There are multiple stages in the process of selling or purchasing a property. Although many sales go smoothly, there may be some problems that arise during the process.
It can be devastating to discover damage to your new property after you’ve exchanged contracts with the seller. You might automatically assume that the seller should pay for the repairs, but there are often disputes over which party has a legal or contractual obligation to pay.
Problems can arise after the exchange of contracts, so it’s a good idea to know where you stand in legal terms. We’ve compiled this handy guide to help you navigate the process between the exchange of contracts through to the sale completion.
Who is liable for damage between exchange and completion?
Once contracts have been exchanged, the risk of the property usually passes to the buyer unless the contract states otherwise. This means that any damage that the property obtains after the contracts have been exchanged is the responsibility of the buyer rather than the seller.
Most solicitors advise buyers to get building insurance to cover the property from the date of the exchange. This is because the property buyer has to continue with the sale once the contracts have been exchanged, regardless of any new damage. However, things become more complicated if it turns out the property already had damage, and the buyer wasn’t informed before the exchange of contracts.
Continue reading to find out about the contract exchange process and what the seller and buyer are responsible for before, during and after.
What happens between exchange and completion?
Exchange of contracts is when the solicitors send the contracts to each other for the buyer and seller to sign. The buyer usually pays a deposit to secure the purchase, which they will lose if they back out of the contract for any reason. This is usually around 5% or 10% of the property’s sale price. The exchange usually happens near the completion date, as the buyer and seller are liable for financial penalties if they back out after signing the contracts.
The sale is completed when the buyer’s solicitor receives the full purchase funds. At this point, the buyer must pay Stamp Duty (if required) to HMRC. Their solicitor may take the payment and pay it to HMRC on the buyer’s behalf. The conveyancer will also register the transfer of ownership and register the new buyer’s ownership with the Land Registry.
The transaction isn’t legally binding until the exchange of contracts has taken place. This means either party can back out of the transaction without any financial penalties up until this point.
How long does it take to complete after exchange of contracts?
The time between the exchange of contracts and completion is decided upon by the buyer and seller. It can take from one to four weeks as the buyer and seller make moving arrangements. There are other factors that can affect the timeline, too, such as problems with other parties in the chain. For example, the seller may have to wait for their house purchase to be finalised before they can complete the sale of their current property.
The buyer and seller must make arrangements such as removal vans, storage arrangements and time off work, which can influence how long before the purchase is completed.
What can go wrong between exchange and completion?
Buying or selling a property can be affected by several issues that can slow down or stop the purchase completely. Below are some of the most common problems that can affect a sale.
Buyer or seller changes their mind
It’s natural to have a change of heart over such a big decision. Whilst the person backing out will likely lose the deposit and could get sued, the other party will lose out, too, because they won’t be able to purchase their new property.
Both the buyer and seller might want to proceed with the property sale, but they may be unable to because there is a disruption further up the chain. Another buyer or seller might have backed out of a property sale, which means the buyer and seller won’t be able to move.
Mortgage offer withdrawn
Although it’s unusual, the mortgage lender may decide to withdraw their offer. This means that the affected party may not be able to proceed with the sale if they can’t get another loan offer in time. The mortgage offer might get withdrawn for a number of reasons, such as the buyer losing their job.
Mortgage lenders can withdraw their offer at any point in the process, up to and including the exchange of contracts. The offer could even be withdrawn on the day of completion if the terms of the agreement have been broached.
Do you insure a property on exchange or completion?
A property becomes your legal responsibility as soon as the exchange of contracts has occurred. Therefore, it’s a good idea to get building insurance once the exchange of contracts has been completed and before the completion date.
If you wait until you move to insure your new property, you will be faced with the full cost of repairs if you discover new damage. For example, if your house were to burn down or get flooded after you have exchanged contracts, you must still commit to buying it or face the loss of your deposit and potential legal fees if the seller sues you.
It’s not a legal requirement to have building insurance, but it’s a good idea to get suitable buildings insurance cover when you sign the contract. Your mortgage lender may even insist you have the insurance. If you insure the property before the date of completion, you’ll be covered if the property gets damaged once it’s under your ownership. You should insure the property if you know you wouldn’t be able to cover repairs or the cost of rebuilding the property should the worst happen.
You should buy suitable building insurance cover for the following areas:
- property structure (including walls and roof)
- permanent fixtures (such as kitchen and bathroom units)
- outside fixtures (such as fences and sheds)
- damage from floods, fires and storms
- damage from vandalism
What is the seller liable for after exchange of contracts?
In some instances, a property might get damaged after the exchange of contracts has occurred. The pipes might burst, or a window could get damaged in a storm. The seller should notify the buyer of the damage. However, it’s the buyer’s responsibility to make sure that repairs are carried out. The buyer can claim on their building insurance policy to cover the repairs, which is why it’s advisable to get insurance before the purchase completion.
Most responsible sellers will fix any small repairs, such as leaking taps, before the buyer moves in. However, there isn’t a legal responsibility to do so and is instead a gesture of goodwill.
Sellers must legally disclose both positive and negative information about the property to the buyer before the exchange of contracts. A buyer can sue the seller if you feel they misrepresented the condition of the property. For example, the seller may not have told the buyer about the damage to the roof before they exchanged contracts. The seller was legally obliged to tell the buyer about the damage before they exchanged the contracts because this may have informed the buyer’s decision about whether to purchase the property or not.
A buyer may demand that repairs are made to the property before they sign the contracts. If the seller wants the sale to go ahead, they will need to pay for the necessary repairs. However, if the buyer demands the seller pay for repairs just before the completion, the seller isn’t legally obliged to do so as it is usually the buyer’s responsibility at this stage. Once the contracts have been signed, the responsibility switches from the seller to the buyer unless the contract says otherwise.
What is the buyer liable for after exchange of contracts?
The buyer is legally responsible for a property after the exchange of contracts. This means that they have to pay for repairs that occur after the contracts have been exchanged, even if the purchase hasn’t been fully completed yet.
As a buyer, you can’t pull out of a purchase just because damage occurs after contracts have been exchanged. You are responsible for repairs because you will have ownership of the property once the sale is complete.
What about damage discovered after completion?
You might notice damage to the property after the purchase has been completed. In most circumstances, it’s your responsibility to pay for repairs or claim on your insurance because the property belongs to you.
If you think the damage already existed before the exchange of contracts, you might be able to take legal action. Most property contracts in the UK have a Law Society’s Standard Conditions of Sale. This means the buyer can claim damages if they discover there is a material difference between how the seller represented the value or description of the property versus the actual state of the property.
You must be able to prove that the issue existed at the exchange of contracts stage, that the damage or defect is genuine and not your opinion and that the issue negatively affects the value of the property.
If your claim is successful, you will be rewarded the ‘diminution of value’, which is the approximate difference between the purchase price and the value of the property now that the damage has been discovered.
In some circumstances, your claim might be against the conveyancer instead of the seller. It’s the conveyancer’s job to do a survey of the property before you purchase it, so it’s their responsibility if they didn’t notice or disclose the damage to the property before the exchange of contracts.
What happens if a buyer backs out after exchange of contracts?
Most buyers have to pay a deposit at the exchange of contracts stage. You won’t get this back if you back out before the purchase has been completed. The size of the deposit can vary, but it can work out to tens of thousands. For example, if the property was worth £500,000 and you paid a 10% deposit, you would lose £50,000. The seller can also sue the buyer for breaking the contract, especially if the property decreases in value during this period.
What happens if the seller backs out after the exchange of contracts?
If the seller decides not to sell the property after the exchange of contracts, they must return the buyer’s deposit, along with interest.
Failure to reach completion is a breach of the contract. The buyer can issue a notice that requires the seller to complete the sale within ten days. The seller has to pay daily interest for ten days, after which the deposit must be returned.
In most circumstances, the seller is responsible for damage to a property up until the exchange of contracts. If any damage occurs after this point, the buyer is responsible because the property will be in their possession once the sale is completed.
The seller is legally obliged to disclose any information about damage to the property before the exchange of contracts. They could get sued by the buyer if it is revealed that they mistakenly or knowingly withheld information about the damage that negatively impacts the value of the property.
It’s a good idea to get an insurance policy that covers your new property as soon as you sign the contract. You might hope that the seller’s policy covers the repairs, but they might not be legally obliged to pay for the repairs at this stage. You should speak with your insurance company to see if you can maintain insurance by transferring the insurable interest during the period between the exchange of properties and the completion.