The contract for the sale of property is the legal document that sets out the terms of the transaction. It incorporates the Standard Conditions of Sale, any special conditions agreed between the parties, and the property details. Once contracts are exchanged, the transaction becomes binding - there is no turning back.
A well-drafted contract prevents disputes and ensures smooth completion. Take time to review the contract carefully, raise appropriate enquiries, and negotiate special conditions where needed. The contract you draft or approve will govern the entire transaction - get it right, and everything else follows.
The Standard Conditions of Sale are pre-drafted terms that apply to property transactions unless expressly excluded or varied. They were created to provide consistency and efficiency in conveyancing. The current version is the 5th edition, published in 2011. Most residential contracts incorporate these conditions by reference.
The 5th edition applies to most residential property transactions in England and Wales. It contains conditions covering everything from what is included in the sale to what happens if something goes wrong. The conditions are incorporated into the contract by reference, meaning they apply even if not physically written in the contract document.
| Condition | Key Point |
|---|---|
| 1.1 - Interpretation | Defines key terms used throughout the conditions |
| 2.1 - Property Description | Seller sells with "title guarantee" (freehold) or "limited title guarantee" (leasehold) |
| 2.2 - Included Fixtures | Fixtures normally remain unless excluded in writing |
| 3.1 - Breach Before Completion | Seller remains liable for breaches after exchange if not remedied |
| 5.1 - Completion Day | Completion must happen by 1pm on the completion day unless otherwise agreed |
| 6.1 - Risk | Risk passes to buyer on completion unless special condition provides otherwise |
| 7.1 - Interest | Seller entitled to interest at 4% above base rate on late payment |
| 8.1 - Requisition for Title | Buyer can raise requisitions (objections) about title within set time |
| 9.1 - Indemnity for notices | Seller indemnifies buyer for notices served before exchange but affecting after completion |
The Standard Conditions apply even if they are not written out in full in the contract. The contract will simply state "incorporating the Standard Conditions of Sale (5th edition)". Make sure you are familiar with these conditions - they govern most aspects of the transaction unless varied by special condition.
Commercial property transactions use the Standard Commercial Property Conditions (2nd edition). These are similar to the residential conditions but tailored for commercial transactions. They reflect the different priorities and risks in commercial deals, such as ongoing business operations and environmental liabilities.
Commercial conditions place more emphasis on business continuity, environmental matters, and allocation of risk. They recognise that commercial buyers often have greater knowledge and resources than residential buyers. Commercial conditions also provide more flexibility for parties to agree different arrangements.
| Feature | Residential (5th Ed.) | Commercial (2nd Ed.) |
|---|---|---|
| Typical use | Homes and residential property | Shops, offices, warehouses, etc. |
| Environmental focus | Basic contamination enquiries | Detailed environmental due diligence |
| Buyer protection | More consumer protection | Assumes greater commercial awareness |
| Flexibility | Less flexible, more prescriptive | More flexible, parties can agree variations |
| Business matters | Not addressed | Addresses business continuity and trading |
Special conditions modify or supplement the Standard Conditions for the particular transaction. They deal with matters specific to the property or the parties' requirements. Well-drafted special conditions can prevent disputes and clarify expectations. Poorly drafted special conditions can create uncertainty and lead to litigation.
The Standard Conditions state that completion must happen by 1pm on the completion day. Special conditions often specify a particular completion date. Sometimes, completion is made "time of the essence" - meaning the exact time matters and delay can lead to termination. This is high risk and should only be used when necessary.
The Standard Conditions specify a 10% deposit. However, many buyers pay less than 10% - often 5% or less. A special condition is needed to agree a lower deposit. The seller must agree to this, and some lenders may have concerns about a lower deposit as it reduces their security if the buyer defaults.
The Standard Conditions include certain fixtures in the sale unless excluded. Special conditions can clarify what stays and what goes, particularly for items that could be considered fixtures or fittings (e.g., curtains, carpets, appliances). The TA10 form should be cross-referenced to avoid disputes.
If the property has had works done without planning permission or building regulations approval, a special condition may require the seller to obtain retrospective approval, provide an indemnity insurance policy, or retain funds to cover potential enforcement. This protects the buyer from taking on unlawful works.
Where a property is affected by chancel repair liability, a special condition typically requires the seller to obtain an indemnity insurance policy before completion. The policy should benefit the buyer and their mortgage lender, and should last forever (a "perpetual" policy). The cost is usually borne by the seller.
Special conditions should be clear, unambiguous, and capable of being performed. Avoid vague language. Each condition should address one specific issue. Consider what happens if the condition is not complied with - does completion become delayed? Can the buyer rescind? Is the deposit forfeited? The consequences should be clear.
Poorly drafted special conditions are a common cause of property disputes. If a condition is unclear, the courts may interpret it against the party that drafted it (the contra proferentem rule). If your client is the buyer, be careful about accepting special conditions drafted by the seller's solicitor - review them thoroughly.
The contract for the sale of freehold property must contain certain essential terms to be valid and enforceable. These include identifying the parties, describing the property, stating the price, and setting out the completion arrangements. Most contracts are based on Law Society templates that include these essentials.
The contract must adequately describe the property being sold. For registered land, this includes the address and the title number. The description should match the title register. For unregistered land, the description may be more detailed. If the description is inaccurate, the buyer may claim misrepresentation or the contract may be frustrated.
The contract states the purchase price and how it will be paid. This includes the deposit payable on exchange and the balance payable on completion. If the buyer is obtaining a mortgage, this will be reflected in the payment provisions. The contract may also allow for the price to be adjusted for completion apportionments (e.g., council tax, service charge).
The contract contains covenants given by the seller about the title. For freehold sales, the seller gives "full title guarantee" - a promise that they have the right to sell and that the title is free from encumbrances (except as noted). For leasehold sales, the guarantee is "limited title guarantee" - reflecting that the seller only guarantees what they can guarantee as a leaseholder.
The deposit is the amount the buyer pays on exchange of contracts as a sign of commitment. It is traditionally 10% of the purchase price, though lower amounts are common in practice. The deposit is deducted from the balance due on completion. If the buyer fails to complete, they may forfeit the deposit.
The Standard Conditions specify a 10% deposit. However, in practice, many buyers pay less than 10% - often 5% or the amount of their mortgage deposit. A special condition is required to agree a lower deposit amount. Sellers should be aware that accepting a lower deposit increases their risk if the buyer defaults.
When the buyer pays the deposit, their solicitor typically holds it as stakeholder. This means the solicitor holds the money on trust for both parties until completion. The solicitor cannot release the deposit to the seller before completion without the buyer's authority. This protects the buyer if something goes wrong.
Sometimes, particularly in new build or auction transactions, the estate agent may hold the deposit. This is less secure than solicitor stakeholding because the agent may not be regulated in the same way and the funds may not be protected. If the agent goes into insolvency, the deposit could be lost. Many lenders prohibit agents holding deposits.
If the deposit is less than 10%, the seller is at greater risk if the buyer defaults. The seller can only claim damages for actual loss suffered, which may be less than the "missing" deposit if the property has increased in value. Some sellers take out insurance against this risk, particularly in chains or where the buyer's financial position is uncertain.
The deposit is held by the buyer's solicitor until completion, when it is released to the seller's solicitor as part of the completion funds. If the seller is buying another property, the deposit may be "used" as part of their purchase - this is called a "deposit transfer" or "chain deposit". Special conditions should address this if it is intended.
Under the Standard Conditions, risk passes to the buyer on completion. This means if the property is damaged between exchange and completion, the seller bears the loss and must either repair it or compensate the buyer. However, many contracts include a special condition (Note 2) transferring risk to the buyer on exchange.
Note 2 to completion (a standard special condition) provides that risk passes to the buyer on exchange, and the buyer must insure the property from that point. The buyer must provide evidence of insurance to the seller before exchange. This is now standard practice in most transactions, as it protects both parties.
The buyer must arrange buildings insurance before exchange if Note 2 applies. The insurance must cover the full reinstatement value, not the market value. The lender will also require insurance, noting their interest in the policy. Make sure your client arranges insurance early - exchange cannot happen without it.
If Note 2 does NOT apply, the seller bears the risk between exchange and completion. This is problematic because the seller may no longer have insurance (they're moving out) and the buyer's insurance may not cover it. Always include Note 2 to ensure the property is insured between exchange and completion.
Value Added Tax (VAT) can apply to property transactions, affecting the purchase price and the buyer's costs. Residential transactions are usually exempt or zero-rated, but commercial property can be standard-rated. VAT rules are complex, and getting them wrong can be expensive. Always check whether VAT applies.
A commercial property owner can "opt to tax", making supplies of that property standard-rated rather than exempt. This allows them to recover VAT on costs, but means the buyer must pay VAT on the purchase. Once an option to tax is made, it lasts forever unless revoked (which is difficult). Check if the property has been opted to tax - the contract should specify.
If a property is sold as part of a transfer of a business as a going concern, it can be VAT-free. This applies to the sale of a business (e.g., a shop, pub, or hotel) including the property. Strict conditions apply - the business must be a going concern and the buyer must intend to continue it. TOGC treatment is beneficial as no VAT is payable.
VAT errors in property transactions can be very expensive. If VAT should have been charged but wasn't, the seller remains liable to HMRC. If VAT was charged in error, the buyer may have overpaid. Always check the VAT position and ensure the contract is clear. For commercial property, consider including a VAT clause specifying the treatment.
Exchange of contracts is the moment when the transaction becomes binding. Before exchange, either party can walk away without liability (except for certain costs). After exchange, both parties are committed - the buyer must buy and the seller must sell. Exchange is the point of no return.
The Law Society formula is the most common method of exchange. Both solicitors sign identical contracts, and the buyer's solicitor sends their signed contract to the seller's solicitor in the post. On receipt, the seller's solicitor telephones the buyer's solicitor to confirm exchange, and both record the date and time of exchange in their files.
In a mail exchange, the buyer's solicitor posts their signed contract to the seller's solicitor, with a letter stating that exchange is to occur on delivery. The seller's solicitor sends their signed contract to the buyer's solicitor. Exchange is deemed to occur when the contracts are posted, not when received. This method is now rarely used due to postal uncertainties.
Telephone exchange is the most common modern method. Both solicitors have signed contracts in their possession. They speak on the telephone, agree that exchange is taking place, and confirm the date and time. They then immediately follow up with written confirmation (a "letter of confirmation" or "exemption letter"). This method is fast and efficient.
Before exchange, the solicitor must have the client's authority to exchange on their behalf. This is usually given in writing. The solicitor must ensure all contract conditions are satisfied (or will be satisfied by completion), that the client has funds available, and that mortgage offer is in place (if applicable). Never exchange without proper authority.
On exchange, a legally binding contract is created. The buyer is contractually obliged to pay the purchase price and complete. The seller is contractually obliged to sell the property and transfer good title. If either party defaults, the other can sue for damages or seek specific performance (a court order to complete).
Once exchange has happened, neither party can withdraw without consequences. The buyer who pulls out loses their deposit and may be sued for any additional loss the seller suffers. The seller who pulls out may be sued for damages. Before exchanging, make absolutely sure your client is committed and all is in order.