SQE1 - Property Law (key elements of a freehold/leasehold residential or commercial property transaction)

What is conveyancing?

The process of transferring the ownership of a property.

What are the two milestones in a conveyancing transaction?

1.Exchange of contracts

2. Completion - the stage when the bulk of the purchase money is made to the seller and the tranfer deed is completed to transfer to the buyer.

Is exchange of contracts compulsory for conveyancing?

SPLIT FLASHCARD

Exchange of contracts is not compulsory, but is useful in the majority of cases because it fixes the completion date and gives the buyer time between exchange of contracts and completion in order to make their final preparations. It is also useful where the parties are agreed that conditions must be fulfilled before completion can take place.

What are the three stages of the conveyancing transaction?

Around the two milestones (exchange and completion), the following stages occur:

1. Pre-contract stage

2. Pre-completion stage

3. Post-completion stage

When are parties bound to the conveyancing transaction?

Parties are only bound by the transaction after the exchange of contracts has been completed.

Why are parties not immediately bound until after the exchange of contracts?

REPHRASE: page 3 of chapter 1

The buyer should not enter the contract until they have carried out numerous searches, enquiries and a survey of the property.

What is the caveat emptor principle?

Latin phrase - 'let the buyer beware'.

Caveat emptor means that the seller is not obliged to disclose information about the property, other than about limited matters of title, and would not be liable for any defects in the property which later come to light.

Therefore, buyer must discover as much about the property as possible before exchanging contracts and committing to the purchase.

Can a seller provide misleading information under the guise of the caveat emptor?

No, caveat emptor does not entitle a seller to give misleading answers to the buyer's enquiries.

Only entitles them not to disclose information about the property.

What should solicitor (for both parties) be doing during the pre-contract stage?

1. Solicitor (for both parties) taking instructions from their client

2. Seller's solicitors submit a pre-contract package of documents to the buyer's solicitor which includes a draft contract and evidence of the seller's title to the property being sold.

3. Buyer's solicitor must check the documents of title to ensure that:

- seller is entitled to sell the property

- there are no issues (e.g. restrictive covenants) which would prevent the buyer from using the property as they intend

What should the solicitors on the seller's side do in the pre-contract stage?

1. Investigation and deduction of title

2. Provides draft contract, supporting documentation, and replies to pre-contract enquiries

3. Responds to additional pre-contract enquiries and requisitions on title.

4. Responds to proposals to amend the contract and produces clean copies for signature.

5. Arranges for contract to be signed by the seller - requests redemption statement from mortgagee(s).

What should the solicitors on the buyer's side do in the pre-contract stage?

1. investigation of title and raises pre-contract searches and enquiries.

2. Review draft contract, supporting documentation, and replies to pre-contract searches and enquiries.

3. Raises additional pre-contract enquiries and requisitions on title.

4. Amends draft contract.

5. Reports to buyer (and possibly their mortgagee) and arranges for contract to be signed by the buyer.

Obtains deposit in readiness for exchange of contracts.

What should solicitors (for both parties) be doing during the pre-completion stage?

Because, the parties are not yet bound.

The time in between exchange and completion, the pre-completion stage, is spent making sure all the correct documentation and the completion money will be available on the completion date. The transfer deed (the document which will transfer the legal title in the property) will need to be prepared and executed in readiness for completion. The buyer's solicitor will carry out precompletion searches to check that the information obtained at the pre-contract stage remains valid and to ensure that there will be no problems registering the buyer's title at the Land Registry. On completion the buyer will pay the balance of the purchase money and the seller will hand over the keys to the property.

What should solicitors (for both parties) be doing during the post-completion stage?

Post-completion - Both sides must finalise administrative matters.

Make sure that all correct documentation and completion money will be available on the completion date.

Will need to prepare and execute the transfer deed for readiness for completion.

Buyer's solicitor - will carry out pre-completion searches to check that the information obtained at the pre-contract stage remains valid and ensure that there will be no problems registering the buyer's title at the Land Registry.

On completion the buyer will pay the balance of the purchase money and the seller will hand over the keys to the property.

What is the Law Society Conveyancing Protocol?

A Protocol is a standardised guide for residential property transactions. It sets out procedures for buying and selling homes, with standard documents like the Property Information Form (TA06).

Firms doing residential conveyancing and aiming for membership in The Law Society's Conveyancing Quality Scheme (CQS) must follow the Protocol. CQS membership is essential for solicitors representing mortgage borrowers. It's available online and serves as a practical checklist for residential transactions.

What is a transfer deed?

The document which will transfer the legal title in the property.

What are the professional conduct issues on a property transaction?

1. Must follow all regulations laid out by the SRA's code of conduct - any breach of this could potentially be a negligence claim.

The most relevant Paragraph in the Code of Conduct is paragraph 6 - dealing with conflicts of interests and confidentiality.

Also:

Para 1.2

Para 1.4

Para 1.3

When is it likely that the Para 1.2 duty (do not abuse your position and take advantage of clients/others) would arise in a property transaction?

A solicitor working on property transactions, may encounter unrepresented parties, there is apotential for this duty to be breached.

What is unrepresented parties?

Someone who does not have legal representation (eg a seller, or buyer, or landlord or tenant who has not appointed a solicitor to act on their behalf). The party could be an individual, company or organisation.

What must a solicitor do when they encounter unrepresented parties?

The solicitor must be careful to ensure that they do not use their position as a solicitor to take unfair advantage of them. Whilst solicitors have a duty to act in their clients best interest (Principle 7), they also need to act with integrity (Principle 5). In the event of conflict, duty to maintain trust and confidence will prevail (Principle 2).

You act for the tenant on the taking of a commercial lease. The landlord, who is unrepresented, produces a draft lease that is clearly defective, as it doesn't contain a forfeiture clause, nor a number of standard tenant covenants for lease of its type.

How should you approach this situation?

In these circumstances, you must advise the landlord to take independent legal advice concerning the terms of the proposed lease. You must avoid giving actual advice, which could suggest that you are acting for the landlord and would give rise to conflict of interest (Para 6.2). You must balance acting in the best interest of your client (by not highlighting the specific errors or remedying them) with not taking unfair advantage of the landlord (this is achieved by pointing out the need to take independent advice).

What is a contract race?

A contract race arises where a client who is selling property instructs their solicitor to submit draft contract documentation to more than one potential buyer. The first to exchange contracts 'wins' the 'race' to buy the property.

When is it likely that the Para 1.4 duty (do not mislead client/others) and Para 1.2 (unfair advantage) would arise in a property transaction?

In the context of a contract race.

These are ok as long as all prospective buyers know that they are engaged in the race.

Where a solicitor acts for

a seller of land, they must not mislead or attempt to mislead the buyers, either by their own

acts or omissions, or by being complicit in the acts or omissions of others. This means that

the solicitor should inform all buyers immediately of the seller's intention to deal with more

than one buyer. If the seller refuses to agree to such disclosure, the solicitor cannot disclose

the contract race to the prospective buyers because they have a duty of confidentiality to the

seller client under paragraph 6.3. Instead, the solicitor should immediately stop acting in the

matter.

What steps should the seller's solicitor do to avoid a breach regarding contract races?

Step 1: The solicitor should obtain their client's consent to disclose the proposed contract race to all potential buyers immediately. It is best practice to have this confirmed in writing. There is no obligation to set up the rules of the race; it is the disclosure of the proposed circumstances that must be made, to avoid taking advantage or misleading.

Step 2: If the client does not consent, the solicitor must immediately cease to act. They will not be able to disclose the reason, due to the confidentiality owed to their client. If they continued to act, this would breach Principle 2.

Step 3: If consent is obtained, the solicitor should inform the seller of the risks associated with a contract race.

What are the risk associated with contract races?

-The seller may lose one or more byers, who may be concerned about the unpredictability involved in the race.

- Potential for wasted time and expense, should they not win.

What is an example of a solicitor misleading a client in a property transaction?

- Para 1.4

Solicitors may mislead by, saying that a transaction is at a particular stage, when it's not.

e.g. confirming that draft contract documentation has been submitted to the buyer's solicitor or that property has been registered.

Would a solicitor be able to act for both a seller and buyer in a contract race?

No, as this would be in breach of Para 6.2.

Would a solicitor be able to act for different buyers in a contract race?

Acting for more than one buyer may be possible, if the solicitor can satisfy the requirements of Para 6.2(b) - as the buyers would arguably be competing for the same objective.

IT IS POSSIBLE.

You act for a small developer in the sale of the last remaining plot of residual development. They received three asking price offers, subject to contract, and they are very keen to move on to another project.

Accordingly, they would like you to submit draft contract documentation to the solicitors of all three parties, with the first to exchange contracts being bound to complete.

How should you approach this situation?

This is a potential contract race. You mist seek your client's consent to disclose the situation to all prospective byers immediately.

If this consent is not forthcoming, you must cease to act, buy will be unable to disclose your reasons, due to the duty of confidentiality owed to your client.

If you receive consent, you should advise your client of the potential risks associated with contract races.

What is an example of a solicitor misleading others in a property transaction?

- Para 1.4

Solicitors could mislead the other party to the proceedings by, e.g. confirming that a mortgage offer has been received when it has not, or that the transaction is not part of a chain when it is.

Main one - Contract Races

Undertakings - Para 1.3

Property Transaction

Undertakings are an important element of property transactions.

Solicitors give undertakings at vatious stages of a property transaction. Such as:

- undertaking to send part contract to the seller/buyer on exchange of contracts

- discharge your client's mortgage(s) when acting on a sale

Undertakings can be more bespoke

- pay the landlord's legal costs, either on grant of lease, or on application for a consent or licence under a lease.

Undertakings assist in the smooth running of matters and are essential in transactional work.

What principles are act the heart of undertakings?

Principle 2

Principle 4

Principle 5

Principle 7

Your client, the seller of a residential property, leaves an old and broken freestanding fridge freezer in the kitchen of the property, on completion.

You subsequently receive a telephone call from the buyer's solicitor and you say, without authority, that your client will remove the offending item by 10 AM the next day.

Have you given an undertaking in this situation?

Yes, you have given an undertaking. It was an oral statement that a third party (your client) will remove the fridge freezer or cause it to be removed by the required time.

It did not need to be in writing and you did not need to use the word 'undertake/undertaking'. It is reasonable for the buyer's solicitor and their client to rely upon this.

You will be personally bound by the undertaking, even though you had no authority to give it and performance of of it is beyond your control.

What question should solicitors be asking themselves before deciding to give an undertaking?

Control

Solicitors must be clear about precisely what you are promosing to do, and when you are promising to do it.

If anything within the required undertakings is outside of a solicitor's control - they must either not give the undertaking or qualify it suitably (eg through pre-conditions)

You act for John, the buyer of a house known as Manor Fields. The contract for the sale

and purchase of Manor Fields was finally agreed last week. The seller's solicitor e- mailed

you three days ago to confirm that he was holding a contract signed by the seller and was ready to exchange contracts. After some delay, you have now received John's signed

contract. John has just telephoned to say that there has been a computer glitch at his bank and the deposit monies required for exchange will not now be transferred into your firm's bank account until tomorrow.

The seller is insisting that exchange of contracts takes place today and is threatening

to pull out if it does not. John is anxious not to lose the property and has been told by

the seller that the seller's solicitor will exchange today if you give the seller's solicitor an

undertaking that the deposit money will be transferred to their firm by close of business

tomorrow. John has instructed you to go ahead and exchange contracts on this basis.

Has an undertaking been made?

Yes, and undertakings are binding even if they are given in relation to something outside the solicitor's control.

Failure to honour the undertaking is professional misconduct. If the solicitor does not receive the deposit money from John, they will be

personally liable to pay it.

What is an example of an undertaking that has pre-conditions?

If in the John case, the undertaking made it very clear that deposit money will only be paid provided it is received from the John.

What is best practice when giving undertakings?

Whilst oral undertakings are valid, it is best practice to confirm undertakings in writing, as you must keep and maintain appropriate records to demonstrate the existence, compliance with and discharge of undertakings (Para 2.2 Conduct of Firms).

Undertakings should be appropriately and carefully worded as any ambiguity is likely to be interpreted in favour of the recipient.

Transactional-specific points on undertakings

Picture of table was made - add this detail

What a

Your client, who needs to raise some capital as a matter of urgency, has decided to sell her house and move into rented accommodation. The property is subject to a mortgage in favour of a high street bank and your firm has been instructed on the sale and discharge of the mortgage.

The client owes £30,000 by way of an unsecured loan from a third party and the third party's solicitors have been asked for an undertaking to repay the loan amount, plus interest, within the next three month's, from the sale of proceeds of the house.

How would you approach this situation?

You should not give an undertaking in the requested terms as actual completion of the sale is beyond your control (the matter may not proceed and completion may not occur).

Any undertaking will need to be conditional on your firm completing the transaction and receiving the sale proceeds (whenever that may be). You should seek to limit the obligation to pay interest to that property payable under the agreement and you should ascertain that the net proceeds of sale would be sufficient to repay.

You should obtain your client's written consent to the proposed undertaking and provide the undertaking in writing.

You are under no obligation to give the undertaking, but you should not act in the completion of the transaction unless you are able to fulfil it.

What are the common conduct questions in property practice?

1. Can I act for seller and buyer

2. Can I act for borrower and lender?

3. Can I act for joint mortgagors?

4. Can I submit a draft contract to more than one buyer?

What is the Para 6.1 and 6.2 (Conflict of interest) duty is relation to property practice?

You must not act if you have an own interest or significant risk of conflict - Para 6.1

You must not act if there is a risk of such conflict in relation to that matter or aspect of it - Para 6.2

Which of the 7 SRA principles would a solicitor breach if they acted when there's a conflict?

Principle 5 - duty to act with integrity

Principle 8 - act in the best interest of the client

What would be an example of a solicitor breaching Para 6.1 of Code (own interest conflict) in a property transaction?

A solicitor acting on a purchase of property where they or those close to them hold shares in the seller company, or are employed by the seller, would be in be in breach of this duty.

What is meant by the term arm's length?

A transaction is at arm's length where both parties are not connected and are each acing in their own commercial self-interest.

What are the professional conduct requirements when a solicitor is acting for both the seller and buyer?

Confidentiality - Para 6.2

Generally, a solicitor should not act for both buyer and seller as this could give rise to a conflict of interest or significant risk rising. (this is not straight-up prohibited)

A conflict is likely to arise, where the property is transferred, as buyer and sellers are at arm's length because the buyer and seller have different interests.

Seller wants to protect themselves from ongoing liability

Buyers want to obtain a good and marketable title.

Therefore, a solicitor may not be able to provide the best independnant advice to both parties - particularly where there is unequal bargaining power, or if one party is vulberable, then the conflict will increase (eg a layperson selling land to an experienced developer).

What must a solicitor do if a conflict arises?

What must they do if a conflict is likely to exist or arise in the future?

Where the conflict arises the solicitor is unable to act (unless an exception applies)

When a conflict is likely to arise, a solicitor must cease to act (unless an exception applies).

Why is a conflict of interest likely to arise when a solicitor is acting for both a buyer and seller?

Possibility of conflict of interest is strongly linked to the need to negotiate between the parties (especially those involving high value commercial property, or grant of commercial lease as there is a real need to negotiate terms e.g. VAT on a freehold transaction and tenant covenants on grant of lease).

Acting for both parties would be inadvisable as you could not give them independent advice. Even in more straightfoward arm's length residential transactions, negotiations may arise because of adverse matters uncovered by the results of searches and enquiries, title investigation or survey.

Can the substantial common interest exception apply in cases where a solicitor would be acting for both the seller and buyer?

No, the buyer and seller are at arm's lengths, they clearly have different interests and not a common purpose (one wishes to buy, the other wishes to sell).

Can the competing for the same objective exception apply in cases where a solicitor would be acting for both the seller and buyer?

No, this exception does not apply because in the case of transfer of land more generally, as the parties are each working towards different objectives (disposal and acquisition).

Would there be a conflict of interest when a solicitor is acting for for both parties where land is gifted or transferred?

This is likely to be more permissible conduct.

Transfers between companies in the same group, or a gratuitous transfer from spouse to spouse, or adult to child).

In these circumstances, it is arguable that no conflict of interest arises or is likely to arise and that the transaction would also come within the substantially common interest exception.

What is best practice if a solicitor they decide to act for both a buyer and seller?

If the solicitor is satisfied that there is no conflict/significant risk of conflict - they should record the reasons for the decision and obtain client's informed consent.

It is also advisable for each party to be represented by a different fee earner.

If a solicitor is satisfied that the transaction comes under the common interest exception, they would need to comply with the three conditions in Para 6.2.

What are the professional conduct requirements when a solicitor is acting for joint buyers?

Subject to compliance with Para 6.2 of Code, a solicitor can usually act for two joint buyers (such as joint tenants), as they usually have the same interest in acquiring a good and marketable title to the property.

What is best practice when a solicitor is acting for joint buyers?

It is best practice to obtain instructions from all clients, due to the risk of duress or undue influence between parties (especially if one is more vulnerable).

In residential cases, the solicitor should advise the buyers separately about how the equitable interest should be held, especially, if they are not married/civil partners.

What are the professional conduct requirements when a solicitor is acting for borrower and lender?

This is possible unless there is a conflict of interest/significant risk.

There are a few cases where a risk of conflict is high.

Likewise, there may be a conflict between the duty of confidentiality under Para 6.3 and the duty of disclosure to the other client.

When will a risk of conflict be high when a solicitor is acting for both a borrower and seller?

Rare circumstances

1.

The mortgage is not a standard mortgage (not in the normal course of the lender's activities, where a significant portion of the lender's activities consist of lending and the mortgage is on standard terms) of property to be used at the borrower's private residence.

2. The mortgage is standard but you do not use the approved certificate of title.

What are the professional conduct requirements when a solicitor is acting for joint borrowers?

Generally, this will be acceptable provided there are no conflicts/significant risk.

However, there may be cases where undue influence arise (e.g. when a mortgage is taken over a matrimonial home of a married couple as security for a business loan - Etridge Principle)

What are the Etridge guidelines placed on lenders?

- Acting for joint borrowers

The lender should provide the solicitor with the following:

- The purpose for which the loan is being made available

- The current amount of the borrower's indebtedness

- The amount of the current overdraft facility

- The amount of the current overdraft facility

- The amount and terms of the new loan

- A copy of any written application made for the loan

What are the Etridge guidelines placed on solicitors?

- Acting for joint borrowers

The solicitor should:

- Explain to the other spouse the purpose for which the solicitor has become involved

- Explain that the lender will rely on the solicitor's involvement to rebut suggestions of undue influence

- Obtain confirmation from the spouse that they wish for the solicitor to act for them in the transaction and to advise on the practical and legal implications of the transaction.

What is the most common way to finance a property transaction?

Most clients will rely on borrowing to finance a purchase. The lender will usually require the loan to be secured by a first legal mortgage on the property and a solicitor may act for both the buyer/borrower and lender.

What restrictions are placed on solicitors under the Financial Services and Market Act 2000 (FSMA)?

Solicitors can only provide generic advice concerning the main types of mortgage - s327 exemption.

Solicitors must not advise a client to enter into a mortgage except when endorsing recommendation made by an authorised person under the FSMA.

What are the two main types of mortgages?

1. Repayment mortgages

2. Interest-only mortgages

What is a repayment mortage?

Borrower pays monthly, consisting of loan instalments and interest.

Options:

Borrower can choose lender's SVR, fixed rate, or tracker rate.

Fixed/Tracker Rate: If chosen, interest may revert to SVR after agreed period.

Advantage: By mortgage term end, borrower has paid off entire debt.

What is an interest-only mortgages?

Borrower makes monthly payments to the lender, but those payments are only comprise interest chargeable on the loan. At the end of the term, the borrower will still owe the lender the whole of the original amount borrowed.

Advantage - monthly payments are lower than repayment.

Can a borrower receive a combination of repayment and interest mortgage?

Yes, it is possible to receive a combined mortgage. However, the lender will usually want to see evidence as to how the capital will be repaid at the end of the term.

What are the other types of mortgages?

For clients who cannot enter into mortgages that charge interest (e.g. Sharia)

Sharia Loans

- the bank buys the property and resells it to the buyer at a higher prince. The buyer repays the excess to the bank by instalments over a period of years.

- OR, the bank buys the property and leases it to the buyer for rent, at the end of the lease, the bank transfers the property to the buyer.

What are the main sources of taxation found in residential property transactions?

Buyer will pay

- Stamp Duty Tax (in England)

- Land Transaction Tax (in Wales)

What is Stamp Duty Land Tax (SDLT)?

SDLT was introduced 1 December 2003 and replaced stamp duty,

Essentially it is a tax on land transactions.

What is the Land Transaction Tax (LTT)?

Tax in Wales replacing SDLT, and introduced 1 April 2018.

What are the main SDLT rates for residential property?

Up to £250,000: Nil

£250,001 to 925,000: 5%

£925,001 to 1.5m: 10%,

Above £1.5m: 12%.

What are the SDLT rates for non-residential/commercial properties?

Up to £150,000: Nil

£150,001 to 250,000: 2%,

Above £250,000: 5%.

What is the deadline for payment of SDLT?

Payment must be made by the buyer to the HMRC within 14 days of completion.

When submitting a SDLT payment to HMRC, what documentation should a buyer send?

Buyer must send a SDLT1 form.

What is the payment threshold for submitting an SDLT1 form?

The form must be filed for all transactions with a consideration of above £40k.

What happens if the buyer fails to pay SDLT within the deadline?

Penalties and interest will be attracted.

What are the SDLT rates for first-time buyers?

First-time buyers can claim SDLT relief (for property no more than £625,000).

Up to £425,000 - pay no SDLT

£425,001-£625,000 - pay 5% on remaining portion.

Is there any SDLT relief for properties above GBP 625,000?

No.

What is the non-UK surcharge for SDLT?

Additional 2% surcharge to relevant rates for non-UK residents.

How is residency defined for the purposes of non-UK surcharge?

Being present in the UK for at least six months in the previous twelve months.

What are the main LTT rates for residential property?

Up to £225,000: 0%

£ 225,001 to 400,000: 6%,

£400,001 to 750,000: 7.5%,

£750,001 to 1.5m: 10%

Above 1.5m: 12%.

Are there higher rates for additional residential properties in LTT?

When do they apply?

Yes.

These higher rates apply if the buyer:

-already owns a property and is buying an additional property; or

- is not a UK resident

What are the LTT rates for non-residential.commercial properties?

Up to £225,000: 0%

£225,001 to 250,000: 1%

£250,001 to 1m: 5%,

Above 1m: 6%.

What is Value Added Tax (VAT)?

Tax on taxable supplies in business provided by a taxable person in the course or furtherance of a business.

What is a taxable person?

- VAT

Person whose turnover exceeds £85,000.

If a person makes below this threshold then VAT is voluntary.

What are the three types of supplies?

- VAT

1. Standard-rated (20%)

2. zero-rated (0% but still taxable)

3. Exempt supplies.

Can a business that makes only exempt supplies register for VAT?

A business that makes only exempt supplies cannot register for VAT and recover input tax paid.

Can a business that makes only zero-rated supplies register for VAT?

Yes, they can register for VAT and recover input tax paid.

What is the VAT status of residential property?

Residential properties are VAT-exempt.

What is the VAT status of 'new' commercial property?

A new commercial property (which is 3 years or younger) - Standard-rated.

What is the VAT status of 'old' commercial properties and the grant of a lease?

Exempt, unless option to tax is made.

What is the purpose of exercising the option to tax?

Recover input tax on a building.

What is the consequence of exercising the option to tax?

VAT charged on SLDT/LTT.

What is considered a taxable supply in a commercial property transaction?

-The sale of a greenfield site is exempt, subject to the option to tax.

- The supply of construction services is standard rated.

- Professional services, provided by an architect or surveyor for example, are

standard rated.

- The sale of a new freehold building is standard rated.

-The sale of an old freehold building is exempt, subject to the option to tax.

-The grant of a lease is exempt, subject to the option to tax.

What is the initial instruction checklist a solicitor should follow when taking instructions?

1.Full names, addresses and contact details of buyer(s) and seller(s)

2.Name, address and person to contact at estate agents

3.Name and address of other party's solicitors

4.Full address of the property to be bought

5. Fixtures and fittings being bought

6.Tenure

7.Price

8.Deposit

9.Mortgage (seller: existing mortgage? buyer: source of funding and mortgage?)

10. Anticipated completion date

11.Synchronisation (chain purchase?)

12.Present and intended use of property and any recent alterations

13. Situation of the property

14.Property survey?

15.Is anyone else in occupation?

16.Have any other terms been agreed?