When buying or selling a property, the stage of the conveyancing process that makes the agreement legally binding is known as ‘exchange of contracts’.
Up until the point that contracts are exchanged, neither the vendor nor buyer are legally required to see the transaction through as they are not deemed to have formally accepted the terms of sale. This means either side can ‘pull out’ until exchange of contract without incurring a penalty.
This makes reaching the exchange of contract stage critical to the smooth-running of a property sale or purchase. Prior to this stage, there remains the risk for example of gazumping, where a different (usually higher) offer is accepted by the owner from another buyer. This comes at the expense of the original buyer who is likely to have already incurred costs through the conveyancing process.
If either the buyer or seller reneges after the exchange of contracts, the other party can claim financial penalties. The buyer could lose their deposit and be liable for compensation costs claimed by the vendor, and likewise the buyer paid damages.
Once contracts have been exchanged, there is a finite window of up to one month in which the parties must complete on the sale/purchase. The time from exchange of contract to house completion can vary and could take between one to four weeks to allow for funds and final checks to take place.
Only on completion will the full funds be transferred, legal ownership of the property passed and the keys ‘handed over’.
Preparing for Exchange of Contracts
While it is beneficial for both parties to exchange contracts quickly, a number of requirements will first need to have been met.
The appointed conveyancers for both the buyer and vender will need to have undertaken the relevant searches and all enquiries dealt with where any anomalies or disputes have arisen, for example in relation to the registered status of the title of the property or as a result of the survey information.
Finances will need to be in order and ready for transfer, including funds for the deposit and if a mortgage lender is involved, the final, formal mortgage offer will need to have been secured.
Any negotiations relating to the terms of contract should have been concluded and final documentation ready for signing. The final contract should identify the buyer and seller. It should include the purchase price, details of agreed fixtures and fittings and an agreed date for completion of the transaction which could be between one to four weeks.
The contract should be checked by both parties’ solicitors before copies are given to their clients to sign.
What happens at ‘Exchange of Contract?’
Your legal adviser will lead on the exchange of contracts as part of the conveyancing process.
A date should be agreed between the parties for the exchange to take place, once you have signed the contract.
The agreed level of deposit (typically 10%) will need to be paid, with the remaining balance to be transferred to the seller on completion.
The buyer’s solicitor will prepare to register the ‘Title Property Transfer Deeds’ to be signed by the vendor.
Final searches will be made with the Land Registry, known as ‘priority’ or’ land registry search’, to ensure there have been no changes to the property or ownership details during the course of the conveyancing process.
Note than the buyer should at this stage take up relevant buildings insurance as they become liable for the property once contracts are exchanged.
How long between exchange of contracts and completion?
At exchange of contracts, a completion date will be set.
On the day of completion, the mortgage lender releases the mortgage funds to the solicitor to transfer the balance of funds to the vendor. Once transferred, the deeds to the property will be sent to the buyer’s solicitors, and the buyer can take possession of the keys.
Agreeing the date of completion should take into consideration when the buyer will have access to or possession of the balance of funds to transfer to the vendor, and likewise when the vendor can vacate the property.
Pulling out after exchange of contracts
Once contracts have been exchanged, both parties are legally bound to the terms of the agreement. This means that if the buyer withdraws, the seller can void the contract, keep the deposit, resell the property and claim damages. Likewise, if the seller pulls out, the buyer can void the contract and the deposit should be returned with interest.
Why legal advice?
The exchange of contracts is a defining stage of the conveyancing process, as it takes parties to a legally binding position, committing them to the transaction.
An experienced conveyancer will manage the entire process for you, ensuring you arrive at exchange of contract fully informed and happy with the terms you will be agreeing to under the sale/purchase.