Real Estate Law - LG 4 PDF

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REAL ESTATE LARGE GROUP 4 Student Guide

The Contract Context The contract is the first important document in the conveyancing process. From the Seller’s perspective it is particularly important to ensure that they have complied with their duty to disclose any incumbrances on the land and that the contract accurately reflects the terms the parties have agreed. Naturally, from the Buyer’s perspective, it is important to ensure that a full investigation of the Seller’s title and other matters relating to the property has been carried out and that the Buyer is fully aware of the nature of the property and the transaction. From both sides point of view, the contract which is about to be entered into must be watertight. The use of standard conditions obviously helps, but the parties’ lawyers must still exercise their skill to ensure that all main terms are covered. The contract is usually drafted by the seller’s solicitor and sent to the buyer’s solicitor as part of the initial pre-contract package. Accordingly, it will have been drafted to suit the “opposing” party and may not contain all the provisions necessary to deal with the issues that have arisen as part of your investigations. As you are proceeding towards exchange, you must also be aware of the requirements of the lender who plays an important part in the property transaction as the major funder of the purchase. Outcomes By the end of this Large Group you should be able to: 1.

Understand the consequences of exchanging contracts.

2.

Identify the different forms of contract and review the standard conditions.

3.

Understand the requirements of a lender in a property transaction.

4.

Understand how to exchange contracts.

1.

The consequences of exchange

Prior to exchange: No legally binding relationship - either party may walk away Upon exchange: Legally bound - point of no return Still need to deed to transfer legal ownership Why have contract? - provide parties with certainty and deadlines to allow time. Allows both parties to sort out practical assets. Gives parties certainty

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2.

Forms of Contract

2.1 Seller’s solicitor role:

Draft contract and send to buyer’s solicitor

Can choose to use either:

Pre-printed contract/Firm Specific(Firm’s preferred style) Look different but include the same elements

Both need to incorporate:

Standard conditions: Open contract rules - derived from statutes and common law. Which assist you when your contract is silent. These rules are not always satisfactory, so it is best to have expressed conditions in the contract. Designed to work for almost all transactions Have to be familiar with small print in both sets of standard conditions because these are the terms that will govern the transaction unless the parties specially agreed different.

There are two sets of standard conditions commonly in use: • The Standard Conditions of Sale (5th edition – 2018 Revision) Used for all residential transaction and some simple commercial transactions (e.g. properties that are empty, straight forward title and a remotely low price)

• The Standard Commercial Property Conditions (3rd edition – 2018 Revision) Most suitable for high value commercial properties and contain more detailed provisions management of occupational leases which the property is being sold. These conditions are more commonly referred to as SCPC

There is a copy of the Standard Conditions of Sale attached as the Appendix at the back of this Student Guide. These should be referred to when going through the next section. 2.2 Three sections: Front page The headings are relating to the description of the property and the terms of the sale. These details are unique to the property and the particular transaction.

Middle pages Cannot be amend as it just repeats the standard conditions Standard conditions designed to apply all transactions. These are the standard conditions of sale or the SCPC. Where the detail is in relation to contract Back page Special conditions. Specifically drafted to meet the particular requirements for this transaction. There are some pre-printed suggestions at the top of the page and then a blank space in which you can insert any requirements of your own.

2.3 Drafting the contract: First step is thinking about what you need and where you’ll get it from. Already obtained Front page Information about parties, property and financial terms of the transaction information about buyer, price and deposit and x Property chattels when you took Official copies will give details of property. Including address, title number, and whether its freehold or lease hold instructions. Form will come from client or estate agent. Should have info about Official copies will tell you whether the seller and cross check property has the benefit of any rights over x Class of title this information with the a joining of properties (e.g right of way). proprietorship register of Find this in the proprietorship register. Some practitioners include these in the In the contract, class of title can either be incorporated into the address of the property, or typed in description of the property but not the official copies. brackets after the title number. necessary to do so. Most common form of title is absolute for freehold priorities

x

Specified Incumbrances

x

Title guarantee

Necessary to disclose all the burdens on the property against the heading specified incumbrances. Incrumbrances meaning third party rights that will survive the transfer of the property to the buyer. E.g restrictive covenants, easements, obligations to contribute to shared facilities. If you do not disclose these then seller could be in breach of standard condition 3.1.1 seller sells free from all incumbrances also those specified in the contract or other types listed in 3.1.2 standard condition. Find incumbrances in the charges register of the official copies but check property register as burdens are often hidden there (e.g. mine and minerals have been excluded from the property) do not include seller’s mortgage as this would be discharged before completion,

Is the seller selling with full or unlimited title guarantee? Look at next page

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Title guarantee - seller should sell with full title guarantee if the seller owns the whole legal and equitable interest in a property. This implies more comprehensive implied covenants, or title than it would in the case with limited title guarantee. Limited or even no title guarantees given when seller has limited knowledge of the property such as a trustee or the executive.

x

Contract rate

State of interest that will be charged if the seller or buyer is late in completing on standard condition 7.2.2 Rate must be high enough to hurt the defaulting party and provide an incentive to complete on time. Most conveyancers opt for the law society interest rate from time to time in force. Published weekly in the Estates Gazette (commercial property market magazine) and its 4% of the base lending rate for Barkley’s PLC. What standard commercial property condition 1.1.1e already provides. If you are content to rely on standard commercial property condition 1.1.1e, you dont need to fill out gap on front page, but it is common to do so.

Pre payment of part of the purchase price paid by the buyer to the seller. Evidence of the buyer’s commitment to this transaction and if the buyer fails to complete, under standard condition 7.4.2, seller may forfeit and keep the deposit. Standard condition 2.2 provides a deposit of 10% of the purchase price is payable on exchange of contracts. This 10% is paid to the seller’s solicitor as a stake holder, this means it can not be handed over to the seller until completion. In practise, sometimes a seller will agree to accept a reduced deposit, (5%) this should be clearly stated on the front of the contract. what happens if the seller needs to use the deposit for a related purchase? Standard condition 2.2.5 allows seller to use deposit as a deposit on a related purchase of a house for that seller. If the deposit is paid to the seller’s solicitor as agent, this means solicitor is able to lease a deposit to the seller before completion. (Obvious danger to buyer - if the sale should fall through, it may be more difficult to get the deposit back from the seller, than the solicitor) Standard conditions also deal with how the deposit is paid to the seller on exchange - 2.2.4- can be electronic means or by solicitor’s client account check

x

Deposit

Back page Special conditions relate to individual characteristics of the property. In the particular circumstances of the transaction.

x

Pre-printed Special Conditions

Whether the property is to be sold with vacant possession. What they need to do is check each intern and decide which would be relevant to the particular transaction. There’s also space to incorporate you’re own specific special conditions

x

Specific Special Conditions

These go beneath pre printed special conditions. Every transaction is unique, its impossible to nurture everything that requires a special condition. However, a starting point, people consider such issues as how to deal defects in title, removal of fixtures, how to protect a seller’s liability once he’s lost physical possession of property.

Drafting Special Conditions: you need to ask yourself the following questions: x What does the buyer want? x What has the seller already agreed to do? x What do the Standard Conditions say? x Is that good enough or is a special condition needed? If you do decide that you need a special condition, remember that as in all legal drafting, you are aiming for a logical structure, clear client-friendly language and comprehensive treatment. For example, when you are drafting an obligation, test your draft against the following questions: x Who performs it? x What do they have to do? x For whom? x By when? x How? x Where?

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Activity 1 You act for Ranmore, the sellers of Brockham House. In the entrance hall to Brockham House there is a bronze statue by a famous sculptor which has been cemented to the floor. The statue is very valuable and has not been included in the purchase price as Ranmore wishes to take it with them. Do you need a special condition and what should it say? Statue is likely to be a fixture, and will automatically pass to the buyer with the land, unless a special condition is included, giving Ranmore the right to remove it. Therefore it should include a special condition, but should also add in another special condition to impose a timetable for its removal and make Ranmore responsible for making any damage caused by its removal.

2.4 Firm Specific contracts Each firms version will be slightly different, but each will contain similar details about the property, financial terms and appropriate special conditions (perhaps different order to the pre-printed version You will usually find a clause incorporating one of the two sets of standard conditions

Activity 2 1

In a transaction where the seller owns the whole legal and equitable interest in a property the draft contract should normally provide that the seller will give the buyer a limited title guarantee Is this statement true or false?

2.

You are acting on the sale of a property for a client. If the seller wishes to use the deposit after exchange to buy a new car, you must ensure that the contract provides for it to be held as: A B C D

3.

If the seller owns the whole legal inequitable interest in a property, then the buyer will expect to receive a full title guarantee. This implies more comprehensive implied covenants for title.

stakeholder agent for the seller agent for the buyer by the estate agent

Seller is free to do what he likes with it

Lorna Nesbitt has agreed to sell her large detached house, The Grange, to Paul and Wendy Blake. Lorna has already found a new property to move into – a cottage in Kent near to where her daughter lives. She has told the Blakes that she would like to use their deposit as soon as possible following exchange of contracts to put towards the deposit she needs to provide on her purchase. Assume that the draft contract provided by Lorna Nesbitt’s solicitor incorporates the Standard Conditions of Sale (Fifth Edition- 2018 Revision) without amendment.

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Which ONE of the following statements is CORRECT?

2.2.6 - any part of deposit not being used in this way must be held as stake holder

A

For Lorna Nesbitt to use the Blakes deposit as she is proposing to, a Special Condition to that effect should have been added to the draft contract.

B

For Lorna Nesbitt to use the Blakes deposit as she is proposing to, a Special Condition stating that her solicitor will hold the deposit as agent should have been added to the draft contract.

C

Lorna Nesbitt cannot use the Blakes deposit as she is proposing to because the Standard Conditions stipulate that the deposit is to be held by the seller’s solicitor as stakeholder.

D

Lorna Nesbitt can use the Blakes deposit as she is proposing to. Standard condition 2.2.5 allows Lorna to put all or some of deposit she receives from the Blake’s towards the deposit she has to pay on her purchase. So special condition will not be necessary.

4.

You are acting on behalf of Abdul who has had an offer to buy a property accepted. The seller’s solicitor has forwarded a draft contract for the sale of the property to you. The contract for the sale of the Property incorporates the Standard Conditions of Sale (Fifth Edition – 2018 Revision) without amendment. Which ONE of the following would you NOT be prepared to accept as the “Contract Rate” in the draft contract? A B C D

“The Law Society’s interest rate from time to time in force” “4% above the base rate from time to time in force of Barclays Bank plc” “As set out in the Standard Conditions” “4% above the Law Society’s interest rate from time to time in force” This would result in the contract rate being 8% above the base rate. Standard conditions provide that the contract rate is the Law Society rate, which is 4% above the base rate of Barcleys Bank plc. So A,B,C are all acceptable.

5.

You are acting for a buyer and you exchanged contracts last week using the Standard Conditions of Sale (Fifth edition – 2018 Revisions) with no relevant special conditions. Completion is to take place tomorrow. The seller’s solicitor has just rung to tell you that there has been a fire at the property and it has been totally destroyed. Which one of the following describes the advice you should give:

Risk is passed to the buyer upon exchange. Buyer is unable to resend the contract, even if the property is destroyed. Buyer should have been advised to take insurance out on the property, coming into effect on exchange.

A. B. C. D.

The buyer will have to complete the purchase but can claim on the insurance that they should have taken out on exchange. The buyer will have to complete but the seller will have to repair the property and pay damages for the delay The seller is responsible for any damage which they cause but not if the damage is caused by others. The buyer may rescind the contract and claim back the deposit with interest.

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3.

Lender Requirements

3.1 Funding the purchase Most important part is funding of the purchase. Vast majority of transactions (especially in residential transactions) most of the finance will be by way of mortgage. Council of mortgage lenders - the average loan to value provided by a mortgage lender against a purchase in 2016 is 84%. The average loan to income ratio in 2016 is 3.61. Given their financial input for a given transaction, mortgage lenders tend to limit their exposure to any risks in a purchase by setting out their own specific instructions and requirements for a conveyancer, many of which a buyer will not be aware of when selecting share lender . Most buyers will appreciate that a lender will perform a basic evaluation on a property, to ensure it is suitable for securing the mortgage and potentially worth the price it is agreed. Lenders also have requirements where they instruct the conveyancer to check specifically on their behalf, and these instructions vary from lender to lender

3.2 Mortgage documentation: x Offer letter/commitment letter

Once a lender is satisfied that a property is good security for a loan and that the buyer is credit worthy, the lender will issue a document to the buyer setting out terms on which the lender is prepared to make the loan - comes in form of: offer letter or residential and simple commercial loans or a commitment letter with a term sheet attached for more complex loans. This document is detailed of the loan amount, interest rate, term, initial repayments and any other conditions. (E.g buyer must carry out certain repair works) may even allow the lender to withdraw the offer, even after the buyer has exchanged contracts. Buyer’s solicitor must ensure that the buyer has received and accepted the mortgage offer, prior to exchange of contacts. (Whist at the same time) the lender will instruct solicitors to act on its behalf in the mortgage of the property. Majority of UK mortgage lenders are members of the council of mortgage lenders known as CML or the Building Society’s Association.

x

Instructions

x

Mortgage Deed

The CML handbook provides the instructions for individual member lenders. Handbook provides comprehensive instructions for the conveyancer on a wide range of matters (covering matters a specific lender will land on, type of searches required by the lender, refer to what circumstances indemnity insurance defects entitle can be accepted. Part 1 applies to all lenders using the handbook Part 2 is where individual lenders set out specific requirements that are different from part 1 Part 3 sets out standard instructions to use where a conveyancer is representing the lender but not the borrower Designed for the residential market but some lenders will use the handbook for commercial loans to issue instructions that are very similar. Lenders requirements must be met before the conveyancer will be in a position to request the release or draw down of the mortgage loans. Will be the case irrespective of whether the buyer wishes to proceed to complete. Should conflict of interest or instructions arise between the instructions of the buyer and requirements of the lender, conveyancer will be unable to proceed to purchase using the mortgage lender’s forms, until the conflict of interest is resolved to the lender’s satisfaction Mortgages are capable of being legal if made by deed and completed by registration. Important to lender as mortgage made by deed has implied power of sale under section 101 of Law and Property Act 1995. Mortgage deed will usually have an expressed power, the lender will want the first legal mortgage so that in the event that the borrower cannot repay the loan, it is paid first out of any proceeds of...