Exchange of Contracts - Your Complete Guide

Posted 18 September 2017 by Nick Parkhouse

If you’re buying or selling a property, you’ll need to know about Exchange of Contracts. Here’s your essential guide

Once you’ve had an offer accepted on a property, or you’ve accepted an offer on your home, the wait to get everything finalised can be a stressful experience.

The ‘exchange of contracts’ stage is a vital step into you getting your purchase or sale finalised. In this guide, we look at the exchange of contracts process and answer all your questions about how exchange of contracts works.

What is Exchange of Contracts?

Until the point that you exchange contracts, the house buying process is not legally binding. Either a buyer or a seller can pull out of the process at any time.

At exchange of contracts both the buyer and the seller of the property sign an official document to complete on the sale/purchase of the property. From this point on you are both legally committed to the purchase of the house.

The Exchange of Contracts process explained

Once a seller has accepted an offer on the property, there are several issues that a buyer should address. These may include arranging a mortgage, completing searches, and carrying out a survey on the property. Find out more about the conveyancing process.

What to do before you exchange contracts

The contract between you and the vendor of the property is signed when:

  • Your mortgage offer has been received and checked.
  • The survey report is completed and any remedial action is taken/agreed.
  • You and your solicitor have made arrangement for the payment of your deposit.
  • Your solicitor or conveyancer has completed all their enquiries/searches and they are satisfied with the outcome.

At this time, your solicitor prepares a final contract which the buyer and the seller both sign. These contracts are then exchanged and, from this point, both the buyer and the seller are legally bound by the contract and the sale of the house has to go ahead.

When to exchange contracts

If you’re buying a property, the unfortunate fact is that the purchase can fall through at any time if the vendor changes their mind. Similarly, you may leave the vendor in a difficult position if you pull out of the sale.

This uncertainty is the reason why both parties generally want to exchange contracts as quickly as possible. However, you should only exchange contracts once all the major issues have been addressed.

When to exchange contracts:

  • When your mortgage offer has been received
  • When you have the deposit available
  • When the legal work has been completed
  • When all searches have been completed and have come back satisfactorily
  • When all parties in the chain are ready to proceed

How to exchange contracts

The exchange of contracts process is managed by your solicitor or licensed conveyancer. There is not much you have to do other than chasing up your solicitor to make sure everything is proceeding.

Your solicitor will draw up a contract which will include the purchase price and other issues such as whether certain fixtures and fittings are to be included or excluded. The contract will set out who the buyer and seller are, and it will also include a date for when the sale will complete and when the property will belong to the buyer.

Once all this has been agreed, your solicitor will call you in so you can go and sign the contract. The other party will also sign and then the contracts can be exchanged. From this point, both parties are legally bound to proceed with the transaction and the new owner of the property will also be added at the Land Registry.

Deposit on exchange of contracts

As a buyer, when you exchange contracts you typically pay a deposit of 10% of the purchase price to the seller. On occasion, this can be reduced to 5%.

The balance of the purchase price – often made up of your mortgage and your own savings – is paid on completion.

New build exchange of contracts deposit

If you are buying a brand-new property, the process is broadly the same except there is generally a longer period between exchange and completion. You may also have a time limit to exchange contracts (this is typically 28 days).

During the reservation period, your solicitor will undertake the necessary checks and searches so that you’re in a position to formally exchange contracts. When all parties are happy with the agreement you will sign the contract and pay the deposit, which is usually 10% of the purchase price.

The contracts can then be formally exchanged and you are legally bound to purchase the property.

Find out more about the new build buying process.

Insuring the property after exchange of contracts

The contract will generally state who has to arrange buildings insurance between exchange of contracts and completion.

The buyer will almost certainly be responsible for the buildings insurance for this period, which can be anything from a day to a few months depending on other buyers and sellers in the chain.

How long does it take between exchange and completion?

When you exchange contracts, a completion date is also confirmed. The completion date is the day you pick up the keys and can move into the property.

One this day, the buyer must hand over all the remaining money needed to buy the property.

When you exchange contracts, it is important that the date set for completion is achievable. The buyer needs to know that they will have the money available and the seller needs to be sure that they can vacate the property by this day.

On completion day:

  • The mortgage lender releases the money to the solicitor so they can complete the purchase.
  • The deeds to the property are handed over to your solicitor/conveyancer.
  • The seller hands over the keys and vacates the property.

Exchange and completion on the same day

It is sometimes possible to exchange contracts and complete on the same day.

Experts warn that this can be risky as it requires all the money to be transferred on time. Similarly, it also leaves the buyer vulnerable to the seller making last minute demands.

Pulling out after exchange of contracts

Once both parties have signed and exchanged contracts, it is very difficult for either party to back out of the agreement.

  • Buyer – If you do not complete you will lose your deposit and you can be sued. The vendor may serve a notice on you requiring you to complete and pay the vendor’s additional legal costs. You may also have to pay interest on the unpaid purchase price. In some cases, if the seller subsequently sells the property for a lower amount, the buyer may be liable for the difference.
  • Seller – If the seller fails to complete the buyer may rescind the contract. The deposit is returned to the buyer with interest and the vendor must pay to cancel any registration of the contract.

What happens if a buyer pulls out after exchange of contracts?

If a buyer pulls out after exchange of contracts, then the seller can rescind the contract and keep any deposit paid. They can also resell the property and claim damages.

There are reasons why a buyer may pull out of the transaction, such as:

  • Unexpected redundancy
  • Change of mind
  • Promised funds not arriving
8 January 2017
WhatHouse? gives you the lowdown on how much and when you can expect early repayment charges from your mortgage provider...Read more
Advice
9 March 2016
While many borrowers have enjoyed record low rates and reduced mortgage payments, some of the wealthiest have been unable to find the same benefi...Read more
Mortgages & Homes
17 February 2016
The big names in the mortgage market are finding their share of business diminishing as new companies target under-served customers...Read more
Mortgages & Homes
Search  

Click here to see your activities