The exchange of contracts is a vital part of buying or selling a property, as it legally binds the buyer and seller into an agreement. This will come after you have accepted an offer on a property you are selling, or have an offer accepted on one you’d like to buy.
Until contracts have been exchanged, neither party is legally bound to the agreement, so could pull out at any time without repercussions. During the exchange of contracts process, an official, binding document is signed by both the buyer and seller, agreeing that the sale of the property will be completed. After this, both parties are legally committed to the transaction.
What is the process of exchanging contracts
When a seller accepts an offer on their property, the buyer has a number of tasks they will perform. They will need to arrange for a mortgage, have a survey of the property conducted, and complete any searches and enquiries necessary. This all forms part of the conveyancing process.
What you need to do before you can exchange contracts
You will sign the contract between you and the vendor of the property when:
- You have received and checked your mortgage offer.
- A survey of the property has been carried out, and any issues that arise have been resolved.
- You have arranged, through your solicitor or conveyancer, for the deposit to be paid.
- All enquiries and searches necessary have been completed by your solicitor or conveyancer, and any problems have been dealt with.
Once these tasks have been completed, your solicitor will create the final contract for the buyer and seller to sign. The contracts will then be exchanged, which legally binds both the buyer and seller to the agreement, and the sale of the house must now go ahead.
When Exchange of Contracts happens
Buying a property can be a long process, with a variety of possible problems that can cause a sale to fall through. This creates problems for the buyer, seller and vendor.
By exchanging contracts as soon as possible, some of the uncertainty of the process if removed for all sides involved. Despite this, you should not exchange contracts until all major issues have been worked out satisfactorily.
You should only exchange contracts after the following steps have been completed:
- All legal work has been finalised.
- You have received your mortgage offer.
- You have the funds available to pay the deposit.
- All searches have been completed and any problems resolved.
- All parties involved in your chain are ready to move to the next stage.
How Exchange of Contracts works
Your solicitor or conveyancer will manage the exchange of contracts process, which removes many of the administrative tasks from your shoulders. However, you will need to keep communicating with your conveyancer to make sure everything is progressing smoothly.
A contract will be created by your solicitor. This document covers the purchase price and answers questions such as what fixtures and fittings will remain in the property after the sale. Details will also be provided about the buyer and seller, and will set a day for completion day, which is when ownership of the property is transferred to the buyer.
When everything has been agreed, your solicitor will be in touch and ask you to the sign the contract. Once the other part has signed the contracts, they can be exchanged. Whens this occurs, all parties are legally bound to the transaction, and the new owner of the property will be added to the Land Registry.
Paying deposit on Exchange of Contracts
If you are buying a property, when exchanging contracts you will usually pay 10% of the purchase price to the seller as a deposit. Sometimes, this may be reduced to 5%.
The remaining balance of the purchase price, which most buyers will pay using a combination of mortgage and savings, is paid on completion.
New build deposit on Exchange of Contracts
If the property you are buying is a new build, the process is very similar but typically there will be a longer period of time between exchanging contracts and completion. There may also be a time limit on when you can exchange contracts, which is usually within 28 days.
Once your property has been reserved, your solicitor will carry out checks and searches so you are fully informed and prepared to exchange contracts. Once all parties involved are happy with the agreement, you will sign the contract and pay the deposit. This is normally 10% of the price of the property.
After the contracts are formally exchanged and you are then legally bound to purchase the property.
Getting insurance for your property after Exchange of Contracts
When you sign the contract, it will usually state who is responsible for arranging buildings insurance to cover the time between exchange of contracts and completion day.
The buyer will almost always be responsible for paying buildings insurance during this period, which can range from a day to several months depending on what happens in the chain with other buyers and sellers.
How long is there between exchange and completion day?
A date for completion day will be set when you exchange contracts. On completion day you can collect the keys to the property and move in. The buyer must also pay all remaining money needed to purchase the property.
When contracts are exchanged, make sure to set a completion day that is realistic. The buyer must be sure they will have the necessary funds available, and the seller must be certain they will have vacated the property in time.
Essential events that occur on completion day:
- The solicitor will receive money from the mortgage lender to pay for the purchase.
- The deeds to the property are given to the buyer’s solicitor.
- The seller transfers the keys and leaves the property.
In some circumstances, it may be possible to exchange contracts and complete on the same day. However, this is usually not advised as it creates risk and potential delay, as all the money must be transferred on time. Additionally, it exposes the buyer to last minute demands from the seller.
What happens if you pull out after Exchange of Contracts?
When contracts have been signed and exchanged, it is hard for any side to try and withdraw from the agreement, as it is legally binding. However, it is possible, but will not occur without repercussions and expenses.
If a buyer pulls out:
- They will lose their deposit and potentially be sued.
- Vendor may legally demand buyer to complete and pay any additional costs.
- May be charged interest on the unpaid purchase price.
- If the seller has to sell for a lower price to someone else, the buyer may have to pay the difference.
If a seller pulls out:
- The buyer may be able to rescind the contract.
- The buyer’s deposit is returned, plus interest.
- The vendor will have to pay to cancel the contract registration.
Some reasons a buyer may pull out of a purchase:
- Unexpectedly losing their job.
- Changing their mind about moving.
- Finding a different property they prefer.
- Lack of available funds.
Also see what happens on completion day for further information.