What is exchange of contracts?
The process of buying or selling your home is largely complicated and lengthy.
Once an offer on a property is accepted by the owner, the conveyancing process begins. However, though the seller may have accepted an offer, there is nothing legally binding either party to deal until the exchange of contracts.
This article explains what exchange of contracts is and what you need to do before it can happen. Then you can learn about the next big step in the conveyancing process – The completion date.
The legal significance of exchange of contracts
At any time before the exchange of contracts, either party may back out of the deal.as at this point the deal is not legally binding.
The buyer may be gazumped by the seller, where the seller accepts a verbal offer but then accepts a higher offer from another individual.
Conversely, the seller may be gazundered by the buyer. This is the act of reducing the original offer on the last minute, essentially forcing the seller to either accept the reduced offer or pass on. (You can read further on what is gazumping and what buyers can do to avoid it or what is gazundering and steps a seller can take to prevent it).
So the legal significance of exchange of contracts is that it becomes legally binding on the parties to complete the property transaction. However, before the parties can get to this stage of the conveyancing process, there’s a lot for the seller, the buyer and their conveyancers to do.
What you need sorted before exchange of contracts
The following are the steps leading up to the exchange of contracts in a property transaction. However, it is only a brief summary of each step. You may wish to read more in-depth regarding each of these steps.
Obtaining a mortgage in principle (for buyers)
Unless you are a cash buyer, you will need to shop around for the mortgage that best suits you. So although a lender may offer a lower interest rate that may seem attractive, other factors are also important in choosing a mortgage.
When you find the best deal, complete all the application forms so that the mortgage lender gives you a mortgage in principle (also called decision in principle).
The decision in principle will reassure the seller that the conveyancing process will not be slowed down because a lender is refusing to lend to you.
However, as the name suggests, it does not guarantee that you will get a mortgage offer. So you may wish to read further about what is a mortgage in principle and why you need one.
Find a conveyancer or solicitor
Estate agents often recommend a licensed conveyancer or solicitor. However, their recommendation is unlikely to be based on performance but rather whether the agent receives a referral fee.
Further, you have to choose between hiring a licensed conveyancer or a solicitor to carry out the conveyancing process for you. Although both will follow the same procedures and processes, there is a crucial difference between a solicitor and a licensed conveyancer.
One difference is between their regulation authority. Solicitors are regulated by the Solicitors Regulation Authority and licensed conveyancer are licensed by the Council of Licensed Conveyancer.
The other difference is in the breath of legal services each can provide.
Further, you need to ensure your solicitor or licensed conveyancer can act for your mortgage company. Generally, mortgage lenders only lend if the solicitor or licensed conveyancer is one their approved panel.
You can also read about using a licensed conveyancer instead of a solicitor.
Offer and acceptance
The buyer will make an offer to the seller that should include the value of the property and the value fittings and contents. If you have an estate agent, all offers will be made through him or her.
Securing the finances (for buyers and sellers)
If there is a property chain, you can use the sale proceeds from the sale of your current property. However, property chains complicate the process and may cause hold-ups. If there is a shortfall, you may also need a loan. If so, you are better off getting a loan from family or friends rather than going to a commercial lender. (You can create your own loan agreement using a loan agreement template).
Otherwise, you may obtain a mortgage to finance the property transaction.
There are many types of mortgages and you have to choose one that best suits you. You should not expect to be helped by your solicitor or your estate agent to decide whether the mortgage is right for you. Although, you can hire a mortgage broker who will scour the market for the best deals for you.
When you apply for a mortgage, the mortgage lender will carry out a mortgage valuation survey to check the property's worth and find defects that might affect its value as security. The mortgage lender may also require you to arrange life insurance. (Read our article to understand what is life insurance and which type of life insurance you need). Depending on whether the mortgage lender wishes the lend to you, you will recieve a formal mortgage offer.
You may also wish to read our guides on whether you need a mortgage broker, what it takes to make a successful mortgage application, or what to do next if your mortgage is declined.
Identification and resolution of legal issues with the property (for buyers)
The buyer’s solicitor or conveyancer will conduct thorough property searches (such as Local Authority Search and checking at the Land Registry) and home surveys that tell important information regarding the property. (You can read further about what is Local Authority Search and which home surveys you need).
Additionally, the buyer’s conveyancer will be provided with a sale pack. The sale pack will contain important documents such as a copy of the title deeds, the completed Property Information Form (TA6 Form), Fittings and Content Form (TA10 Form). If the property is a leasehold property, the sale pack will contain the seller’s Leasehold Information Form.
Further, the buyer will be provided with the property’s Energy Performance Certificate that shows how efficient the property is in consuming energy. Share all of the documents you receive with your conveyancer or solicitor.
Once all information has been collected, your conveyancer or solicitor will provide a report on it.
Review the conveyancer’s report (for buyers)
It is important to read that report several times and ask questions to your conveyancer or request that the seller’s solicitor provide more information on matters that you don’t think have been disclosed sufficiently.
Be aware that your conveyancer might assume that you know what you are buying and rely on you to think about the related risks.
For instance, your conveyancer might not know that you have agreed with the seller to buy the fixed wardrobe in the master bedroom; or a recently constructed garden shed may not appear on the plans yet appears to be permanent on the structure.
The contract of sale
Usually, the buyer’s conveyancer or solicitor draws up a draft contract and send it to the seller’s conveyancer. This document goes back and forth between the conveyancers until an agreement is reached regarding its term.
Sign the contract
Once you and your conveyancer have received full information about the property and are convinced with making the deal permanent, you can sign the contract.
The seller will also have to fill out the TR1 Form, which is the form that actually transfers ownership.
Transfer the deposit money (for buyers)
The buyer’s conveyancer will usually ask the buyer to transfer the deposit money to their client account. Generally, the amount is 5% or 10% of the sale price.
Upon exchange of contracts, the deposit will be transferred to the seller.
You may wish to read about how to save for a house deposit.
Set the completion date
The completion date is when the property’s legal transfer occurs and the remaining sale consideration is paid to the seller.
The parties usually agree to a completion date that is 7 to 28 days after the exchange of contracts.
Contracts exchange process
Until the parties sign and exchange contracts, either pay pull out of the deal.
In a property chain, the exchange of contracts only occurs once your buyer is ready to exchange contracts on your property.
Both parties need to ensure that they hold the same contract. In the past, one would travel to the other to verify that their contracts match.
However, nowadays, the general practice is that exchanging contracts takes place over telephone conversation. One side reads his or her contract and then immediately sends their copy to the other (generally my email and then by recorded post).
What happens after exchange of contracts?
Once the contracts have been exchanged, a legally binding contract now exists that requires the parties to complete the transaction.
The next big step is completion.
Between exchange and completion, you are liable for the property. So you may need building insurance. You can read our article on buildings insurance to acertain how much protection you will need.
How to speed up the conveyancing process
Exchange of contracts generally happens some 8-10 weeks (that is if nothing else goes wrong) after acceptance of the offer due to the processes involved, which is a lot of time. Further, till then neither of the parties involved are under any legal obligation to complete the transaction. So a lot can go wrong during this period that can hold up the property sale.
An amazing one third of property sales fall through due to delay in the processes. If you are hoping to secure your purchase or sale, it may be a wise isea to find out more about what you could do to make sure the process happens as quickly as possible.
Is it possible for exchange of contracts and completion to fall on the same day?
It is up to the parties to decide when they want to complete the transaction after the exchanging contracts (unless you are getting a mortgage).
While it is possible to exchange contracts and complete the sale the same day, it is not advisable in most cases.
Possible consequences and issues
While it will remove the need for the buyer to pay a deposit to the seller, the exchanging of contracts and completion should not take place the same day.
Most mortgage lenders require you to wait a minimum period (usually 5-7 days) between exchanging contracts and completing the transaction.
It can also be very impracticable, as packing up and moving requires time. If you were not prepared for what happens on completion day, you would commit a breach of the contract. For example, if the seller was unable to give vacant possession, it will be a similar breach as if the buyer fails to pay the seller on the agreed completion date.
If there is an issue with the transfer, the seller may have given possession to the buyer without having received a penny.
Usually, your conveyancer will request the lender to transfer the amount to him or her so that they are readily available on completion day and no hold-ups are caused. However, this can take time, so it is best to leave a sufficient gap between the exchange of contracts and completion to ensure everything is in order for completion day.
Pulling out after exchange of contracts
Once the parties have signed and exchanged contracts, it is usually very difficult for either party to back out of the deal.
If the buyer does not complete, they risk surrendering the deposit and being sued to complete the transaction. The buyer may also have to cover the seller’s legal costs and pay interest on the unpaid purchase price.
If the pulling out party is the seller, the buyer can rescind the contract, and the seller will have to pay back the deposit with interest.
A few last words on exchange of contracts
Having exchanged contracts, the hardest part is done. It becomes legally binding on the parties to complete the transaction. Neither party can back out of the deal without being exposed to legal action from the other party.
Generally, parties don’t back out once contracts have been exchanged.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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