Contracts are usually exchanged by both solicitors/conveyancers reading out the contracts over the phone (which is recorded by both of them) to make sure the contracts are identical. The contracts are then immediately sent out by them to one another in the post. This is known as “exchange”.
If you are in a chain, your lawyer will do the same thing. However, they will only release the contract to the lawyer acting for the party on the other side if all the other people in the chain are happy to go ahead. This means that if one person pulls out or delays, everything gets held up.
As soon as exchange has happened you will be in a legally binding contract to buy or sell the property. If you do not complete on the date agreed in the contract and you are the buyer, you risk losing your deposit and you can be sued. However, if you are the seller, you must sell to the buyer. If you do not, the buyer can keep their deposit and sue you.
Why do we exchange contracts?
Until you exchange contracts, neither side has any legal obligation to buy or sell the property. Both seller and buyer can pull out of the transaction without any penalty. It is only when contracts are formally exchanged by the lawyers does the deal become legally binding. If completion is late penalties will start to accrue. For each day that completion does not take place interest will accrue at a rate specified in the contract until completion has taken place. The injured party may claim that they are ready, willing and able to complete and may decide to serve a Notice to Complete. This Notice is served on the lawyer acting for the other party and requires that party to complete within 10 working days of service of this Notice. If this deadline is not met, the injured party may then exercise their option to rescind (cancel) the contract and any deposit paid may then be lost. There may then be a claim for damages to be made by the injured party if they consider that they have suffered any loss as a result of the breach of contract. However, it is extremely rare for anyone to pull out after exchanging contracts, and in practical terms, you can be pretty sure your transaction will go through after this has happened.
When do I exchange contracts?
You usually exchange contracts between 7 and 28 days before completion – although you can exchange contracts on the day of completion in exceptional circumstances. As exchanging contracts means you are legally committed to buying the property, you need to make sure you have everything in place before hand, so that nothing can go wrong. For example, if you are buying:
- You have agreed on an offer, including for fixtures and fittings
- You have had the mortgage valuation and any surveys you want
- You have been formally offered a mortgage in writing
- You have funding for any deposit available
- Your solicitor has carried out and reported out to you on the relevant searches, all enquiries and replies to those, the mortgage and the title to the property and you have confirmed that you are happy with everything received
- You have organised building insurance. After you exchange contracts, you must put your building insurance on risk as you will be liable for the property immediately after exchange of contracts
- You have agreed a date for completion with the other party. The date will be set in stone on exchange and will be written into the contract
- You have read, understood and signed the contract
As soon as you have all of these in place, you can proceed to instruct your solicitor to exchange contracts.
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