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Exchange of contracts


Legal formalities

Contracts for the disposition of an interest in land must comply with the requirements set in section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (LPMPA 1989). Failure to comply with the LPMPA 1989 will result in there being no valid contract in existence.

The requirements of section 2 of the LPMPA 1989 are that:

 

·                 The contract must be in writing.

·                 The contract must incorporate all the terms that the parties have expressly agreed in one document, or where contracts are to be exchanged, in each document.

·                 The contract must be signed by or on behalf of each party.

Process of exchanging contracts

Typically, contracts for the sale of land or for the grant of a lease are prepared in two identical parts, one part signed by the seller (or proposed landlord), one part signed by the buyer (or proposed tenant). Each part of the contract must incorporate all the terms to comply with section 2 of the LPMPA 1989.

 

Once each part of the contract has been signed and the parties are ready to exchange contracts, the parties date and physically exchange their respective parts of the contract so that the seller holds the part signed by the buyer and the buyer holds the part signed by the seller.

 

Once exchange has taken place, the contract is said to have been made. This marks the point when the contract becomes legally binding.

 

The time at which the contract is made will depend on the method of exchange (Eccles v Bryant and Pollock [1948] Ch 93).

The practice of preparing the contract in parts and exchanging them is not legally necessary. A sale contract can be embodied in a single document, signed by all the parties, in which case the contract becomes legally binding as soon as the final signature is added. 

Methods of exchange

The main methods used for an exchange of contracts are:

 

·                 Telephone exchange.

·                 Personal exchange.

·                 Postal exchange.

·                 Document exchange.

Telephone exchange

This is the most common method of exchanging contracts and was recognized by the Court of Appeal in Domb v Isoz [1980] Ch 548.

 

Telephone exchange is convenient and quick. The agreement to treat contracts as exchanged before a physical exchange takes place avoids uncertainty. Whilst there is no opportunity before exchange for either party to check the form of the other party's part of the contract or that it has been properly signed, copies of the signed parts of the contract can be sent by fax or by e-mail in advance of exchange if this is of concern.
 

Each solicitor should keep a written record of what was agreed during the telephone conversations so that, in the event of a dispute, there is evidence of what was agreed.

The parties' solicitors follow one of the three Law Society formulae for exchanging contracts by telephone: 

 

·                 Formula A.

·                 Formula B.

·                 Formula C.

Essentially these formulae allow the solicitors to agree over the telephone that contracts are exchanged and the contract becomes legally binding at that point, rather than on the subsequent physical exchange. The formulae also allow for the use of fax or telex instead of a telephone conversation. Each formula assumes that the contract is in two parts, one part signed by the seller and the other by the buyer.


Formula A

Formula A is used where one solicitor holds both parts of the contract pending exchange.

·                 The solicitors agree over the telephone that contracts are exchanged and the contract becomes legally binding at this point.

·                 The solicitor holding the documents dates them and sends the part signed by its own client to the other solicitor.

·                 Physical exchange follows the legal exchange but the contract is still legally binding even if the physical exchange of contracts does not take place.

Formula B

Formula B is used where each solicitor holds their own client's part of the contract.

·                 The solicitors agree over the telephone that contracts are exchanged and the contract becomes legally binding at this point.

·                 Each solicitor sends to the other its respective client's signed part of the contract, so that there is a physical exchange.

·                 There is still a legally binding contract even if the physical exchange does not take place.

Formula C

Formula C is similar to B but involves the solicitors agreeing to release the contracts for exchange for a limited period. This formula is particularly appropriate where there is a chain of buyers and sellers, and so is more commonly used in residential conveyancing. It enables all the parties to be lined up ready for exchange so that as soon as the party at the end of the chain is ready, all the contracts in the chain can be exchanged. The formula minimises the risk of one party exchanging on its purchase when it has not exchanged on its sale. Again a physical exchange follows the legal exchange but is not necessary for contracts to be legally binding.


Personal Exchange

The solicitors for the parties meet and physically exchange the documents. The contract becomes legally binding as soon as the signed parts of the contract are physically exchanged.

 

This method gives the parties the opportunity to check the signed parts of the contract before exchange, to make sure they are identical and have been properly signed. The method is not commonly used, however, because of the inconvenience of arranging and attending meetings and the time involved.

Postal Exchange

The buyer's solicitor sends the buyer's signed part of the contract to the seller's solicitor who then posts the seller's signed part of the contract back to the buyer's solicitor.

Unless the contract specifies otherwise, there will be no legally binding contract unless and until the seller's part of the contract is put into the letter-box (but it does become binding at that point). This means that the contract will be binding even if the seller's part of the contract is subsequently lost in the post.

 

It is not sufficient for the envelope containing the seller's part of the contract to be handed to a third party with instructions to post.

 

The buyer will not be able to check the form of the seller's part of the contract or that it has been properly signed, unless a copy is faxed or e-mailed to the buyer. During the period between the buyer's solicitor sending off the buyer's part of the contract and the seller's solicitor posting the seller's part of the contract, there is no guarantee that contracts will be exchanged. This uncertainty and delay makes this method unsuitable for linked transactions but this is less of an issue for commercial property transactions than for residential.


Document Exchange

The document exchange is used to exchange contracts in a similar way to the normal postal service but the rules on when exchange is effected are different. Unless the contract provides otherwise, exchange is not effected and the contract does not become legally binding until the seller's signed part of the contract is actually received by the

buyer's solicitor.


No exchange of contracts by fax

It has been held that an exchange of faxes does not constitute an exchange of contracts because the legal requirements for the creation of a land contract are not satisfied (Milton Keynes Development Corporation v Cooper (Great Britain) Ltd [1993] EGCS 142).

Fax can be used to activate the Law Society's formulae for exchanging contracts. 

Solicitors need the authority of their client to exchange

In exchanging contracts, a solicitor is acting as an agent for the seller, not a principal. Therefore, the solicitor must always ensure that the client has authorised the exchange of contracts.

 

A solicitor who exchanges contracts without the client's express or implied authority will be liable to the client in negligence. To avoid uncertainty, it is advisable to ensure that express authority is obtained.

 

In OPM Property Services Limited v Venner [2003] EWHC 427 (Ch), the solicitor had exchanged without authority. The client was initially happy and by his conduct ratified the contract, but had he not done so, the solicitor may have been liable.


“Practical Law PLC” January 2010




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