Introduction to Freehold Transactions — SQE1 FLK2 Property Law and Practice

A man exchanges contracts to buy a freehold cottage for £310,000 and pays his 10% deposit. Completion is six weeks away. Four weeks in, an electrical fault starts a fire and guts the place. Nobody is at fault. Neither side had buildings insurance. Rebuilding will cost £150,000. He tells his solicitor he no longer wants it and asks for his deposit back. Does he still have to buy it? Yes.

This is Introduction to Freehold Transactions, the first topic in Property Law and Practice, and it is the map for everything that follows. A purchase runs through five stages, and there are two moments where the ground shifts under your client. Exchange is one. Registration is the other. Keep our cottage in mind. We are coming back to it.

Here is the route. Who is involved, and what you are actually retained to do. Then the five stages in order, from taking instructions to registering the transfer. Then freehold against leasehold, and why almost every flat is leasehold. And last, the two things that go wrong before the law does: client care, and money laundering.

Start with what you are for. Conveyancing is the legal process of transferring ownership of land from one person to another, and you are the project manager of it. You investigate title, raise enquiries, order searches, approve the contract, run exchange and completion, and register the transfer. What you are not is a valuer, an insurance broker, or the person who haggles over the price.

The cast. The buyer, who in formal documents is the purchaser, and the seller, who is the vendor. Each has their own solicitor, and they do different jobs. The seller's solicitor supplies the title and drafts the contract. The buyer's solicitor investigates it and raises the enquiries. Around them sit the estate agent, the surveyor and the mortgage broker.

Now the five stages, and learn them as a list. Pre-contract. Exchange. Pre-completion. Completion. Post-completion. Most exam questions are really asking you which stage you are at, and what has to happen before you move to the next one.

Pre-contract is due diligence. The seller's solicitor sends the draft contract and the title. You report on title to your client, raise pre-contract enquiries on the standard forms, and order the searches: local authority, drainage, environmental. You wait for the mortgage offer. And you get your client's authority before you exchange anything.

And through all of that, nothing binds anybody. A sale agreed subject to contract commits neither side, which is why gazumping is lawful and why pre-contract spending is at the buyer's own risk. A buyer can get a little protection: a promise by the seller, given for consideration, not to negotiate with anyone else for a fixed period. That is enforceable. But it sounds only in damages. It cannot get him the house.

So what does bind? Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. A contract for the sale of an interest in land must be in writing. It must incorporate all the terms the parties expressly agreed, in one document. And it must be signed by or on behalf of each party. So try one. A handshake, an email confirming price and address, the seller replying Agreed, and a note about the garden shed signed by the seller alone. Contract? No.

Two things follow. An oral contract for the sale of land is void, not merely unenforceable. And a variation of a material term has to satisfy section 2 as well. Agree on the telephone to bring completion forward, put nothing in writing, and the contract stands unvaried. That is McCausland v Duncan Lawrie, where the term varied was, as it happens, the completion date.

Exchange, then. Both parties sign identical contracts and the solicitors exchange them. The completion date is fixed, the price is fixed, and neither side can walk away. A deposit is paid, usually 10%. And here is one people get wrong. On a purchase at £275,000, must the buyer find £27,500 to exchange? No. Ten per cent is the traditional contractual figure, not a statutory one, and a seller may agree to take less.

Now the part that catches people, and our cottage. On exchange the buyer becomes the owner in equity. That is Lysaght v Edwards, and with beneficial ownership comes the risk. Unless the contract says otherwise the seller has no duty to insure, and a seller in possession answers only for want of reasonable care, not for an accidental fire. So the man completes, at £310,000, on a burnt-out shell. Insure from exchange, not from completion.

One consequence worth knowing. If the buyer asks to move in early, let him in only as a licensee, on written terms. A buyer who already has the house loses much of his urgency to complete, and if the sale collapses the seller has to get him out again.

And if your client is both selling and buying, exchange on both at the same moment. Exchange on the purchase alone and she is bound to buy with no certainty that the sale money will exist. It is the same reason a chain completes on a single day, at the pace of its slowest link, rather than each transaction going whenever it happens to be ready.

Pre-completion. The transfer deed, the TR1, is the document that actually moves legal ownership. The seller executes it as a deed before completion, which means signed and witnessed by an independent adult, and it is handed over on the day. Then two searches, shortly before completion: an official search of the register with priority, and a bankruptcy search against the seller.

Completion. It used to mean meeting to hand over the transfer and the deeds against a banker's draft. Today almost all completions are by post, under the Law Society's Code for Completion by Post. The seller's solicitor acts as the buyer's solicitor's agent. He holds the transfer and the deeds to their order, completes on receipt of the money, and gives undertakings enforceable against him personally.

The money moves electronically between the two client accounts, usually by CHAPS. That is the payment mechanism, not a separate kind of completion. And the keys? Not released until the seller's solicitor has the whole of the completion money. Not most of it. All of it.

What if the seller still has a mortgage on completion day, and no money to repay it except your client's? You complete against the seller's solicitor's undertaking to redeem the charge out of the completion money and to send you evidence of the discharge. That undertaking is what makes it safe to hand over the price.

Post-completion, and a deadline. Stamp Duty Land Tax must be filed and paid to HMRC within 14 days of completion. Late payment attracts interest and penalties, and you cannot register until the return has gone in and you have the transaction reference.

Then registration at HM Land Registry, and this is the second moment where the ground shifts. Legal title does not pass on completion. It passes on registration, and registration takes effect from the date the application was received. In between sits the registration gap, and that is what the priority search protects. An entry made by somebody else during the priority period is postponed to your application, provided you lodge it before the period runs out.

Freehold against leasehold. Freehold is ownership of the land and the building for good, in fee simple absolute: no landlord, no ground rent, no time limit. Leasehold is ownership for a fixed term, with a landlord who owns the reversion, usually a ground rent and usually a service charge. When the term runs out, it goes back. And the value falls as the term shortens.

So why is almost every flat leasehold? Because of one rule. The burden of a positive covenant does not run with freehold land. That is Rhone v Stephens. Sell four flats in a building freehold, each transfer obliging the owner to pay a quarter of the roof repairs. Once those flats change hands, nobody can be made to pay. There is no dependable maintenance structure, which is why lenders refuse freehold flats.

And share of freehold? A marketing label, not a form of ownership. She takes two things: a long lease of the flat, often 999 years at a peppercorn, and a share in the company that owns the freehold of the building. The lease survives, and its covenants still bind her. She simply gets a vote in her own landlord.

Two things left, and both are about you rather than the land. Client care first. You must not begin substantive work before your client has terms of engagement in writing: what you will do, what it will cost, how long it will take. The client care letter has to explain the stages, the likely costs and the main risks, in plain English rather than jargon.

And be precise about costs. Your fee plus VAT is one thing. Disbursements are money you pay out to third parties on your client's behalf: the search fees, the Land Registry fee, the bank charge for sending the completion money. The estate agent's commission and the buyer's own insurance premium are neither.

Last, money laundering, because property is exactly what launderers want. Before you act, verify your client's identity from original documents, and for a company work out who really owns and controls it. But identity is only half of it. You must also establish the source of the funds. A £500,000 gift from parents abroad needs evidence, not an assurance that family money needs no explanation.

Two escalations. If the client is a politically exposed person, a government minister in another state, say, you can still act. But only with senior management approval, having established source of wealth as well as source of funds, and with enhanced ongoing monitoring. And if you are actually suspicious, you do not proceed. You report to the National Crime Agency, and you do not tell the client you have done it.

Finally, expectations. A straightforward residential purchase runs about eight to twelve weeks. A cash buyer with no chain might do it in four to six weeks. A chain of four or more can take twelve to twenty weeks. Many firms follow the Law Society Conveyancing Protocol, which standardises the steps. Tell your client the longer figure.

A word on how SQE1 tests this. Property is a procedural subject, and the questions are about process, not authorities. You get a scenario, five answers, and one instruction: pick the best. There are only a handful of case names in this whole topic, and none of them will be worth a mark on its own.

If you keep only three. Section 2 of the 1989 Act: one document, all the terms, both signatures, or there is no contract. Lysaght v Edwards: on exchange the buyer owns in equity, so the risk is his and he insures from that day. And Rhone v Stephens: the burden of a positive covenant does not run with freehold land, which is why your client's flat is a lease.

Four traps. One: legal title does not pass on completion. It passes on registration, and until the application is lodged your client's ownership is not on the register. Completion moves the money and the keys. Registration moves the title.

Two: the 10% deposit is contractual, not statutory. No statute requires it, and a seller who wants the sale may agree to take less. Do not tell a client he cannot exchange without it.

Three: the Conveyancing Protocol is preferred practice, not law. Adopting it creates no contractual liability between the parties and certainly no criminal liability. A firm that misses one of its steps is not in breach of contract, and its client has no claim on that basis.

Four: never start substantive work before the terms of engagement have gone out, however urgently the client presses. And a variation agreed on the telephone is not a variation. If it is a material term of a land contract, it needs section 2 all over again.

Quick check. A buyer completed the purchase of a flat three days ago. Her solicitor has submitted the executed transfer and the application to register her as proprietor, and HM Land Registry has acknowledged receipt but has not yet processed it. She has looked at the register online, seen that it still names the seller as proprietor, and telephoned her solicitor in some alarm to ask whether the flat is hers.

Is she the legal owner? Three candidate answers. One: yes, because legal title passed on completion and registration merely records what has already happened. Two: no, and she has no interest of any kind in the flat until the registration is completed. Three: not yet, because legal title passes on registration, which takes effect from the date her application was received. Pause here if you want a moment.

The answer is three. Completion did not make her the legal owner. Registration does, and when it happens it takes effect from the date the Land Registry received the application, not the date somebody gets round to processing it. So the delay does not hurt her, and the priority search is protecting the gap.

Why the others fail. Option one is the belief almost every client has, and correcting it is the point of this whole segment. Option two overcorrects. She is not the legal owner yet, but she is certainly not without an interest. She has owned the flat in equity since the day contracts were exchanged.

Five things to take away. One: five stages, and know which one you are in. Pre-contract, exchange, pre-completion, completion, post-completion. Two: nothing binds until exchange, and section 2 decides whether anything binds at all. One document, all the terms, both signatures.

Three: on exchange the buyer becomes owner in equity, so the risk is his and he insures from that day. Four: legal title passes on registration, not completion, and the Stamp Duty return is due within 14 days. Five: freehold is forever, leasehold is for a term, and positive covenants are the reason your client's flat is a lease.

And our cottage? He exchanged, so he owned it in equity, so the fire was his loss. He completes at £310,000 on a burnt-out shell, and nobody had told him to insure from the day of exchange. That is the whole episode in one sentence. Next time, Investigation of Freehold Title.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.