Contract
A contract is an agreement between two or more persons (individuals or companies) to do, or to refrain from doing, something in particular in exchange for something of value. Therefore one party makes an offer and the other accepts it. We enter into simple contracts every day of our lives; when we buy something,, we are offering to pay money in exchange for the product that the shopkeeper offers us.
Contracts can be entered into either orally or in writing; but in general they are usually written. If one side fails to honour their part of the contract, it is considered a “breach” of contract. The terms and conditions of the contract define the intentions of the parties and what the parties agree to do, when they agree to do it and how they will do it.
Contracts are considered valid the moment the offer is accepted.
Pre-contract stage
Once the buyer and seller have instructed their conveyancing solicitors, the seller’s solicitor will then send the draft contract, evidence of title and the energy performance certificate. The buyer’s solicitor will look through the documents to make sure there are no concerns about the property. If there are any concerns, he or she will ‘raise a requisition’ (make a request) for more information from the seller’s solicitor and/or advise the buyer accordingly. This stage is important because, in England and Wales, all sale-and-purchase transactions are carried out under the principle of caveat emptor (Latin for ‘buyer beware’). It is assumed that buyers buy something knowing fully well if there are any flaws or not. Furthermore, there is usually a clause in the contract which prevents the buyer from questioning the seller’s title once contracts have been exchanged.
The aim of the searches is to find out anything in the local area that might affect the property. The information is held by public bodies such as the local authority, Land Registry or the Environment Agency. The buyer’s solicitor commissions a search company to investigate the databases.
One of the things that local authority search results reveal is the existence of any planning permissions obtained for the property. It will also reveal whether any work has been done on the property, for which planning permission has not, but should have, been obtained. A water company search will reveal the liabilities of the property owner for maintaining pipes and the environmental search will show whether the property is in an area susceptible to flooding, subsidence and exposure to a radioactive gas called Radon. These are the basic searches; but they may also reveal whether any other, more complex, searches need to be carried out.
The seller’s conveyancing solicitor will send a copy of the Land Registry title document, but this may be from the time of their purchase and therefore out of date. It is usual for the buyer’s solicitor to carry out their own Land Registry search to make sure that nothing has happened since the seller’s purchase. Some of the things that may raise issue with the buyer’s solicitor are if the names of the owners on the title document are different from the sellers or if there are any charges (loans) registered against the property. It will show whether there is any access to the property that may go over someone else’s land. It may also reveal whether owners of properties are liable for contributing to maintenance of the chancel of a church (under an ancient legal right of the church), in which case a Chancel Search will also be recommended.
It is also usual for the buyer’s conveyancing solicitor to act on behalf of the buyer’s lender, where the buyer has obtained a mortgage, because their interests coincide. However, the solicitor will ensure that the buyer is able to make up the difference in the purchase price and will want to see some form of evidence such as a bank statement. Furthermore, the solicitor will also have to ensure that non-mortgage funds, if any, are not the result of money laundering.
It is important, however, that pre-contract searches are only documentary information about a property and should always be considered alongside the buyer and seller’s subjective knowledge of the property. During this stage, the buyer or the seller is free to withdraw from the transaction for any reason. It could be due to
- Change in circumstances (loss of job, bereavement, etc.)
- The seller has found a buyer willing to pay more
- The buyer simply raises the asking price (gazumping)
- The buyer has found a cheaper property
- The buyer insists on a reduction (gazundering).
Phew Conveyancing make no judgement about gazumping or gazundering; as conveyancing solicitors, we carry out the client’s instructions regarding contract negotiations. In particular, in light of information that has been revealed through pre-contract enquiries, there may indeed be valid reasons for a reduction in the price.
Exchange of Contracts
Through out the pre-contract stage, as new information becomes available, the buyer’s and seller’s solicitors will make amendments to the contract, in accordance with their clients’ needs, in writing. Once it appears that both parties are more or less agreed, they can proceed to exchange of contracts.
The date of exchange may already have been pencilled in at the start of the pre-contract enquiries, but this can change as a result of new information. Actual exchange takes place over the telephone and is, in reality, a confirmation of what has previously been agreed. Telephone exchange is immediately followed by postal exchange.
At exchange of contracts, the buyer will pay a deposit, usually 10%, as a firm statement of intent. Once the exchange has taken place, it forms a binding contract and if either party withdraws (fails to complete), there are financial liabilities for breach of contract. For the buyer, in particular, this includes loss of the deposit. Failure to complete can also be taken to mean not completing by the date agreed at exchange.
