Shahida Salim, senior solicitor in the Residential Property Team, looks at what it means to exchange contracts in conveyancing.
Exchange of contracts is the point when a binding legal obligation to buy or to sell a property is created. Up until exchange of contracts either party is free to walk away from the transaction without any repercussions. Therefore both parties in a transaction are at risk right up until contracts are exchanged.
On the day of exchange, the solicitors for each party will seek their prospective client’s express authority to proceed. The solicitors for each party will then enter into the contract, usually over the telephone, at which point in time the obligations under the contract become binding on both the seller and the buyer. Each party has already signed their own copy of the contract in advance and then those signed copies are swapped or “exchanged” by the solicitors on behalf of their clients. In practice the contracts are sent out in the post but at the moment contracts are exchanged over the telephone each solicitor promises to hold the signed contract on behalf of the other until they are posted. In addition, on exchange of contracts, the deposit is paid and the solicitors agree the completion date.
Contracts normally allow for two stages in a conveyancing transaction. The first is “exchange of contracts” where the deposit is paid by the buyer (normally 10%). The second is “completion” when the balance of the purchase price and any other money payable under the contract is contractually due and needs to be paid to the buyer. The buyer’s solicitors will send the balance to complete on the day of completion to the seller’s solicitors. Once the money is received by the seller’s solicitors, the estate agent will release the keys to the property to the buyer and the buyer is now the legal owner of the property.