When you get to the stage of the Conveyancing process where contracts are exchanged, both the seller and the buyer become legally bound to seeing the transaction through to completion. If either side then fails to complete the transaction on the agreed date, they will be subject to severe penalties.
The exchange of contracts is one of the most important stages in the Conveyancing process, along with completion. The contract will set out all of the terms and conditions for the property transaction, including details such as the sale price and the completion date. This is because the Law of Property (Miscellaneous Provisions) Act 1989 requires that the terms of a property sale are set out in a written contract, with all of the details in a single document that is signed by both the seller and the buyer.
Your Conveyancer will usually ask you to sign the contract and return this to them without dating it. This is so that the completion date can be confirmed right before the contracts are exchanged. Once the contracts have been exchanged, both sides are legally obliged to complete the transaction on the stated date.
Right up until the point that contracts are exchanged, both the seller and the buyer are free to pull out of the property transaction if they wish, and they don't have to give a reason for this. After contracts have been exchanged, however, neither party is able to pull out unless they are prepared to face severe penalties.
What this means in essence is that the buyer must pay the agreed amount to the seller and the seller must vacate the property and release the keys to the buyer on this day.
If the buyer fails to complete the transaction on the agreed day, then they could lose their deposit, which is usually 10% of the purchase price. So for a £250,000 house, for example, this would be a whopping £25,000. The seller will then be free to remarket their property at the full market value.
If the seller fails to complete the transaction on the agreed day, then they will also face financial penalties, including compensation for certain losses suffered by the buyer.
What to Consider before Exchanging Contracts
For this reason, before contracts are exchanged it's really important that the buyer and the seller are both completely happy with the terms of the sale and confident in their ability to complete the transaction on the agreed completion date.
For the buyer, this means that they need to have the funds ready and waiting to transfer to the seller on the day. This means that funds need to be ready and waiting in bank accounts and not tied up in other assets, for example, and if the buyer is purchasing with a mortgage then the mortgage offer needs to be in place and the mortgage provider prepared to release the funds.
If the buyer is taking out a mortgage, it's likely that their mortgage provider will require buildings insurance to be in place from the date of exchange. The buyer will also need to ensure that they have funds will need to be available at this point to cover the deposit, which is usually 10% of the purchase price and is payable when the contracts are exchanged.
For the seller, they must be confident that on completion day the property will be vacant of all occupants and possessions. This means all rubbish, personal items, and items of furniture, excluding those which are being included in the sale and are set out in the fittings and contents form. If the property is rented out, then the seller will need to ensure that the tenants will have vacated and removed all of their possessions by the completion day.