What this means is that when you make an offer to purchase land and that offer is accepted by the seller, neither of you are actually bound to complete the transaction until contracts are exchanged. The seller is free up until exchange to accept a better offer from another purchaser and the purchaser is free to withdraw if he has a change of heart. In either case, regardless of any money which may have been expended or loss or inconvenience suffered in reliance on the agreement, such as surveys and searches purchased by the buyer or other offers declined by the seller, neither party can be liable to the other for any loss because no contractual relationship exists.

Effect of Exchanging Contracts

On exchange of contracts a legally binding contractual relationship is created between buyer and seller so that both parties are bound by the terms of the contract. This means that the buyer is bound to buy and the seller is bound sell. A date for completion will be entered into the contract and if completion does not happen on this date the party in default is liable to be sued.

Prior to exchange of contracts, nothing that the buyer and seller have agreed with each other in terms of the sale of the land, such as price, completion date etc is binding.

When Will Exchange of Contracts Occur?

Exchange of contracts usually occurs several weeks into the transaction. As the contract is binding following exchange the purchaser’s conveyancer needs to make sure he has raised all necessary enquiries and carried out all necessary searches, and he and his his client are satisfied with the results, beforehand.

If for example a search is carried out and contracts are exchanged before the result is returned, and the search reveals something which causes the purchaser to not want to proceed, it is unlikely he will be able to escape the contract without severe financial penalty.

The purchaser’s conveyancer must also be satisfied that, subject to collecting any money due from his client and drawing down mortgage funds, he is ready to complete before exchange. He must not agree to a completion date which is too soon to allow to allow time for funds to be collected.

The seller will usually have to vacate on completion and so must not exchange until he has arranged alternative accommodation.

How are Contracts Exchanged?

The seller’s conveyancer will produce two identical copies of the contract, one which he will forward to the purchaser’s conveyancer for the purchaser’s signature and another which he will retain for his client’s signature.

Traditionally the two conveyancers would meet and would physically exchange the contracts, having had them signed, and the purchaser’s conveyancer would hand over the deposit cheque. Increasingly however the two conveyancers are in different parts of the country and due to it’s impracticality the in person method has become extremely rare and has been replaced by the Law Society’s formulae for exchange.

Law Society Formulae for Exchange of Contracts

Where the two conveyancers are not able, or simply do not wish, to meet in person one of the Law Society’s formulae for exchange must be used. There two options, A and B. To use formula A, the purchaser’s conveyancer will forward his client’s part of the contract to the seller’s conveyancer together with the deposit cheque. On receipt the seller’s conveyancer will check that both parts of the contract are identical and if so, will telephone the purchaser’s conveyancer to confirm the terms and confirm the exchange. Both parts of the contract will then be dated and timed with the exact time of the exchange and the names of the two conveyancers who are carrying out the exchange will be noted on the face of each contract.

By using this formula the seller’s conveyancer gives an implied undertaking to forward the part contract signed by his client to the purchaser’s conveyancer on the day of exchange.

Formula B is the most common. Using this method, the two conveyancers each hold their own client’s part contract. One telephones the other and they go through the contract checking that both parts are identical. Once they are satisfied each times and dates their part (with the same time and date) and as with formula A, the conveyancers’ names are added.

Both conveyancers then impliedly undertake to one another to forward their respective parts of the contract to the other that day and in addition the purchaser’s conveyancer undertakes to forward a cheque for the deposit along with his part of the contract.

Exchange of Contracts Where There is a Chain

Where a conveyancer’s client is both selling and buying and the completion of the purchase will be dependent on the sale taking place and vice versa (this will usually be the case since the client will need to use the proceeds from his to fund his purchase and once the sale completes will need to move straight into the purchase property) it is vital that he ensures that a situation does not arise whereby it is possible for one contract to be exchanged but not the other.

To solve this problem a third exchange formula, formula C was created. Using this formula the conveyancer will first contact the purchaser’s conveyancer in respect of his client’s sale and take a “release”. This involves calling the purchaser’s conveyancer and as with a formula B or A, checking that both parts of the contract are identical. Instead of confirming the exchange in that call however he will agree that provided he calls back by a certain time that day (the release time) the purchaser’s conveyancer will be obliged to exchange with him on the terms agreed. He can then call the seller’s conveyancer on his client’s purchase and exchange as normal provided he does so before the release time.

One the purchase is exchanged he can go back to the purchaser’s conveyancer and confirm exchanged. The release is known as a formula C release but the exchange itself is either formula A or B.

Failure to Complete After Contracts are Exchanged

Once contracts are exchanged both parties are bound to complete on the completion date. Failure to do so entitles the party not in default to sue the defaulting party for any reasonable losses suffered as a result. The contract cannot be rescinded (cancelled) immediately however. The standard conditions of sale state that if one party fails to complete the other may serve a “notice to complete” giving him 10 days in which to complete. This notice period can and sometimes is reduced via a special condition (special conditions generally override the standard conditions).

If the notice period expires and completion has still not taken place the party who served the notice may rescind the contract, though he is not obliged to do so immediately and can rescind at any time after the notice period has expired and before completion. Following rescission, if the seller has rescinded he can retain the buyer’s deposit of 10% of the purchase price.

Either buyer or seller is entitled to claim interest due under the contract for each day following completion up to either the eventual completion date or the date of completion. In addition they can sue for their losses as a result of the breach. For a buyer this can include the difference in price between the property and any subsequent property of a similar standard (if the subsequent property is more expensive). For a seller it can include the difference between the contract price and the price for which they eventually sell (provided they get the best price reasonably achievable and it is less than the contract price). Other expenses, such as temporary accommodation, extra removal and storage fees and even new clothes (most likely all of your clothes will be packed away ready for the move).