Exchanging Contracts - What's Involved?
Buying or selling property is usually a two-stage process: first contracts are exchanged and then completion takes place at a later date. Any sale or transfer of property is a serious, technical process and it is vital that the buyer and seller both agree on precisely what is being bought and how the sale will proceed.
Special rules apply to contracts for the sale of land – the point at which a legally binding agreement is made will be different to most other types of contract.
Many different versions of the contract may be drafted before the buyer and seller finally agree on everything that should be included.
The ContractOnce the buyer and seller have reached an agreement on all aspects of the sale the final version of the contract will be prepared. On the day set for exchange of contracts this final version will be dated, the date for completion will be added and both the buyer and the seller will sign a copy of the contract. Generally, the buyer and seller will each sign a different copy of the contract - other than the respective signatures, the two copies must be exactly the same.
Different Methods of Exchange of ContractThere are various different ways in which contracts may be formally exchanged. The precise time at which exchange is deemed to have taken place will vary depending on the method used.
Exchange of Contract by TelephoneExchange of contract by telephone is now one of the most common methods of exchange. However, to be valid this method requires a solicitor or qualified conveyancer to give certain undertakings or promises. This is because exchange is treated as having taken place before the contracts have been physically exchanged. Assurances must, therefore, be given that both parties will take the next steps necessary for a valid exchange.
An unqualified person cannot give valid undertakings and therefore this method cannot be used if either the buyer or the seller is unrepresented.
Exchange of Contract by PostWhen exchange of contract takes place by post the buyer’s signed copy of the contract is sent to the seller (or their conveyancer) together with the deposit. When this is received the seller’s signed copy of the contract will be sent to the buyer. Contracts are treated as having been exchanged when the seller’s contract is posted.
There is a risk with this method that the seller may fail to post his copy, meaning that there is no valid exchange.
Exchange of Contract in PersonIf exchange is to take place in person the parties to the sale – or their solicitors or conveyancers – will meet to physically exchange contracts. Naturally, exchange takes place at the point when the contracts are actually exchanged.
Exchange of Contract by 'DX' (Document Exchange)The DX or document exchange system is often used by lawyers as an alternative method of transferring documents from one place to another. If it is agreed that exchange will take place by DX, contracts will be treated as having been exchanged when the buyer’s conveyancer receives the copy of the contract signed by the seller.
Paying the DepositThe buyer will usually have to pay a deposit at the same time as contracts are exchanged. (However, there is no absolute requirement that a deposit is paid.) In paying a deposit the buyer is giving the seller a guarantee that they will complete on the sale. If the buyer does not complete, the seller will usually be able to keep the deposit. In many sales the deposit will represent 10% of the sale price – however, this is always open to negotiation.
Where the parties have solicitors or conveyancers acting for them the deposit will usually be paid either by credit card or by a cheque drawn on the company bank account of the buyer’s conveyancer. This provides a guarantee that the payment will actually clear. Payment is made to the seller’s conveyancer.