Exchange of contracts is an important aspect of any conveyancing transaction that makes the parties involved legally bound to fulfil their individual parts of the deal. Before the point of contract exchange, either side can change their mind, resulting in frustrated efforts and wasted expense. It is the final step in the purchase of a property, and it occurs when the solicitor involved has finished carrying out all the required research and gotten agreement to the terms of the contract. Immediately the contracts have been signed, and exchanged, the contract becomes binding.
A specific date of completion is included in the contract, i.e. the date when the property is acquired by the buyer. During exchange of contract, the necessary deposits need to be paid and in addition, building insurance needs to be arranged in order to make the property insured right from the date of the contract. More often than not, the property is covered by the present insurer free of increased premium till the contract completion date.
Exchange of contract only occurs under English law, and it can take place many long months after a sale offer has been agreed upon. In other countries, a house sale becomes binding a lot quicker.
Neither side i.e. the buyer and the seller, has any obligation to buy or to sell the property until contracts have been exchanged. There is therefore no penalty for changing one’s mind and pulling out of the deal (although the deposit on agreeing offers can be lost). However, it is rather rare to find situations where persons involved in exchange of contracts pull out of the deal, and usually getting to this stage leads to a successful house sale. The contracts become binding when the buyer and seller sign similar contracts which are afterward officially exchanged by the solicitors. During the process of exchanging contracts and completion, pulling out of the contract will cost major penalties.
After contracts have been exchanged, the individual is obligated by law to purchase the property. In order to ensure a smooth transaction of exchange of contract, certain conditions need to be put in place: deposit, mortgage offer, surveys, life insurance and property insurance, revision of contract terms, and setting of completion date.
A non-refundable deposit is paid to the seller after which the solicitor prepares a transfer document which the buyer has to sign. This document officially transfers the property from the seller to the buyer, and after an agreement has been made, both parties sign the document. Mortgage arrangements are then finalised by the solicitor and the money is prepared to be transferred to the buyer upon completion of the arrangements. The solicitor carries final searched and inquires. In addition stamp duty and Land Registry fees need to be paid.
Exchange of contracts is usually carried out between 7 to 28 days before completion, although both exchange of contracts and completion can be organised on the same day. Exchange of contract means that the buyer and seller are committed to the deal, and cannot pull out afterward therefore it is important to ensure that everything necessary is done beforehand, to ensure a smooth transaction.
Exchange of contract begins when the solicitors involved in the property sale possess the authority of their clients for the sale, a copy of the agreed contract that has been signed by their clients, and the necessary deposit. The solicitors need to agree about the exchange. Contract exchange can easily be carried out when a completion date has been fixed so that the exchange can occur at a specified time.
Contract exchanges generally occurs over the telephone. A short phone call between the solicitors for both the buyer and the seller will confirm that the contracts are exchanged. Parties involved are not permitted to change their minds afterwards because of the prior agreement. All parties in the various transactions are legally bound, right from the telephone exchange of contracts, to complete the transaction. Failure to do so could result in being sued for breach of contract.
Completion is the date when a buyer is able to move into his or her new home. On the date of completion, the solicitor sends funds to the seller, and the sale of the property is completed. The buyer receives the transfer deeds, title deeds, and the keys to the house. Ideally, buyers and sellers complete on the same day, so that there is no need to wait for the seller to complete buying their new home.
Exchange of contract and completion can be done on the same day and is increasingly common among buyers and sellers in the property market. The advantage of it is that the process is significantly sped up, and there is no longer a need to pay a deposit on exchange of contracts. The downside of merging both processes is the level of stress involved. Here is no prior knowledge of the actual moving day which makes the process of arranging for removals men and forwarding post more complicated. In addition, there is hardly time to put things right in the event that something goes wrong. The house needs to be packed up, and removals men ready as you wait to find out that contracts are being exchanged.
There are some useful tips that need to be put into consideration by a person who wants to carry out exchange of contract and completion on the same day.
While some mortgage lenders do not mind same day exchange of contract and completion, others may request a minimum period between (about five working days)