What Is Exchange Of Contracts And When Should You Do It?
When selling a house there are certain terms that get thrown around a lot by estate agents, solicitors or even friends and family. One of these terms is Exchange Of Contracts! If it’s your first time buying or selling a house or even if you’ve just forgotten what exchange of contracts is, let me explain in simple terms what exchange of contracts is and when you should exchange contracts to best protect your interests as a buyer or seller!
What Is Exchange Of Contracts?
When buying or selling a house, after you’ve had the homebuyer reports done and agreed on a price, contracts of sale will be drawn up by the solicitors of both parties outlining the exact terms of the sale or purchase. At some point your solicitor will call you into his office and ask you to sign the contract. A date will then be set for an ‘exchange of contracts’ and this date really is the point of no return in your decision to buy or sell a property! It’s important to know that even when you have signed this contract, you are not legally bound by its terms and are able to pull out of the sale at any point without legal consequences. The contracts only become legally binding once they have been exchanged by the solicitors involved. Once exchange of contracts has taken place, neither the buyer nor the seller can then legally withdraw from the agreement.
Will I know when contracts are going to be exchanged?
Exchange of contracts is a critical part in the house buying process. As a result solicitors from both sides of the sale will not exchange contracts without explicit permission from the party that they represent.
When should I exchange contracts and why is this so important?
When an exchange of contracts should take place is a vital question any buyer or seller should be asking themselves.
The Argument For Early Exchange Of Contracts
The house buying/selling process can be very unnerving and full of uncertainty as both parties are trying to plan their future life course. You may be trying to make decisions about where you will work, where your children will be schooled or even what furniture you need to sell or buy. All of these decisions can be planned for but are difficult to commit to without the knowledge that a house sale is completely finalised.
Let’s say for example that you have been offered a job in a new area, have accepted an offer on your house and are moving into rented accommodation. You are expecting the sale of your property to complete within the next four weeks and need somewhere to live at the end of this period. During your rental search you find the perfect property and want to secure it! The landlord of the property wants you to sign a tenancy agreement which commits you to pay the rent on the property for the next 6 months. The problem you have is that exchange of contracts has not yet taken place on the sale of your house. What might be the consequence if you were to sign that tenancy agreement and the buyer of your house then pulled out of the purchase? You could be left paying the mortgage on your current home, whilst being legally obligated to pay 6 months rent on a property you now can’t move into!
If you can secure an early exchange of contracts from your buyer, you can confidently move ahead and sign the tenancy agreement knowing that your buyer is legally bound to the purchase of your property. What, though, if a problem arises with the job offer you have received?
The Argument For Late Exchange Of Contracts
So you’ve got a fantastic new job offer in a new area. You’ve also pushed for an early exchange of contracts on your house sale to secure your dream rental. You are now committed to the sale of your house, have signed a tenancy agreement and are unable to back out on either agreement. Now imagine that your potential employer turns around and informs you the fantastic new job you were offered is no longer available!
Your current employer is kindly willing to let you keep your job, but you are committed to your house sale and are also legally bound to pay the rent on a house which you are now unable to move into as it’s miles away. Can you see the kind of problems an early exchange of contracts could cause?
A late exchange of contracts can allow you the time to back out of a house purchase or sale at the last minute if your financial situation was to change dramatically, through a job loss for example. It might not seem likely of even fair to have to back out at this late stage but anything can happen in life and it’s good to prepare for every eventuality.
So when is the best time to exchange contracts?
The uncertainty of the house buying process is quite simply the nature of the beast. No matter how hard you try, you can’t avoid the fact that things can go wrong at any time! With this in mind when should you exchange contracts?
Unfortunately, the answer to this question is completely dependent upon the circumstances of both the buyer and the seller involved. If you’re buying or selling a house and are willing to accept the risks involved with an early exchange of contracts to secure the sale, then by all means push for one. In the same vein if you’re willing to hold off exchanging contracts and risk a last minute break down of the sale, then be patient.
In my opinion, I would aim to exchange contracts a week or two before completion day. I feel this gives both parties adequate time to make their necessary arrangements with confidence that the sale is finalised and in the hope that nothing will go wrong in the short period between exchange and completion.