Freehold Transactions PDF

**Freehold Transactions** Contents {#contents.TOCHeading} ======== [**Introduction to property practice** 2](#introduction-to-property-practice) [Practice Questions 4](#practice-questions) [**Outline of the conveyancing process** 5](#outline-of-the-conveyancing-process) [Practice Questions 7](#...

**Freehold Transactions** Contents {#contents.TOCHeading} ======== [**Introduction to property practice** 2](#introduction-to-property-practice) [Practice Questions 4](#practice-questions) [**Outline of the conveyancing process** 5](#outline-of-the-conveyancing-process) [Practice Questions 7](#practice-questions-1) [**Caveat emptor** 9](#caveat-emptor) [Practice Questions 10](#practice-questions-2) [**Taking Instructions -- Initial Advice** 12](#taking-instructions-initial-advice) [Practice Questions 15](#practice-questions-3) [**Sources of finance and types of mortgage** 17](#sources-of-finance-and-types-of-mortgage) [Practice Questions 18](#practice-questions-4) [**Professional conduct issues in property transactions** 20](#professional-conduct-issues-in-property-transactions) **Introduction to property practice** ===================================== Why does a client need a property solicitor? *Value*: land and buildings are often the most valuable assets an individual or company will buy There are risks of losing money: - Conveyancing process of transferring property and paying money - Problems with the property -- legal issues can affect the buyer's use of the property and its open market value [Buyer's aim in a freehold transaction] The buyer will think about - Speed - Quality service - Low cost Can have 2/3 but not all 3 What we need to think about: - Any issue which may restrict your clients ability to do what it wants with the property - Any issue which passes liability (potential expense) on to your client for something the seller has done Our aims when acting for the buyer is to make sure that: - The seller has the right to sell the property - The physical condition of the land and buildings is adequate for the buyers needs and the property is worth the money being paid - You identify all the rights that the property enjoys - You identify any 3^rd^ party rights affecting the property - The property is free from any security interest (such as mortgages) or will be on completion - The contract reflects the terms agree between the parties - There are sufficient funds to finance the purchase [Lenders aims in a freehold transaction ] Unless the buyer has enough cash to purchase, they will borrow money from a lender The lender will take a security interest over the buyer's (borrower's) property. If the buyer does not repay the mortgage, the lender knows that it can sell the property to cover its losses **The lenders aims** Lender will not worry so much how long it takes or even if the transaction doesn't even proceed. He cares about: - That the property is marketable (easy to sell) - That the property's value is sufficient to cover any losses if the buyer does not repay the mortgage Our aims acting for the lender ensure that: - the seller has the right to sell the property - the physical condition of the land and buildings is adequate for the lender\'s needs and the property is worth enough to cover any losses if the buyer fails to repay the mortgage - you identify all the rights that the property enjoys - you identify any 3rd party rights affecting the property - the property is free from any security interest (such as mortgages) or will be on completion - the contract reflects the terms agreed between the parties - there are sufficient funds to finance the purchase - there are no discrepancies in the lender\'s understanding of the transaction and the borrower\'s circumstances - the security document (mortgage) is valid and enforceable [Seller's aims in a freehold transaction] The sellers interests are simpler, they just want to sell the property and receive money quick as possible. Can be complicated if they have a related purchase Our aims when acting for the seller ensure that: - the contract reflects the terms agreed between the parties - provide the buyer's solicitor with what they need to proceed with the purchase - tie the timing of the sale to any related purchase - transfer legal ownership (and responsibility) of the property to the buyer - collect money from the sale, repay the mortgage and account to the seller for the balance [Practice Questions ] --------------------------------- 1. **Which of the following statements best describes why the parties to a property transaction will often appoint a solicitor?** A. To ensure there are sufficient funds to finance the transaction. B. To investigate the physical condition of the land and any buildings on it C. To identify any potential issues and offer practical solutions D. There will be rights, obligations and restrictions on the property that will need advising on. Answer: **D** **Which of the following correctly describes the buyer's aims in a property transaction?** A. Ensure that the buyer has the right to buy the property. B. Realise funds from the sale transaction and repay any mortgage on the property. C. Identify the rights that the property enjoys. D. Effect a legal transfer of the property to the buyer Answer: **C** **Which of the following correctly describes the seller's aims in a property transaction?** A. Identify any third-party rights affecting the property B. Ensure the property transaction is tied in with any related transaction and meets their business requirements. C. Ensure there are sufficient funds to finance the purchase D. Ensure the seller has the right to sell the property Answer: **B** **Outline of the conveyancing process** ======================================= **3 Stages** [Pre-Exchange ] - Buyer decides to buy property, agrees price - Surveyor surveys property and reports on its value and condition - Buyer\'s solicitor investigates and reports on title (the complete legal picture of the property) - Only when the buyer is satisfied with the above, will they proceed to exchange [Exchange ] - The seller and buyer enter into a contract to sell and buy the property on the completion date - The buyer pays a deposit (usually 10% of the full price) - From this point on, neither of them can pull out without serious financial consequences [Pre-Completion ] - Buyer's solicitor orders mortgage funds and ensures has full money from client in time for the completion date - (for residential) seller and buyer book removal vans for completion date if appropriate - Seller ensures that has all necessary paperwork to transfer the property on completion [Completion ] - The buyer\'s solicitors send the purchase price to the seller\'s solicitors - The seller\'s solicitors agree to send the necessary paperwork to transfer the property to the buyer\'s solicitors - The buyer gets the keys - (for residential) the buyer and seller physically move house [Post Completion ] - Seller\'s solicitor pays off the seller\'s mortgage and pays balance to seller - Buyer\'s solicitor pays Stamp Duty Land Tax (SDLT) or, in Wales, Land Transaction Tax (LTT), and registers buyer as the new owner at the Land Registry. [Practice Questions ] --------------------------------- **In which of the following stages in the conveyancing transaction does most of the work take place?** A. Pre-completion to completion B. Post-completion C. Pre-contract to exchange Answer: **C** **At what point in a property transaction do the parties become contractually committed to the deal?** A. Exchange of contracts B. Completion C. Registration of the transfer deed at the Land registry D. When the TR1 is executed E. When Heads of Terms are agreed Answer: **A** **At what stage in a property transaction is the buyer recognised as the new legal owner?** A. When the TR1 is executed B. Registration of the buyer at the Land Registry C. Completion D. When Heads of Terms are agreed E. Exchange of contracts Answer: **B** **At which stage in the property transaction is SDLT paid?** A. Pre-contract to exchange B. Post completion C. Pre-completion to completion Answer: **B** **At which stage in a property transaction does the buyer's solicitor request mortgage funds from the buyer's mortgage lender?** A. Post completion B. Pre-completion to completion C. Pre-contract to exchange Answer: **B** **Caveat emptor** ================= *Caveat emptor*: Let the buyer beware This Latin term means if a buyer takes the property as they find it, they can withdraw at any point up to exchange of contracts. After exchange they cannot withdraw simply because they found a problem with the property With limited exceptions, the seller is generally under **no obligation** to give the buyer all the relevant information that the buyer may need. It is the buyer's solicitor's job to investigate as thoroughly as possible and report to buyer [Finding out info about the property] Investigate the title and raise pre-contract searches Need to look at: 1. **The title to the property:** The Land Registry official copies (if it is registered) or the deeds (if it's not) 2. **The seller's replies to enquires:** Whether standard enquires or the buyers solicitors own specific enquires 3. **Searches:** Requests for info from various bodies 4. **A survey of the property:** The surveyor will inspect the property and report on value, defects and any repairs needed. They may flag issues for further investigation (such as physical evidence) **Hardy v Griffiths \[2014\]** This case shows importance of a buyer fully investigating property before becoming contractually bound to the purchase FACTS: - Mr and Mrs hardy exchange contracts for the purchase of a property for 3.6 mil from Mr and Mrs Griffiths. - They paid 150k deposit on exchange - The contract stated that it would need to be topped up to 360k (10%) if the Hardys didn't complete on the agreed completion date - The Hardys refused to complete and sought return of their deposit on the basis of 'reckless misrepresentation' - They said the Griffiths had misrepresented the condition of the property by not revealing the damp and dry rot that would cost 600k to rectify HELD: - The buyers had to pay the full 10% deposit as they had failed to complete - Court applied the principle of caveat emptor - There was no onus on the sellers to disclose any physical defects - The buyer had to discover them - The buyers didn't commission a professional survey prior to exchange - As to misrep, the seller stated that they were not aware of any issues relating to damp or rot. Court found it to be true [What happens if there is something wrong with the property before exchange?] Up till the contracts are exchanged the buyer can walk away without legal liability. There is no legal right to recover any costs from the other party The buyer could require the seller take steps to remedy the problem before completion. This could be a condition of the sale contract They can lose money from paying for surveying or searches or legal fees but there is no legal obligations, there is costs [Practice Questions] -------------------------------- **To which party is the principle of caveat emptor most relevant?** A. The seller B. It is equally relevant to both parties C. The buyer Answer: **C** **Which of the following option sis not a source of information about the property for the buyer?** A. The draft contract B. Official copies from the Land Registry C. Pre-contract search results D. Physical survey E. Replies to standard pre-contract enquiries Answer: **A** **Which of the following options best describes the principle from the case Hardy v Griffiths?** A. A seller does not have to disclose information about rising damp or dry rot in replies to enquiries. B. There is no onus on the seller to disclose any physical defects, it is for the buyer to discover them. C. A buyer can claim misrepresentation if the seller fails to disclose any information in the replies to enquires. It is not even necessary for the buyer to have read the replies. D. A buyer can pull out of a deal before contracts are exchanged. E. There is an onus on the seller to disclose any physical defects in the property. Answer: **B** **Taking Instructions -- Initial Advice** ========================================= You would need to give advice to a client at the start of a transaction. When taking instructions from a client, you need to address: - Energy Performance Certificate - Likely timescale and costs - Co-ownership - Surveys - Tax [Energy Performance Certificate (EPC)] - The seller must commission an EPC before marketing the property and make it available to a prospective buyer free of charge - An EPC is prepared by an accredited energy assessor and reports on the energy efficiency rating of the property and recommends on how the energy rating could be improved (if necessary) - An EPC is valid for 10 years and available on a public online register - The sellers and buyers solicitors should check that the EPC has been provided when accepting instructions [Likely timescale and costs ] - It can be difficult to predict how long the transaction will take, as it will depend on what issues arise, and also on how quickly the other parties solicitors deal with their parts of the transaction E.g. the average residential sale may take around 6-8 weeks from the sale being agreed to completion - Some large value commercial matters are on a tight timescale and will require exchange within 2 weeks, completion within 4 weeks. The buyers solicitor in such a case may need to priorities this matter above all others - The costs may be fixed (particularly with residential matters) or on a time basis in which case you would need to provide an estimate [Co-ownership] *Co-ownership*: 2 or more owners Need to look at legal ownership and beneficial ownership (equitable ownership) **Legal ownership** - Owner registered at Land Registry - There is maximum number of 4 legal owners - Must be over 18 - Can only be sole or a joint tenancy - The legal owners hold the property on trust for the benefit of the beneficial owners **Beneficial ownership** - May or may not be the same as the legal owners - They are not registered at the Land Registry (unless as legal owners - No maximum number of beneficial owners - Any age - Beneficial ownership can be joint tenancy or a tenancy in common *Beneficial ownership: joint tenancy* Suitable for married couple, civil partnership etc. not suitable for a co-owner who wants to pass a share of the property in their will. Not suitable for business relationships Co-owners own the whole of the beneficial estate with each other. They are seen as a single entity The **right of survivorship** applies: if any co-owner dies, then the surviving co-owners hold the property between them. The deceased co-owner cannot pass an interest by their will. *Equitable ownership: Tenants in common* Suitable where co-owners wish to leave the estate in their will, or have contributed unequal proportions to the purchase price. Suitable for business relationship Purchaser own their own undivided share in the property and can share the property in whatever proportions they choose The **right of survivorship** does not apply -- the share will pass under a will **Recording co-ownership arrangements** A declaration of trust of land must be in writing and signed by the declarant (LPA 1925 s.53(1)(b)) The standard Land Registry form transfer deed (TR1) provides a panel to include a declaration of trust. The buyer should select the correct option [Surveys] A buyer should always be advised to instruct a surveyor to undertake a physical survey of the property in order to identify if there are any physical defects Physical defect with the property can be expensive to fix, affecting the value. Identifying them gives the buyer the opportunity to renegotiate the price, require a contribution from the seller and to withdraw before exchange If the physical defects are serious, the lender may refuse to lend until the defects are corrected. This means that the buyer cannot proceed even if they want to Types of surveys: - Basic valuation - If there is a mortgage then the lender will insist on a basic valuation - Cheapest option and the surveyor will give valuation and identify major defects - Its to ensure that the lender will be able to recover any loses by selling the property - A buyer is advised to obtain a fuller survey - With a block of flat in 90, so structural problem is split 90 ways. So check obvious issues - Homebuyer report - More detailed than basic valuation - Suitable for properties in reasonable condition, aged less than 150 years - Tells the property's true condition - Full structural survey - Suitable for any property but should where the property is listed or has had extensive renovations or where alterations are planned - Anyone can still get it if they want comfort or more info about the property - Most expensive option [Tax considerations] At the start of a transaction, you need to be aware be able to advise your client of any tax implications There are 3 different taxes that could be payable: - Stamp Duty Land Tax/Land Transaction Tax (SLDT/LTT) - Capital Gains Tax (CGT) - Value Added Tax (VAT) **SLDT/LTT** - Buyer must pay SLDT if it buys a property/land over a certain price in England and NI - If the property value doesn't exceed threshold figures, no SLDT is payable - The threshold figures and rates of SLDT payable are diff depending on whether the property is residential or commercial - The tax is different in the property/land is in Wales where the LTT is payable if the sale was after 1 April 2018 **CGT** It's a tax on the profit when you sell certain assets (including land and buildings) that have increased in value It's the gain you make that's taxed, not the amount you receive E.g. buy a piece of land for 100k and then sell for 135k. You made a gain of 35k. Taxed on the 35k CGT is not payable on most residential sales, because if the client is selling their own home, they can use an exemption called Private Residence Relief (PRR) More for residential **VAT** It's a tax that is added to the price of certain goods and services. Applicable to types of property transactions Not usually applicable to existing residential properties, which are VAT exempt Some property purchases will be subject to VAT. The buyer must pay VAT on the sale price to the seller [Practice Questions ] --------------------------------- **In which of the following situations would co-ownership issues not need to be considered?** A. An individual buying a house to be held on trust for his grandchildren B. A company is buying a property C. Two individuals buying a property from which they will run their business D. A man is buying a property by himself with a contribution to the purchase price from his brother E. Four friends are buying a property together Answer: A **Which of these following statements applies in respect of the equitable title (ownership)?** A. There can only be a maximum of 4 who hold the title B. You can only hold the title as tenants in common C. You must be over 18 to hold the title D. You can hold the title as joint tenants or tenants in common. E. You can only hold the title as joint tenants Answer: D **Two clients are buying a property together. They are contributing in equal proportions to the purchase price but have stated they want to be able to pass their share in the property under a will should they die during the ownership of the property. Which of the following correctly explains the best advice you should give your clients?** A. The legal title should be held by them as tenants in common because the right of survivorship will not then apply B. The equitable title should be held by them as joints tenants because the right of survivorship will apply C. The legal title should be held by them as joints tenants because the right of survivorship will apply D. The equitable title should be held by them as tenants in common because the right of survivorship will not then apply E. The equitable title should be held by them as joints tenants because they are contributing equal proportions to the purchase price Answer: D **Your client is buying a 1950s house that has been lived in continuously. Which of the following correctly explains the advice you should give your client about surveys?** A. A basic valuation need only be carried out because this is all a lender requires B. A structural survey should be carried out as this is the only survey that gives a valuation. C. A home buyer\'s survey should be carried out because this is the most detailed survey D. A homebuyer report would be appropriate for this kind of property. E. A full structural survey should be carried out because this is the most detailed survey Answer: D **You are acting for the seller of a property. Which of the following types of tax do you need to consider may be payable by your client depending upon the circumstances?** A. SDLT and VAT B. Capital Gains Tax and VAT C. Capital Gains Tax and SDLT D. SDLT only E. VAT only Answer: B **Sources of finance and types of mortgage** ============================================ [Funding the purchase ] - The buyer must have enough funds to complete the purchase: - Cash to pay the deposit on exchange - The balance of the price on completion - The agreed price for any extras, such as contents that come with the property - Tax (SLDT/LTT, CGT, VAT) (SLDT would be classes as a disbursement) - The solicitors fees, which will be subject to VAT (separate from property VAT) - The solicitors disbursements -- search fees and Land Registry fees They need enough money for stamp duty, solicitor fees, so its not enough if they have just money for the property [Residential transactions ] Funding comes from: - Clients own resources - A mortgage loan - Proceeds of any related sale [Commercial transactions] Funding is more varied and complex With higher valued properties -- money may be raised from a group of lenders (syndicate) to raise the money and limit their risk exposure A public company may raise finance for a purchase by equity finance -- selling shares on the stock market to raise capital A lender may fund a development where the lender will provide money to the buyer not just to buy the land but to build buildings on it The lender will require the power to step in to complete the development if the buyer fails to carry it out Legal fees much higher for commercial [Types of residential mortgages ] When the borrower is considered as a high risk, the interest rate will be charged higher. This means the cost of the debt for the borrower is higher. This reflects the risk the lender is taking by loaning to the borrower [Practice Questions ] --------------------------------- **Which of the following would be classed as a disbursement for a buyer in a property transaction?** A. SDLT B. A mortgage loan C. Proceeds from any related sale D. The purchase price E. Legal fees Answer: A **Which of the following statements is correct in respect of interest rates?** A. A high-risk borrower is likely to be charged a higher interest rate B. A low-risk borrower is likely to be charged a higher interest rate C. A high-risk borrower is likely to be charged a lower interest rate D. The higher the interest rate the lower the monthly payments that a borrower will make E. The interest rate is the cost of debt for the lender Answer: A **A borrower is repaying monthly sums on their mortgage loan. At the end of the term they will have repaid all sums owed through these repayments. Which of the following types of mortgage loan will the borrower have?** A. A capital repayment mortgage B. A sharia-compliant mortgage C. An endowment mortgage D. A pension mortgage E. An interest only mortgage Answer: A **Professional conduct issues in property transactions** ======================================================== Key things to think about: - Money laundering - Authorised to act on your clients behalf - Providing a competent and timely service - Conflict of interest - Duty of confidentiality - Duty of disclosure - Client money [Conflict of interest ] Would you have any conflict of interest? There are 2 types 1. Own interest conflict 2. Conflicts which do not involve your own interest *Own interest conflict*: any situation where your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interest in relation to that or a related matter (CANNOT ACT) *Conflict of interest*: a situation where your separate duties to act in the best interests of 2 or more clients in the same or related matter conflict (CANNOT ACT UNLESS AN EXCEPTION APPLIES) [Own interest conflict ] An example: Circumstances that may give rise to an own interest conflict: - **A financial interest of yours or someone close to you** Your developer client asks you to advise on a large development. You realise that it is sited next to your partner\'s holiday cottage and will likely affect its value. - **A personal or business relationship of yours** You act for the buyer of a house. The seller is your best friend. The seller fails to complete the purchase, and the buyer instructs you to claim for damages. **Relationships between solicitors** If you have been asked to act in purchase of a house and your friend who is a solicitor at another firm has been asked to act for a seller is there conflict? If you and your friend are able to separate you clients interest from your own then this may be acceptable. However, if you feel that it would hinder your independence and impartiality then you should consider declining to act or passing it to another lawyer [Conflict of interest ] If you act for a seller, your client\'s interest may be to sell the property at the full price as quickly as possible. If you act for the buyer, your client\'s interest may to take as long as necessary to investigate the title before exchange. If you try to act for both seller and buyer, then you will be torn between these two conflicting interests. You may wish to review the principles on the following slide, and how this might offend those principles. There are other examples, such as negotiating the contract where each party will have an interest in protecting themselves from liability, or where the price has to be renegotiated. This is why you are prohibited from acting where there is a conflict of interest. [The Exceptions ] Relating back to CCS 6.2 at the end, it mentioned 'unless' [Substantially common interest (SCI) ] *Substantially common interest*: a situation where there is a clear common purpose between the clients and a strong consensus on how it is to be achieved Example: Two clients who often buy properties together for development ask you to prepare a report on title for a site. They have a clear common purpose (to investigate the land) and a strong consensus on how it is to be achieved (through your report). You can act for both clients and prepare the report on title. On receiving the report on title, both clients decide to buy the property together. You must check again that they have a clear common purpose (to buy the land) and a strong consensus on how it is to be achieved (i.e., do they agree on the price, timetable, etc?). The clients then fall out and decide to negotiate separately against each other for the same property. They no longer have a clear common purpose, and therefore you may not act for both of them (and ideally neither of them). What is NOT an SCI: Arguably a seller and buyer have a clear common purpose in that they both want the agreed deal to take place as soon as possible. However, they will lack strong consensus on how it is to be achieved. The seller will likely want the sale completed as soon as possible, whereas the buyer will only want to complete if satisfied that all issues have been identified and resolved. They do not therefore have a substantially common interest, and you cannot act for both. [Competing for the same objective exception CFSO] \"competing for the same objective\" - any situation in which two or more clients are competing for an \"objective\" which, if attained by one client, will make that \"objective\" unattainable to the other client or clients, and \"objective\" means an asset, contract or business opportunity which two or more clients are seeking to acquire or recover through a liquidation (or some other form of insolvency process) or by means of an auction or tender process or a bid or offer, but not a public takeover This would apply in a structured competition process, such as an auction or tender. In this instance, you may act for two or more clients, as the process itself will mean that only one of the clients will be successful. (Compare this to the last example, where the two commercial clients are separately negotiating for the same property - this would not satisfy the test as the seller may elect to give them different terms or different parts of the same property.) In practice this exception only applies to sophisticated clients. Although you would be acting for two or more clients at the beginning of the process, the nature of the process is that at the end of the process, you will only have one client. [The conditions to the exceptions ] [Can you act for buyer and lender] Acting for a buyer and lender in the same transaction is permitted because both parties have a common interest To ensure the property is good and marketable and that the value of the property is not jeopardised by any means **Commercial transactions** -- this doesn't usually happen In commercial transactions this does not usually happen. Lenders and borrowers often have a different approach as to how they would resolve issues which arise during the transaction, so it makes it impossible for the same solicitor to act even-handedly for both parties. In addition, the same solicitor cannot negotiate with him or herself the terms of a loan agreement or security documentation. Conflicts of interest are likely and often significant. **Residential transactions --** it is usual for the buyers solicitor to act for both In residential transactions it is common for the buyer\'s solicitor to act for the lender in residential transactions because there is unlikely to be any conflict of interest between these parties. This is because they will not tend to negotiate the terms or form of the loan or security documentation and a standard form of certificate of title (this is a reporting document) approved by the Law Society and the Council for Mortgage Lenders will be used.