What happens on exchange of contracts

What exchange of contracts is

Until contracts are exchanged there is no contract. gov.uk states that an offer is not legally binding in England and Wales until contracts are exchanged, so either side can walk away up to that point for any reason.

Land cannot be bought on a handshake. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires a contract for the sale of an interest in land to be in writing, incorporating every expressly agreed term, and where contracts are exchanged, in each part. One of the two documents, though not necessarily the same one, has to be signed by or on behalf of each party.

Exchange turns that writing into a contract. gov.uk describes both sides signing final copies and sending them to each other, after which usually neither party can pull out without paying compensation.

What has to be in place before exchange

gov.uk’s How to buy guide sets out what has to be settled first, and even then a solicitor cannot exchange without the client’s express authority. The stages before exchange are where the waiting happens.

• Satisfaction with the searches, the survey and the contract details
• The lender’s confirmation of the mortgage, since Citizens Advice notes that contracts cannot be exchanged until the mortgage offer is made
• Funds available for the deposit
• Cleared funds for the other costs, including stamp duty and removals
• Buildings insurance arranged, because signing the contract makes you legally responsible for the property

The three Law Society formulae for telephone exchange

Exchange by post still happens, and under condition 2.1.1 of the Standard Conditions of Sale the contract is made when the last copy is posted or deposited at the document exchange. Most exchanges run on the telephone instead, using one of three formulae published by the Law Society.

Formula	Who holds the signed parts	What happens after the call
A	One solicitor holds both parts, signed by buyer and seller	That solicitor dates both parts, inserts the completion date, and sends the part signed by their own client to the other side
B	Each solicitor holds their own client’s signed part	Each dates their own part, inserts the completion date and sends it to the other
C	Each holds their own client’s signed part, used for chains	Contracts are released for exchange for a set period, so once the last party in the chain is ready every contract exchanges almost simultaneously

A memorandum follows the call, and that record is what proves the contract exists. It carries the date and time of exchange, the formula used and the wording of any variation, the completion date, the balance of the deposit still to be paid, and who was on the call. Formula C needs two.

The 10% deposit and who holds it

Condition 2.2.1 of the Standard Conditions of Sale requires the buyer to pay a deposit of 10% of the purchase price no later than the date of the contract. Citizens Advice gives the same figure with the same caveat, often 10% but able to vary.

Condition 2.2.6 has the seller’s conveyancer hold it as stakeholder and pay it over with accrued interest on completion, and Citizens Advice notes that the interest earned meanwhile is something the seller may have to ask for. Condition 2.2.5 is what makes chains work, letting a seller who has agreed to buy another property in England and Wales for their residence use all or any part of that deposit on their own purchase.

The four deadlines written into the standard contract

Four numbers sit inside the Standard Conditions of Sale most sales adopt, and nobody reads them until one bites.

Condition	What it fixes	The number
6.1.1	Completion date, where the contract fills in nothing	20 working days after the date of the contract
6.1.2	Money for completion received after 2.00pm	Treated as the next working day for compensation, as the buyer’s default
6.8.2	A notice to complete, once served	10 working days, time of the essence
1.1.1(e) and 7.2	Compensation for late completion	The contract rate, currently 7.75%

A working day under condition 1.1.1 is any day from Monday to Friday that is not Christmas Day, Good Friday or a statutory bank holiday. The 20 working day default rarely applies, because the completion date is agreed at exchange. gov.uk puts the usual gap at around 2 to 4 weeks, Citizens Advice at about four weeks.

The contract rate is the price of being late. Condition 1.1.1(e) defines it as the Law Society’s interest rate, which is 4% above Barclays Bank base rate. With base rate at 3.75%, that is 7.75%.

Risk and buildings insurance from the date of the contract

Condition 5.1.1 puts the property at the buyer’s risk from the date of the contract, not from completion, which is why the insurance has to be running before the exchange call, not before the removal van.

Where a house is damaged in that gap, Citizens Advice says the seller has to tell the buyer, and it falls to the buyer to have the repairs done and claim on their own policy. The price in the contract does not move because a storm took the roof off.

Notice to complete and the 10 working days it runs

If the completion date passes without completion, the contract does not collapse by itself. Under condition 6.8.1 a party ready, able and willing to complete may serve a notice to complete after 2.00pm that day, and condition 6.8.2 gives both sides ten working days from the day after the notice is given, with time of the essence.

Serving it also changes the deposit. Condition 6.8.3 requires a buyer who paid less than 10% to pay the balance of that 10% forthwith, and a buyer who paid nothing to pay a full 10%.

Who fails to complete	What follows
The buyer, after a notice to complete	The seller may rescind under condition 7.4.2, and forfeit and keep the deposit with accrued interest
The seller, after a notice to complete	The buyer may rescind under condition 7.5.2, and the deposit is repaid with accrued interest
Either party, where completion is merely late	Compensation under conditions 7.2.1 and 7.2.2, at the contract rate on the purchase price less any deposit paid where the buyer is paying, for the period of net default

Keys before completion and the section 44 stamp duty trap

Letting a buyer move in between exchange and completion moves the tax date. Under section 44 of the Finance Act 2003 entering into the contract is not itself a land transaction, and where a transaction completes without being substantially performed first, the effective date is the date of completion.

Substantial performance changes that. Where a contract is substantially performed without being completed, it is treated as the transaction itself and the effective date moves to the day of that performance. Performance is substantial when the purchaser, or someone connected with them, takes possession of the whole or substantially the whole of the property, or when a substantial amount of the price is paid, and possession counts even under a licence or a temporary lease.

The effective date is what the filing deadline runs from. gov.uk gives the stamp duty return and payment as due within 14 days of completion, and where substantial performance has moved the effective date, those 14 days move with it. A late return costs a flat £100 where it arrives within three months of the filing date and £200 after that, on top of any tax-related penalty. Wales is taxed separately by Land Transaction Tax, whose return runs to 30 days from the day after the effective date.

Gazumping, gazundering and contract races before exchange

All three are legal, and all three stop at exchange. Citizens Advice explains that gazumping is not illegal because the purchase price is only legally settled when contracts are exchanged, though an agreement that the seller will not consider other offers for a set period is enforceable, and being gazumped inside it is a breach of contract.

Gazundering runs the other way, the buyer cutting the offer just before exchange, and after exchange the buyer is committed to the price in the contract. In a contract race the seller sends draft contracts to several buyers, the solicitor has to tell all of them, and the first returned signed and ready for exchange gets the house.

Exchange of contracts in Scotland and Northern Ireland

Scotland has no exchange of contracts. The binding moment is the conclusion of missives, the letters passing between the two solicitors, and the Requirements of Writing (Scotland) Act 1995 is what makes those letters enough. The buyer’s offer goes as a formal letter from their solicitor, the seller’s solicitor replies with a qualified acceptance, and once every point is agreed in writing the missives are concluded. The Law Society of Scotland’s wording is that the buyer will not have signed anything and is still bound, and mygov.scot puts the cost of pulling out afterwards at thousands of pounds in damages.

Everything downstream carries a different name. Completion is settlement, on the date of entry, the transfer deed is a disposition and the mortgage deed a standard security. Protection between conclusion of missives and registration comes from an advance notice, whose protected period is 35 days from the day after it is entered. Buyers insure from conclusion of the missives unless the missives say otherwise, and the seller’s Home Report means a Scottish buyer is not paying for a survey before committing.

Northern Ireland does exchange contracts, on a different deposit convention. nidirect gives it as at least 5% of the house price, rather than the 10% the English standard contract sets. Formation is by receipt rather than mutual exchange, since the Law Society of Northern Ireland describes the contract as formed once the seller has signed and the purchaser or their solicitor receives the accepted offer. The three telephone formulae are a Law Society of England and Wales publication. Licensed conveyancers exist only in England and Wales, so the choice between a solicitor and a licensed conveyancer never arises there, and every firm on the Belfast list is a solicitors’ practice.

Question	England and Wales	Scotland	Northern Ireland
When it becomes binding	Exchange of contracts	Conclusion of missives	Exchange of contracts
Does the buyer sign a contract	Yes, one signed part each	No, the solicitors’ letters are the contract	Yes
Usual deposit	10% under the Standard Conditions of Sale	The price is paid at settlement	At least 5%
Regulator	Solicitors Regulation Authority	Law Society of Scotland	Law Society of Northern Ireland
Tax return deadline	14 days for stamp duty in England, 30 days for Land Transaction Tax in Wales	30 days for Land and Buildings Transaction Tax	14 days for stamp duty