The exchange is usually initiated by the buyer to show that he is now ready to commit to the contract. Once the contract is exchanged it becomes binding on both parties, and neither would be able to rescind without proper notice or reason.
The formulae can be divided into three parts:
a) Formula A: This formula is used when the conveyancing solicitor (usually the seller’s) is in custody of both, the seller’s and the buyer’s contract documents.
b) Formula B: This is used when at the time of exchange, the conveyancing solicitors are in custody of the contract documents of their respective clients.
c) Formula C: This is used in the case of chain transactions.
Let us discuss each of these formulae in detail:
Although this is the safest of all the three formulae, it is the least used. Under this formula, the buyer sends the signed copy of the contract document along with deposit cheque and instructions to the seller’s conveyancing solicitor to hold these. Once these documents reach the seller, the buyer telephones the seller to confirm the completion date. The seller’s solicitor then confirms that he holds the seller’s part of the signed contract signed by the seller and that this is in the agreed form. After these are confirmed, it will be agreed that the exchange can take place at that moment. The seller’s conveyancing lawyer will also have to agree to send the seller’s part of the signed contract to the buyer immediately.
As earlier said, this formula is preferred due to the fact that both parties can be assured about the safety of money and contract. The seller’s conveyancing solicitor can be assured that he has seen the buyer’s contract documents and they are in the agreed format. He can be also assured about the deposit money. The seller can be assured that the deposit money is now in his hands (although it cannot be cashed until the contract is exchanged).
This is a commonly used formula especially in the case of chain transactions. Here both the buyer and the seller hold their part of the contract documents. Over the telephone conversation, both parties agree that the documents are signed and are in the agreed form. Once the exchange takes place, both parties agree to send their respective documents to each other. The buyer also agrees to send the deposit money along with the signed contract document.
Consider the following transaction:
A seller A agrees to sell to B who in turn is selling his property to C. In this context we represent B who has agreed to contract with A as a buyer and with C as a seller. Before exchanging with C the buyer will have to confirm from A that he is ready to exchange. Once this is decided, B will then have to set an exchange date with C (if possible on the same day). B will then exchange with A on the stipulated date and agrees on the completion date. After this B will immediately call C and effect an exchange. There also exists a risk that since the time of exchanging the contract with A, C may have changed his mind. But this risk has to be taken and could be minimised by agreeing to exchange the contract on the same day.
Another problem that is commonly faced here is regarding the deposit money. B would naturally use the deposit money sought from C and spend it to pay deposit money to A. Upon exchange of contract with C, B cannot undertake to send the deposit money to A on that day itself. Under such circumstances, it is common for B to obtain A’s approval (prior to the exchange) that the deposit money would be sent directly by C. Sometimes B may undertake that the contract has been exchanged with C and the money will now be send as soon as possible.
This is designed for chain transactions, but is seldom used in practice because of its complexity. The formula includes provisions where the seller can use the buyer’s deposit money to fund his own deposit requirements. The formula can be divided into three parts- Part I where both parties agree that they hold their part of the signed documents. While the exchange does not take place at the time of this agreement, they undertake that exchange will take place when the other party contacts them before a specified time later that day. Thus, both the buyer and the seller enter into the contract, secure with the knowledge that the transaction will become binding when either of them contacts before the specified time. Part II of the Formula takes place when one party to the contract contacts within the specified time. Here, although the exchange takes place, there also exists a provision for both parties to make use of the deposit money under a dependent sale. Thus, the buyer would arrange for the deposit money to be sent on that day or arrange for it to be sent. The money is to be sent to the seller’s conveyancing solicitor or such other person nominated by the seller. The use of Formula C can be done only after obtaining permission from the client.
Photo courtesy: Dennis Jarvis