the option of incorporation some addition Standard Conditions. Found in Part 2 of the SCPC, conditions A to C. The more relevant is condition A1 VAT. It should be ticked if VAT is going to be payable on the contract price. This is the case if the property is a new commercial freehold property less than 3 years old. Or if the property is old but the seller is exercise its option to tax. Under SCPC 1.1.4 and 1.1.4(a), the inclusion of a special condition supersedes the SCPC article.

When Drafting your own Special Conditions, answer:

Who Performs the obligation?

What do they have to do?

For whom?

By When?

How?

Where?

Common special conditions include:
VAT (Generally, under SCPC 1.4.1 the Seller is already prevented from charging VAT as a result of any exercise of the election to waive exemption. However, The Buyer can be required to pay VAT under 1.4.2 (change of law). In such case4 the Buyer would only be protected if there is a special condition stating that the purchase price is deemed to be inclusive of VAT)
Defects in title (SCPC already prevents the buyer raising requisitions on the title as deduce before exchange of contracts and you could decide to rely on this. However, where there is a defect in title it is common practice to include a special condition recording that the relevant defect has been disclosed to the buyer before the date of the contract and the buyer may not raise any requisition or make any objection to it after exchange)
Removal of Fixtures (In cases where the seller does not want a fixture to be part of the sale the buyer will have to include a special condition clearly identifying the relevant fixture, impose a timetable for its removal and making the seller responsible for making good any damage caused by its removal)
Indemnity against future liability (SCPC provides for indemnity covenants for promises made by the seller to a 3^rd party. However, it is common practice to include a special condition to remind the solicitors of the need to include an indemnity covenant in the transfer and to avoid any later argument about the exact wording of that...

#10229 - Scpc V Sc Table Ws 4 Itutorial - Property Law and Practice

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