Exchange & Completion: Explained
The final two stages of exchange of contracts and completion when buying or selling a property are an exciting time.
These steps can be confusing for many homeowners, but they are vital legal steps.
Completion, and particularly the exchange of contracts requires substantial preparations, often leaving new buyers and sellers with lots of questions.
This guide will explain in detail what each of these two necessary property stages are, involve, and require as a buyer or seller.
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2. The Exchange of Contracts Explained
- How to prepare for the exchange of contracts?
- What happens at exchange of contracts?
- Why is the exchange of contracts significant?
- What is a buyer’s deposit?
- How do property chains affect exchanging contracts on a house sale?
- How should I prepare for completion?
- What happens during completion?
- What is a completion statement?
- Do you need to do anything after completion?
- Why might exchanging contracts be delayed?
- Can someone pull out of the contract between exchange and completion?
- Why might completion be delayed?
- What is a house chain collapse?
1. Introduction
What is the exchange of contracts?
The exchange of contracts is when both buyer and seller finally formally agree on the terms of the transaction going ahead.
At this point, the deal becomes legally binding for both the buyer and the seller. After this, there are serious downsides to backing out of the deal for both parties.
Commonly referred to as simply ‘the exchange’, this step involves the parties involved in the transaction exchanging signed copies of the contract of sale and the payment of a buyer’s deposit.
Typically, exchange of contracts follows an extensive process of conveyancing carried out by legal representatives. This will have included forms and documents, surveys and searches, offers and counteroffers.
The formal exchange of contracts is typically completed by the buyers and sellers’ conveyancers or solicitors.
What is completion?
Completion is the final step involved in a property sale.
This is when remaining payments are made, the transfer of ownership occurs, and the buyer takes possession of the property. Payments are usually made up of a buyer’s deposit and mortgage. However, sometimes payments are made from just cash following a previous sale.
Generally, a completion day is agreed upon just before the exchange of contracts takes place.
Completion marks the end of a property transaction, and is, providing everything is in place, considered final.
2. The Exchange of Contracts Explained
How to prepare for the exchange of contracts
You will need to have all the required elements ready before you can exchange contracts.
Buyers should ensure that all their finances are prepared, that they have both their buyer’s deposit and mortgage offer (not a provisional offer) ready, and they have building insurance in place. Sellers will need to be ready to cancel their building insurance and ensure the departure of any tenant’s resident in the property if disposing of a buy to let investment.
In addition, both parties will need to have negotiated and agreed on the terms of the deal. The key points that would have been up for negotiation prior include:
- the sale price of the property
- what fixtures and fittings are included
- who will pay for any indemnity insurance for added protection, (if necessary) and
- when completion day will occur
Any negotiations will be based on information in the survey and the conveyancing searches. These searches are made mandatory by all mortgage lenders and are also advised for most cash buyers. The survey and searches will determine if any structural work or indemnity insurance is needed and if the house is worth the agreed sale price.
Once the parties have completed their negotiations, they will each need to sign a copy of the contract of sale. This will be used by their legal representatives during the formal exchange of contracts. A date can then be arranged for exchanging contracts.
What happens at exchange of contracts?
When it comes time to conduct the exchange of contracts, each party must provide a signed copy of the contract of sale to their conveyancer.
Typically, it is the conveyancers who do the actual formal business of exchanging contracts, via a recorded phone call.
They each examine a signed copy of the contract from their client to ensure they are identical, and check that their clients have agreed the same terms.
After they have ensured the forms are identical, they will send each other a copy of the document carrying their customer’s signature.
Following the exchange, the buyer’s conveyancer will send the seller’s conveyancer the agreed buyer’s deposit to hold until completion day.
Why is exchanging contracts significant?
The exchange of contracts is significant because if either party tries to pull out after this point the other has a valid claim for legal recourse.
Exchanging contracts on a house sale offers certainty that your transaction will proceed to completion. A detail which both parties will have lacked up till this point. While more than a third of UK property transactions fail, the vast majority of those which reach the exchange stage succeed.
In addition, the exchange of contracts is often a key step in securing funds for the property transaction. This is because many mortgage lenders will not release funds until after the exchange has taken place.
What is a buyer’s deposit?
As part of the exchange of contracts, the buyer will pay a deposit to the seller’s conveyancer. This will be held by them until the transaction completes.
The buyer’s deposit is designed to give sellers security that the buyers fully intend to complete the transaction. If the buyer does not complete the transaction the seller will be entitled to keep the full deposit.
This deposit differs from the ‘deposit’ which is put down on a mortgaged property and is typically less, only around 5-10% of the property’s value.
When buying a property in a chain the deposits of properties lower down in the chain carry up. This means someone in the middle of the chain has access to the deposit paid for their own property when it comes time to pay the deposit for the property they are buying. They will often use this to fund some or all of the deposit for their purchase.
How do property chains affect exchanging contracts on a house sale?
A property chain is a series of property transactions which are dependent on each other to go ahead. A chain is composed of one person who is only buying, any number of people who are both buying and selling, and one person only selling.
When you are in a property chain, the entire chain needs to exchange contracts in sequence, ensuring that each party is committed to their sale before the next party commits to theirs.
For this to happen, all the links in the chain barring the top and bottom need to have found both a seller and a buyer and all need to have agreed to all the terms of their transactions beforehand.
Once this has occurred, all the parties will agree on a date for exchanging contracts. This date must also suit all conveyancers involved, as they have to contact each other up and down the chain, ensuring all parties are ready to proceed.
When they are ready to proceed the first conveyancer in the chain, working for the party only buying, will set off the exchange, contacting their client’s seller’s conveyancer. They will confirm they intend to go ahead with the transaction and give the next conveyancer a release a latest time to get back to them by. This is typically 5pm. This continues until it reaches the conveyancer at the end of the chain, working for the person selling only, who will communicate confirmation back down the chain.
This must reach the first conveyancing company by the stated release time, otherwise, the exchange fails and must be restarted the next working day.
3. Completion Explained
How should I prepare for completion?
Once you exchange contracts and agree on a completion date you will need to begin final preparations. Buyers should ensure their conveyancer checks up on their mortgage company, so they can be certain about their finances for completion.
Sellers should check that everything in the fittings and fixtures form has been left in place, and leave a key with their estate agent so the buyer will be able to move in.
What happens during completion?
Completion is the final stage of a property transaction. It is at this point that the final payment is made and ownership and responsibility for the property are transferred from seller to buyer.
The first thing which should happen on completion day is the buyer’s conveyancer transferring the remaining balance of purchase monies to the seller’s conveyancer.
Once this has taken place and they have received the full funds, the seller’s conveyancer will let their client, the buyer’s legal representative, and the estate agent working on the sale know the sale has successfully completed.
They will then sort out the money from the sale, taking their fees and repaying the seller’s mortgage lender before sending any remaining funds on to the seller.
Upon being notified of the completion succeeding, the estate agent will release the property’s keys to the buyer, who can then move in. The selling agents fee will then also be paid.
What is a completion statement?
A completion statement is a document produced by a conveyancer to indicate all the incomings and outgoings associated with a transaction. These documents will be made up for both the buyer and the seller, though they differ from each other and are used for different purposes.
Typically, a ‘draft’ completion statement is produced before exchange of contracts to allow for this be checked before committing to the purchase or sale. A ‘final’ completion statement will be produced only once the purchase or sale is completed to finally record all movements of money.
The buyer’s completion statement indicates all the monies which will have been paid. A buyer must provide this money before completion day in order for their house purchase to be successful. The money owed will include the property’s purchase price, an agreed payment for fittings and fixtures, the HM Land Registry registration fee, Stamp duty land tax (if any is owed), search fees and any remaining unpaid conveyancers’ fees.
Many conveyancers charge for much of their services prior to completion. Any already paid fees will be included on your completion statement but deducted from your final required payment.
Much like the buyer’s completion statement, the seller’s completion statement indicates all the incomings and outgoings involved in the transaction. This includes details about the money received for the property, conveyancer’s fees, and any required mortgage settlement. Finally, this will state any sale proceeds due to the seller upon completion.
Do you need to do anything after completion of sale?
While the buyer and seller involved in a transaction do not need to do anything after completion, their legal representatives certainly will do.
The seller’s solicitor must send official copies of the title register to the buyer’s conveyancer, who will then use these, along with the transfer deed, to register the new owner with HM Land Registry.
After this, they must organise the payment of Stamp Duty Land Tax (SDLT), a tax levied by the UK Government on property transactions. This must be done within 30 days of the transaction.
Why might exchanging contracts be delayed?
There are a whole lot of things that can hold up the exchange of contracts.
A building surveyor may take a long time to complete their report, while alternatively busy conveyancers could delay in preparing documents and ordering searches. Beyond this, delays in returning documents by both the buyer and seller can slow down the process too.
Other elements, however, are entirely out of their hands, for example, the local authority search. While knowing whether a regulated or council search is better for a certain local authority can help speed it up, some local authorities will always be painfully slow.
Beyond the buyer taking a long time to appraise the property, delays can also be caused by the results of that appraisal. If a major problem is found, be it structural or legal, most buyers will want to negotiate about repairs, indemnity insurance, and the property’s price.
These negotiations can take a while, and some more experienced buyers may try to sidestep this by having an attended exchange of contracts.
Finally, the exchange is often held up by someone else having these issues further up or down any property chain you may be part of.
Can someone pull out of the contract between exchange and completion?
Technically yes, but this can be very expensive, and therefore rarely happens.
If you are buying a property and pull out between exchange and completion you will automatically lose your deposit and will be at risk of being sued.
When you are selling a property the consequences of pulling out after the exchange are similar but slightly less substantial. Your buyer can issue a document called a Notice to Complete, which gives you a 10-day grace period to change your mind.
If you do not complete, you will be asked to repay their deposit with interest, return all the documents you have received from the buyer, and cover their conveyancing, removal, and any finance costs.
Why might completion be delayed?
Sometimes, something can go wrong between exchange and completion which leads to the completion date being delayed past the contractually agreed date.
This is very unusual, as the consequences for not completing a property transaction are very severe.
Typically, a party cannot complete because they:
- did not receive the funds from their lender in time
- did not complete a necessary action in time
- had a tenant refuse to move out of their property or
- made an administrative error organising their removal van or had one bail on them.
If a party in your chain cannot complete on a certain day, it is often worth attempting to reorganise rather than letting the chain collapse.
What is a house chain collapse?
When one party in a chain cannot exchange contracts or complete a house sale, the whole chain becomes derailed. This is because each party relies on the whole chain being able to exchange and complete, in order to finalise their property transaction.
While many problems can be resolved quickly, and estate agents will move heaven and earth to keep a property chain intact. After completion this can lead to a serious problem for everyone except the person at the top of the chain.
This is because they will all be in breach of contract with each other.
If this does not go well, and a solution cannot be found, the chain may collapse, and the parties involved may decide to settle things in court. But try not to worry as cases like this are very rare indeed.
If this happens to you, you should speak with your conveyancer and try to figure out the best way to salvage as much as possible from the wrecked chain.
4. Frequently asked questions
Can I speed up exchange and completion?
Sometimes.
While hiring a competent and quick conveyancer, paying attention to them, and ensuring all documents are delivered on time can help make sure that you are not the cause of any delays, there is less you can do to impact the rest of the chain.
To make an impact you have to collaborate with the rest of the parties involved ensuring they have everything ready when the time comes for exchange and completion in turn. This can be difficult if they are not highly motivated, or if they have hired a bad conveyancer.
By trying to avoid long chains you can mitigate this to a certain extent, but it limits potential properties or buyers. By choosing a cash buyer, or a buyer not involved in a chain you can substantially boost the pace of exchange and completion, at the cost of potentially spending longer searching for a buyer.
Similarly, by choosing a property with no further chain you can help ensure a quick transaction.
Can you get building work done between exchange and completion?
Yes!
This is done through a legal agreement called a “key undertaking.” This document grants the buyers and their builders’ access to a property prior to completion to complete a very specific set of works.
Normally, this type of agreement is used when a property requires immediate maintenance.
This could be so buyers can move in on completion day, or because a buyer’s mortgage lender requires remedial work to be carried out on a property before they are willing to advance their loan.
Either way, when a seller is unwilling to complete this necessary work, the buyer can get it done via a key undertaking. In some cases, this may be the only way for the sale to proceed.
When a key undertaking is agreed upon for an unoccupied property, a seller may stipulate that the buyer pays for council tax and utilities during the period between exchange and completion.
Why would you have an attended exchange of contracts?
Sometimes, one of the parties involved in a transaction might request an ‘attended’ exchange of contracts. Typically, this is done when they wish to push through exchanging of contracts as quickly as possible.
This is normally done by experienced and well-capitalised property investors, who are typically cash buyers.
Often, they will do this when the demand for a property is high, as it can allow a buyer to push through, removing the risk of being gazumped.
The buyer will often meet with the seller and their conveyancer and negotiate with them, ideally until the deal is done.
Buying a property this way has some big downsides. Firstly, you will not typically have time to conduct searches or building survey. This means essentially going in blind and having to trust the seller not to try to sneak a major structural, title, or planning issue past you.
On top of this, an attended exchange of contracts costs a lot more than a conventional conveyancing service, as you may need the undivided attention of your professional for a whole day.
In general, organising an attended exchange of contracts is not normally a promising idea for an inexperienced buyer. However, they can be useful if there is a need to buy a property fast.
How long is typical left between exchanging contracts and completion?
Buyers and sellers typically leave 1 -2 weeks between exchange and completion.
This gives both parties time to prepare for their upcoming moves, and ensure their finances are all in order.
While two weeks is the most common amount of time between exchange and completion, this is not universal. If someone wants to push through a deal quickly they can ask to exchange contracts and complete on the same day. This is often called simultaneous exchange and completion.
Summary
It is vitally important for anyone involved in a property transaction to understand what the terms ‘exchange of contracts’ and ‘completion’ mean.
The exchange of contracts is the point at which both parties legally commit to the agreed terms of the sale and the buyer’s deposit is transferred to the seller’s conveyancer. After this, the transaction is legally binding and very expensive to back out of.
Various things can delay the exchange of contracts, including problems with the property, missing documents, slow chains, inefficient conveyancing and surveying. This can also be caused by buyers and sellers simply not paying enough attention to the process when asked to carry out a task.
When exchanged of contracts finally goes ahead a date is typically set for completion. This is called the completion day.
On completion, the buyer pays the remaining amount owed for a property and takes ownership, possession of and responsibility for it. Normally, this is the point in the transaction where all parties move house.
Once a completion day is selected this is typically adhered to due to the serious legal consequences of failing to complete the transaction. Normally, completion is set 1-2 weeks after the exchange of contracts, but this can vary, depending on what is convenient for all parties.
After completion, both parties’ conveyancers still have work to do. The buyer’s conveyancer must register the change in ownership with HM Land Registry and pay SDLT. The seller’s conveyancer should write up a completion statement, take their fees, pay back any mortgage, and then transfer any remaining sum to the seller.
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