What does exchange of contracts mean?
Exchange of contracts is a key stage in the property purchase process in the UK. The act of exchanging contracts commits both sides to the property transaction.
Despite being in the plural, the 'contracts' are actually two copies of the same contract - the sale agreement - one copy signed by the buyer and one by the seller.
The 'exchange' is the transfer to the other party's conveyancer of the signed contract, as well as confirmation of certain other things: that the seller has signed the transfer of deed of title, that the buyer's solicitor is holding a deposit, and that the buyer has arranged a buildings insurance policy.
Prior to the exchange, neither the buyer nor the seller are legally obliged to go through with the property sale.
After this point, neither can pull out without incurring major penalties. For example, the buyer might have to pay interest on the sale price.
When do I exchange contracts, and what does it involve?
Exchange of contracts happens when the buyer and the seller are ready to commit the sale.
That point on the conveyancing timeline is typically after the buyer's conveyancer has:
- carried out all the property searches
- checked all documentation given to them by the seller's conveyancer, and
- has informed their client of any risks of buying;
and when the seller is confident that the buyer has the funds to buy.
Exchange of contracts is usually one or two weeks before the completion day. The exact period of time is negotiable.
What is the minimum time between exchange and completion?
The timeframe for conveyancing is important for both buyers and sellers.
The 'delay' allows both the seller and the buyer enough time to carry out anything that contractually needs to be done before possession can be given: pack, inform utility companies of their move, pay outstanding council tax, and redirect mail; and allow the mortgage lender enough time to transfer the funds to the buyer's conveyancer.
For a rental property that is sold with vacant possession, the minimum timeframe will be two months, since this is the notice period that needs to be given the the existing tenants by law.
If the property is a new build, building may need to be completed.
Be aware that mortgage offers are usually valid only for three months, and if the period between exchange of contracts and completion is longer, you might need to secure a new mortgage having committed to the purchase.
Can I exchange and complete on the same day?
Yes, you can exchange and complete on the same day. But its unusual to do so because of the risk that one party may not be able to complete.
Same day exchange of contracts and completion often suits those who are purchasing a vacant or new property without a chain and who are a cash buyer. There would usually need to be a pressing reason for speed.
It is unlikely that any mortgage provider would be able to complete on the same day as exchange of contracts - most mortgage lenders just can't process all the paperwork fast enough. Five days is usually the minimum period for them.
The downside to aiming to exchange and complete on the same day is that if there are any problems (and there often can be) you might have to pay financial penalties to the other side.
How both the buyer and seller's solicitor exchange contracts
When both the buyer and seller's solicitor are ready, they set a date and time for exchanging contracts.
In the past, solicitors used to meet in person and physically exchange contracts (known as attended exchange of contracts). However, that took up a lot of time with travel, particularly if the solicitors were not working geographically close to each other.
Now, exchange of contracts usually occurs via a recorded phone call so as provide the convenience of not having to travel, with a record of what was agreed. The call follows a strict protocol to ensure both parties agree to the terms.
The buyer and the seller are not on the call.
Attended exchange of contracts
Attended exchange of contracts does still happen, but it is usually only developers and professional property investors who transact in this way.
The buyer needs to have cash, and be willing to take risks as to the condition of the property or issues that searches would otherwise flag.
The seller may be keen to exchange quickly because they need the equity from the sale.
The advantage for the buyer is that if there could be a lot of demand for the property, they can close the deal before being gazumped.
If your property is in a chain, then contracts are exchanged for every property in the chain on the same day.
The date set for exchange is the date that suits everyone in the chain.
The solicitor acting for the first property buyer in the chain contacts the seller's solicitor to confirm readiness to exchange. They give that solicitor a release time, usually the end of the day, to come back and confirm the exchange.
That person then contacts the next conveyancer in the chain in the same way until the conveyancer at the top of the chain has been contacted.
Each exchange is then confirmed back down the chain by the release deadline. If that doesn't happen, the whole process starts again the next day.
What if something delays the exchange of contracts?
Delays can occur if there are issues with the mortgage provider releasing funds, local authority searches taking longer than anticipated, or missing documentation. These hold-ups might extend the contracts process and may require you to renegotiate completion dates.
It's wise to maintain open communication with your conveyancing solicitor to anticipate and possibly prevent these delays. You might also explore handling some tasks yourself to save time and cost.
Who's involved in the process of exchanging contracts?
Buyer's solicitor: The buyer's conveyancer prepares the draft contract (usually based on the Law Society's Standard Terms of Sale) that is signed and exchanged, negotiated terms on the buyer's behalf, and organised the essential searches.
Seller's solicitor: The seller's conveyancer will have disclosed information and checked that the proposed sale contract is acceptable to the seller. They will also have confirmed the documentation that shows that a mortgage lender is willing to lend against the property, if needed.
Estate agent: The estate agent is likely to be the first party to be informed of successful exchange, and is often the person who first contacts the buyer and the seller to tell them.
Mortgage lenders: If the property purchase requires a mortgage, the lender will confirm the availability of funds and ensure that the buyer fulfils their lending criteria.
Responsibilities of the buyer and seller in preparing for contract exchange
Both legal firms must have sent copies of various required documentation to each other earlier in the conveyancing process so as to be sure that risks of non-completion are reduced.
Mortgage offer: If borrowing is necessary, the mortgage offer from the lender should be available.
Searches: These provide essential information about risk factors concerning ownership and resale of the property, such as planning permissions or environmental factors.
Buildings insurance: Insurance must be in place from the day of exchange.
House survey: a survey should have been completed.
Documentation: This includes property deeds, the property information form (TA6), the Fixtures and Fittings Form (TA10), lease details if applicable, and replies to standard enquiries.
The deposit on exchange
The deposit on exchange (or exchange deposit) is typically 5% to 10% of the purchase price.
The buyer pays it.
It must be received by the buyer's solicitor as cleared funds in advance of the planned exchange date.
It provides an incentive for the buyer not to pull out, since if they do after exchange of contracts, they forfeit the deposit to the seller.
Note that this isn't the same deposit as for the mortgage funds - that might be a different amount
Who holds the deposit on exchange of contracts?
The deposit on exchange of contracts is usually held by the seller's solicitor in a secure account. It is transferred on the day of exchange by the buyer's conveyancer.
The deposit funds remain there until completion, at which point they are deducted from the property's overall purchase price.
The seller does not have access to the deposit until the completion date.
Deposits when there is a chain
If there is a chain, then the buyer may be using some or all of the exchange deposit given to them by the buyer of their property.
A deposit lodged by a buyer at the bottom of the chain could be used all the way up the chain, perhaps being added to if prices increase, or partially used if prices decrease.
What if either the buyer or seller pulls out after exchanging contracts?
With exchanged contracts, both buyer and seller have a legal obligation to see through the transaction. Pulling out post-exchange results in severe consequences. However, it is extremely rare.
For the buyer: if you withdraw after the exchange of contracts happen, you are likely to lose your deposit, and possibly be sued for breach of contract.
For the seller: backing out means you may be liable for the buyer's costs, including survey fees and legal charges. Penalties can be substantial, so consult with a legal professional or consider handling the matter diligently yourself to understand the full scope of your obligations.
What happens after exchanging contracts?
The next step after exchange of contracts is the agreement on a completion date.
What is completion?
Completion is the final stage of conveyancing.
It happens on a on a specific date. Factors like existing rental agreements, removal services, or existing property transactions might affect how long after exchange of contracts it is.
On that date the seller’s solicitor confirms they are in receipt of the full purchase monies (from the buyer and the mortgage lender).
Legal ownership is transferred by the conveyancers dating the title deeds (the final step in their preparation), and then informing the Land Registry of the transfer (electronically).
Unless the property is a rental property, the sellers will move out by an agreed time (usually 1pm) giving vacant possession, and allowing the buyers to move in.
Often the buyers are given the keys to their new home by the estate agent (usually because the estate agent's office is closer, and it is more practical for them to give the keys than the seller's solicitor).
Choosing the best day to complete
When considering a date, buyers and sellers must be mindful of the days that will work best for both parties. Most choose a weekday mid-week to ensure that banks are open and solicitors can be reached if any issues arise.
The date must be clear to all involved parties to avoid any last-minute confusion or inconvenience.
Avoid Friday for your completion day
Because most people have a full-time job that requires them to be working at the beginning of the week, completions are often planned to take place on a Friday.
In theory, this gives the buyer (and the seller, who is buying a new home) a long weekend to move in and start unpacking without having to take more than an afternoon or day off-work.
If you can, choose another day.
Friday is the busiest day for removal companies. They may charge a premium to work on a Friday, or a lack of choice over who you use may mean you pay for a more expensive firm.
Mortgage companies and solicitors are also often busiest on a Friday, so transactions on Fridays are likely to complete later on in the day. If there is a large chain, there may not be enough time to confirm each buyer in the chain can complete, and the chain may fail.
If there is a problem, and you're aiming to complete mid-week, then if something goes wrong, the longest you'll have to wait is 24 hours, not a whole weekend. Furniture can be stored overnight by your removals company rather than over two nights. Similarly, you won't need alternative accommodation for as long. You'll still have the subsequent weekend to unpack.
Frequently asked questions about exchange of contracts and completion
How much does it cost to exchange contracts?
Usually, the cost of conveyancing is charged as a single amount for the whole process.
As such, the act of exchanging contracts doesn't carry a specific fee, but is included in the overall price.
There should be no separate or additional costs (known as disbursements) to pay.
Can you exchange contracts without a completion date?
While it's standard to agree on a completion date at the time of exchange, there are situations where this might not happen, such as when buying a new build property that's not yet finished. In such cases, a notice to complete might be used instead.
What does it mean when you exchange contracts on leasehold property?
Exchanging contracts for the leasehold of a property follows a similar process as for freehold property.
However, additional considerations such as service charges, ground rent, and lease terms may be included.
What if buying a property in Scotland or buying leasehold: different rules and regulations
Property law varies between Scotland and other parts of the UK. In Scotland, the exchange of contracts is replaced by the missives, which is a series of formal letters forming a legally binding contract.
Leasehold properties also have specific considerations, and understanding these differences is crucial for anyone entering into such agreements.