Exchange of Contracts – How it works
Exchange of contracts is the crucial point in any conveyancing transaction when the parties become legally bound to complete the deal. Prior to that point, either side may change their mind, with all of the frustration and wasted expense that that may involve. However, while Solicitors may often refer to “exchange of contracts” in conversation and correspondence, the actual process of what happens remains a mystery to many of those who are directly involved in the transaction. For a brief overview of the whole Conveyancing Process please click here.
When does Exchange of Contracts Happen?
Of course, before an exchange of contracts can take place everyone in the conveyancing “chain” needs to be ready. All of the parties Solicitors need to be satisfied that their clients are getting what they expect from the deal, that their enquiries have been dealt with and the necessary funding is in place, however that is being provided. Everyone must also agree the completion date, the date upon which the money will be handed over, properties will be vacated and buyers will be able to collect the keys, perhaps with a bottle of wine to celebrate their new acquisition.
What is the Problem with Exchange of Contracts?
While there are a number of possibilities so far as the method of exchange of contracts is concerned the most commonly used are something that Solicitors refer to as “Formula B” or “Formula C”. Fortunately these are not some idiosyncratic mathematical constructions. In order to ensure that the conveyancing process works smoothly the Law Society developed 3 formulae to assist in the exchange of contracts process. The intention was to remove the very obvious difficulty that arises when you are both selling and buying a property. Unfortunately the majority of us cannot afford to own 2 houses, nor would we want to be homeless. It is also virtually impossible for a Solicitor to exchange contracts on two transactions at exactly the same time. Imagine then the scenario where you have exchanged contracts in relation to a property that you are buying, only to find that when your Solicitor tries to exchange contract on your sale the buyer has changed his mind. If the sale is exchanged first your seller might refuse to go ahead, or suddenly increase the price.
How Does Exchange of Contract Happen?
In order that these nightmares can be avoided, once they have their client’s authority, are holding a copy of the agreed contract signed by their client and any necessary deposit, all of the Solicitors in the “chain” will agree that they will exchange contracts with completion fixed for the agreed date provided that the exchange takes place by a particular time. Once these Solicitors have all entered into such an agreement the individual contract “exchanges” take place, usually over the telephone. In practice this is simply a short telephone call between Solicitors who agree that contracts are deemed to be exchanged. Because of the prior agreement parties are not permitted to change their minds. From the moment the telephone exchange of contracts take place all of the parties to the various transactions are legally bound to complete them and risk being sued for breach of contract if they do not.
Exchange of contracts usually takes place over the phone
When the initial agreements are reached the Solicitors involved give an undertaking that they will exchange contracts provided that this takes place by the agreed time. If a Solicitor fails to keep to an undertaking there are personally at risk of being ordered by a court to pay compensation and the breach of an undertaking amounts to serious professional misconduct. In view of the very dire consequences for a Solicitor who refused to exchange contracts having undertaken to do so it happens very rarely, if ever. We must confess however that there have been a few tense occasions when a Solicitor in the middle of a chain is tied up in a long meeting and the time limit for the exchange to take place is rapidly approaching!
Once the relative excitement of the telephone exchanges has been completed and clients notified that indeed they will be moving on their chosen date the Solicitors carry out the more mundane task of actually posting the contracts signed by their client to the Solicitor acting for the other party. At that time deposits are also handed over. There is therefore a physical exchange of contracts – the seller’s Solicitor receives the contract signed by the buyer and vice versa. Incidentally, when Solicitors refer to the seller or the buyer’s “part” of the contract they are simply mentioning that the contracts is almost always in two parts, one signed by each of the parties, but the two “parts” are identical.
Isn’t there a Better Way?
This may sound something of an anti-climax and a rather quaint, old fashioned way of doing things. However people have been looking for a better alternative since the Law Society’s Formulae were first set out almost 30 years ago and so far nothing better has been found. There was a time when many in England and Wales were suggesting the adoption of the rather different Scottish model, but that seems to have as many problems as the existing system, at least if you talk to Scots. The Land Registry also embarked on an ambitious “e conveyancing” program that was intended to take transactions into the digital world. They abandoned their efforts, declaring that were too many complications.
For the foreseeable future therefore “we’ve exchanged contracts” will be three of the most welcome words that anyone involved in a property sale or purchase will hear.
If you are buying property together you should be sure of the arrangements between you. Here is some brief guidance.
Before you exchange contracts you should always have a survey and check out the risk of flooding. Some more information in regard to the latter can be found here
However it is not the contract which transfers the property. This is another Document called the TR1.
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