Under Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, an agreement to acquire land or property, whether freehold or leasehold, must be in writing and incorporate all the terms agreed. The agreement must be signed by or on behalf of each party.
Usually contracts for the sale or lease of property are prepared in two identical parts. One part of each will be signed by the buyer and seller respectively.
Once the contracts have been signed the parties are ready to exchange. The solicitors will exchange contracts using one of the Law Society’s Formula for exchange, usually over the telephone using Formula B.
The Law Society’s Formula B contains undertakings which will bind the firms giving them. Each solicitor undertakes that they are holding a contract signed by or on behalf of their client. The solicitors will agree to insert the completion date into the contract. The solicitors then agree to date the contract and that the contracts have been exchanged.
Formula B contains an undertaking that the solicitor will send that day to the other, either by first class post or document exchange, their clients part of the contract. The solicitor will then hold the contract signed by the other party.
Except in exceptional circumstances the buyers will pay a deposit on exchange which is normally 10% of the agreed price.This is payable to the seller’s solicitors on exchange to be held as either agent or stakeholder.
Once exchange has taken place, a legally binding contract has been entered into. It is therefore difficult for the buyer or seller to back out of the transaction.
If either party failed to complete on the agreed completion date there would be financial penalties. The buyer would for instance lose the deposit paid. The defaulting party may also have to pay further compensation for any loss suffered by the other party, such storage costs.
The innocent party cannot unilaterally terminate the contract unless completion was made “of the essence”. Most contracts provide that time is not of the essence to give the defaulting party time to rescue the transaction rather than the contract being terminated automatically. Following default the innocent party would need to serve a notice to complete to make time of the essence.
It is worth noting that although it is usual practice for a contract to be prepared in two identical parts and signed respectively this is not necessary. The document can be prepared as one document. If this were the case the contract would be binding once the final signature were added.