When Contracts Are Exchanged
Prior to exchange of contracts, both solicitors will have obtained theirclients’ signature to the contract, in readiness. Signing the contract does not make it binding on either party. Either person can still pull out of the transaction until contracts are exchanged. (Exchange is instigated by the two solicitors, on the instructions of their clients.) At the point when contracts are exchanged, a 10% deposit is usually paid by the buyer and this will be held by one of the solicitors until completion. Now both sides are legally bound to complete the transaction on the day set for completion. If the seller fails to complete, the deposit will be returned to the buyer. If the buyer fails to complete, the seller will retain the 10% deposit and may also sue under the contract for other losses. If the buyer has not paid a 10% deposit on exchange (eg 5%) he will still be liable to the seller for the full 10% of the purchase price. The seller will retain the 5% deposit and the buyer will owe the seller a further 5%. It is very rare for a transaction not to complete at all, once contracts are exchanged. However sometimes, completion is delayed and does not take place on the designated day. In those circumstances, the person causing the delay will be charged a daily rate of interest up until the day that completion takes place. The rate of interest will be determined by the contract but in most cases it is 4% above banking base rate (currently therefore - 4.5%). In order that the delay does not go on indefinitely, usually the person who is ready and able to complete will instruct their solicitor to issue a ‘notice to complete’. The purpose of the notice is to establish the last date by which completion must take place. Again this is determined by the terms of the contract. Usually it will state that a notice to complete will be of 10 days’ duration but some solicitors write a different length of time into their contracts. Quite often it will be written into the contract that in these circumstances, the person causing the delay must pay the costs of the other person’s solicitors in respect of the notice to complete. Once a notice to complete has been served, the other person will be obliged to complete on the day specified. If he does not do so, the ‘innocent person’ will be entitled to ‘rescind’ (end) the contract. Following this litigation proceedings may be instigated by the innocent person to seek compensation and or damages from the person who failed to complete. Example Bill’s solicitor exchanges contracts on the 14 May, with completion set for 23 May. The price of the property is £200,000 and Bill pays a deposit of £10,000. Bill is getting a mortgage for £150,000. Bill’s solicitors advise him that they will need a further £40,000 plus stamp duty and legal fees from him, by no later than 22 May. Bill is cashing in an investment to raise the additional money. Unfortunately he has miscalculated how long it will take him to obtain the money and on the 23 May, he is not in a position to pay the necessary money to his solicitors to enable them to complete the purchase. His solicitors inform the seller’s solicitors. The seller’s solicitors issue a notice to complete, stating that Bill must complete by 2 June or the seller will rescind the contract. They issue a bill for their work in connection with the notice to complete for £150 plus VAT (£180). On 27 May, Bill is in a position to complete the purchase in order to do so, he must now pay – The balance of the purchase price - £40,000 Four days interest on £190,000 @ 4.5% - £93.70 (he has paid a deposit of £10,000 on exchange and does not have to pay interest on that) The seller’s solicitors bill for the notice to complete - £180. He may have also incurred additional charges in relation to his mortgage advance. Some lenders require the money to be sent back and then reissued in the event of delayed completion. Others will allow the solicitors to hold the money for up to 7 days. Interest will be charged to Bill on the mortgage for any days that his solicitors hold the mortgage advance. In the above example, if Bill had not been able to raise the money by 2 June, the seller could have rescinded the contract. Bill would then lose his £10,000 deposit, owe the seller another £10,000 to make up the balance of the 10% deposit which should have been paid on exchange and the seller may also sue him for other losses. The above example relates to a situation where the seller is not buying another property on the same day. If he is, his sellers would be looking for the same type of costs and remedies from him. As the delay or failed completion is not the fault of Bill’s seller, he will also be looking to Bill to cover those costs.
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