Buying or selling a home involves a number of legal documents, but the contract is one of the most important.

It records the principal terms of the transaction and, once contracts are exchanged, creates a binding commitment between the buyer and seller. Understanding what the contract covers, how it is prepared and when it takes legal effect can help both parties feel more informed as the transaction progresses.

In this article, we explain the role of the property contract, the steps leading up to exchange and what happens between exchange and completion.

What is a property contract?

A property contract is the formal agreement governing the sale and purchase of a property.

It identifies the parties, describes the property being transferred and records the financial and practical terms that have been agreed. Before exchange, the contract can still be amended and either party can generally withdraw from the transaction. Once exchange takes place, however, the agreement becomes legally binding.

The contract will usually include:

• the names of the buyer and seller;
• the address and title details of the property;
• the agreed purchase price;
• the amount of the deposit;
• any fixtures and fittings included in the sale;
• any special conditions applying to the transaction; and
• the agreed completion date.

The completion date may not appear in the first draft. It is usually agreed later in the transaction and inserted when contracts are exchanged.

Who prepares the contract?

The seller’s conveyancer will normally prepare the initial draft contract.

This is based on the title information held by HM Land Registry, the terms agreed through the estate agent and any other relevant information about the property.

The contract is then sent to the buyer’s conveyancer as part of the contract pack. This will usually be accompanied by supporting documents, which may include:

• official copies of the registered title;
• a plan of the property;
• property information forms completed by the seller;
• a fittings and contents form;
• planning or building regulation documents; and
• leasehold information, where the property is a flat or leasehold house.

The buyer’s conveyancer will review the documents, carry out searches and raise enquiries about any points requiring further information or clarification.

Reviewing and agreeing the terms

Before the contract can be exchanged, the buyer’s conveyancer must be satisfied that the legal title is acceptable and that any issues affecting the property have been properly considered.

This may involve asking questions about rights of way, boundaries, alterations, restrictive covenants, planning permissions, guarantees or arrangements affecting a leasehold property.

The buyer will also need to have suitable funding in place. Where a mortgage is involved, the formal mortgage offer must be checked and any conditions imposed by the lender must be addressed.

If changes are required, the conveyancers will agree the final form of the contract before it is signed.

Signing the contract does not, by itself, make the transaction legally binding. That happens only when the conveyancers formally exchange contracts.

What happens at exchange of contracts?

Exchange takes place when the buyer’s and seller’s conveyancers confirm that they are holding signed contracts and agree that the transaction is to become binding.

The completion date is confirmed at this stage. The buyer will also usually provide a deposit, which is commonly 10% of the purchase price, although a different amount may sometimes be agreed.

The exchange is normally dealt with by the conveyancers over the telephone. The signed contracts are then dated and treated as exchanged.

From that point:

• the buyer is legally committed to purchasing the property;
• the seller is legally committed to selling it;
• the purchase price and completion date are fixed; and
• withdrawing from the transaction may result in serious financial consequences.

The deposit will usually be sent to the seller’s conveyancer or held by the buyer’s conveyancer on the seller’s behalf, depending on the arrangements agreed.

Why is exchange such an important stage?

Before exchange, either party can usually withdraw without being required to complete the transaction, although they will remain responsible for the costs they have already incurred.

After exchange, the position changes significantly.

If the buyer fails to complete, the seller may be entitled to retain the deposit and pursue the buyer for further losses. If the seller refuses to complete, the buyer may have legal remedies available, which could include seeking compensation or an order requiring the sale to proceed.

For this reason, contracts should not be exchanged until the legal work is complete, the buyer’s funding is secure and both parties are confident that they can complete on the agreed date.

Buyers and sellers should avoid making firm removal arrangements or other irreversible commitments until their conveyancer confirms that exchange has taken place.

What happens between exchange and completion?

The period between exchange and completion allows the final arrangements for the move to be made.

The length of this period can vary. Some transactions complete shortly after exchange, while others allow one or more weeks. In some cases, exchange and completion take place on the same day.

During this period, the buyer’s conveyancer will normally:

• carry out final searches;
• request the mortgage advance from the lender;
• prepare a completion statement;
• arrange for the balance of the purchase funds to be received; and
• make final checks against the seller and the property title.

The seller’s conveyancer will obtain an up-to-date redemption figure for any mortgage secured against the property and prepare for the transfer of ownership.

Buyers will also usually need to arrange buildings insurance from exchange, as the risk in the property commonly passes to them at that point. Different arrangements may apply to leasehold properties where the building is insured by the freeholder or management company.

Your conveyancer will advise you on the insurance requirements applying to your purchase.

What happens on completion?

Completion is the point at which the purchase money is transferred and ownership of the property passes from the seller to the buyer.

The buyer’s conveyancer sends the remaining purchase funds to the seller’s conveyancer. Once the money has arrived, completion is confirmed and the estate agent can normally release the keys to the buyer.

The seller must leave the property in accordance with the contract and provide vacant possession unless a different arrangement has been agreed.

Following completion, the seller’s conveyancer will repay any existing mortgage and account to the seller for the remaining proceeds of sale.

The buyer’s conveyancer will deal with the Stamp Duty Land Tax return, where applicable, and apply to HM Land Registry to register the buyer as the new owner. Any new mortgage will also be registered against the title.

Why understanding the contract matters

The contract brings together the central terms of a property transaction and establishes what each party has agreed to do.

Understanding its role can help buyers and sellers appreciate why certain enquiries must be resolved, why funding needs to be confirmed and why exchange should not take place until everyone is ready to proceed.

It can also reduce the risk of misunderstandings about matters such as the completion date, the deposit, items included in the sale and any conditions attached to the transaction.

The Residential Property team at stevensdrake can guide you through each stage of your sale or purchase, explain the contract terms and ensure that you understand your position before the transaction becomes legally binding.

This article is provided for general information only and does not constitute legal advice. Advice should be obtained in relation to the particular circumstances of a property transaction.