Buying and selling a property is a complex process and it isn’t until contracts are exchanged that the transaction is legally binding and penalty free pulling out is no longer an option. Up until that stage, either party can pull out at any time for any reason without penalty, unless there is an alternative agreement in place. Here we will take a look at the steps that need to be taken before contracts can be exchanged and what happens at exchange of contracts.
What is a contract?
The contract is essentially the document that agrees the sale of the property between the seller and the buyer. It will contain details about the property such as:
- the sale price
- the property boundaries
- which fixtures and fittings (like carpets and kitchen units) are included
- any legal restrictions or rights, like public footpaths or rules about using the property
- any planning restrictions
- services to the property, like drainage and gas
- when the sale will complete
This is prepared by the seller’s solicitor and passed to the buyer’s solicitor for review and any questions or negotiations. Only when both sides are happy with the particulars of the contract will contracts be exchanged.
What needs to happen before exchange?
There are several steps that need to happen before contracts are formally exchanged such as:
- All details of the transaction are agreed including price and included fixtures and fittings
- A formal mortgage offer is in place and the buyer has the full deposit in their possession
- All relevant searches have been carried out by the buyer’s solicitor and any issues resolved
- The completion date has been agreed by all parties
- The buyer’s solicitor’s questions have been fully answered to their satisfaction
- Surveys have been carried out and any issues raised discussed and agreed
- The buyer needs to have buildings insurance in place
Once everything has been agreed, both parties will sign the contracts ready for exchange
When are contracts exchanged?
Typically exchange will happen between 7 and 28 days of completion but it is more and more common to exchanging and completing on the same day. There are pros and cons of both.
Exchanging prior to completion gives both parties plenty of notice and security of the move date. Exchanging on the same day as completion always leaves a little uncertainty around whether everything will go through smoothly as there is a lot that needs to be sorted before completion can occur such as sorting the finances and ensuring everyone else in the chain is sorted. One of the disadvantages of exchanging ahead of time is if the buyer is using proceeds from their house sale to finance the deposit. In this case, it is unlikely that the buyer would have the deposit funds available until their house sale went through and this would then potentially leave the buyer homeless for a short period of time after selling their property.
What happens on exchange?
The exchange itself is carried out by the two sets of solicitors. Essentially, they do this over the phone to make sure that the contracts are identical and correct. This call is recorded as proof of the checks. The buyer will also need to have transferred the deposit to their solicitor. Once both sets of solicitors are happy that the contracts are correct and identical and that they have been signed and dated, they have been exchanged. The solicitors will then send copies in the post.
Once completion has happened, both parties are legally bound to complete the transaction or face a financial penalty.