Introduction to property transactions - Key elements and structure of freehold and leasehold property transactions

Learning Outcomes

After studying this article, you will be able to identify and explain the main stages and legal features of freehold and leasehold property transactions in England and Wales. You will understand the structure of conveyancing, the differences between freehold and leasehold estates, the role of title investigation, contract formation, and completion, and the key legal documents and terms involved. You will also be able to apply these principles to SQE1-style scenarios and MCQs.

SQE1 Syllabus

For SQE1, you are required to understand the structure and process of property transactions, including both freehold and leasehold estates. This article focuses your revision on:

• The main stages of a freehold and leasehold property transaction
• The distinction between freehold and leasehold estates
• The process of title investigation and deduction of title
• The function and content of contracts for sale and leases
• The significance of exchange of contracts and completion
• The key legal documents and terms used in property transactions

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the two main legal estates in land in England and Wales?
2. At what point in a property transaction do the parties become legally bound to complete?
3. What is the primary difference between a freehold and a leasehold estate?
4. What is the purpose of investigating title before exchange of contracts?

Introduction

Property transactions in England and Wales are structured around the transfer or grant of legal estates in land. The two principal types of estate are freehold (absolute ownership) and leasehold (a right to occupy for a limited period). Understanding the key elements and structure of both freehold and leasehold transactions is essential for SQE1.

The Stages of a Property Transaction

A typical property transaction is divided into three main stages:

1. Pre-contract stage: Initial instructions, investigation and deduction of title, searches and enquiries, and contract negotiation.
2. Exchange of contracts: The point at which the agreement becomes legally binding.
3. Completion and post-completion: Transfer of legal title, payment of the purchase price, and registration of the new owner.

Key Term: freehold estate
An estate in land that gives the owner absolute and indefinite ownership, subject only to statutory restrictions and third-party rights.

Key Term: leasehold estate
An estate in land that gives the tenant the right to occupy and use the property for a fixed period, subject to the terms of a lease.

Pre-Contract Stage

The transaction begins with the seller's solicitor preparing a pre-contract package, including evidence of title and a draft contract (for freehold) or draft lease (for leasehold). The buyer's solicitor investigates title to ensure the seller can lawfully transfer the estate and that there are no adverse rights or defects.

Key Term: investigation of title
The process by which the buyer's solicitor checks the seller's right to sell and identifies any issues affecting the property.

Key Term: deduction of title
The process by which the seller provides documentary evidence of their ownership and right to sell the property.

The buyer's solicitor also conducts searches (e.g., local authority, water and drainage, environmental) and raises pre-contract enquiries to uncover practical or legal issues.

Contracts and Leases

Once title and other matters are satisfactory, the parties negotiate and agree the contract for sale (freehold) or the lease (leasehold). The contract sets out the terms of the sale, including the property description, price, deposit, completion date, and any special conditions.

Key Term: contract for sale
A legally binding agreement between seller and buyer setting out the terms for the transfer of a freehold or leasehold estate.

Key Term: lease
A legal document granting a leasehold estate, specifying the rights and obligations of landlord and tenant.

Exchange of Contracts

Exchange of contracts is the critical milestone where both parties become legally bound to complete the transaction. The buyer usually pays a deposit (commonly 10% of the purchase price) at this stage.

Key Term: exchange of contracts
The formal process by which the parties swap signed contracts, creating a binding agreement to complete the transaction on the agreed date.

Completion and Post-Completion

On completion, the buyer pays the balance of the purchase price, and legal title is transferred. The seller's solicitor provides the executed transfer deed (or lease), and the buyer's solicitor arranges for registration of the new owner at the Land Registry.

Key Term: completion
The stage at which the purchase price is paid, legal title is transferred, and the buyer takes possession.

Key Term: transfer deed
The legal document used to transfer ownership of a freehold or leasehold estate from seller to buyer.

Freehold vs Leasehold Transactions

The main distinction is that a freehold transaction transfers absolute ownership, while a leasehold transaction grants a right to occupy for a limited term under a lease. Leasehold transactions involve additional considerations, such as the terms of the lease, ground rent, service charges, and landlord consents for assignment or alterations.

Title Investigation: Registered and Unregistered Land

For registered land, the seller provides official copies of the register and title plan. For unregistered land, the seller provides an epitome of title, including a chain of deeds going back at least 15 years.

Key Term: official copies
Certified copies of the Land Registry entries and title plan, used as evidence of registered title.

Key Term: epitome of title
A chronological bundle of deeds and documents proving ownership of unregistered land.

Worked Example 1.1

Scenario:
A buyer is purchasing a freehold house. The seller's solicitor provides official copies of the register showing a restrictive covenant prohibiting business use. The buyer intends to run a business from home.

Answer:
The buyer's solicitor should advise that the restrictive covenant will bind the buyer after completion. The buyer may need to seek a release or indemnity insurance, or reconsider the intended use.

Worked Example 1.2

Scenario:
A tenant wishes to assign a leasehold office to a new business. The lease requires landlord's consent to assignment.

Answer:
The tenant must apply for landlord's consent, and the landlord cannot unreasonably withhold consent if the lease is a commercial lease with a qualified covenant. The assignment cannot proceed without consent.

Exam Warning

In SQE1, questions may test your understanding of the difference between freehold and leasehold estates, and the legal effect of exchange of contracts. Always check whether the scenario involves absolute ownership or a time-limited right to occupy.

Revision Tip

When revising, focus on the sequence of steps in a property transaction and the function of each key document. Practice identifying whether a scenario is freehold or leasehold.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The main stages of a property transaction: pre-contract, exchange, completion, and post-completion
• The distinction between freehold (absolute ownership) and leasehold (time-limited right to occupy) estates
• The purpose and process of title investigation and deduction of title
• The function and content of contracts for sale and leases
• The legal effect of exchange of contracts and completion
• The key documents and terms used in freehold and leasehold transactions

Key Terms and Concepts

• freehold estate
• leasehold estate
• investigation of title
• deduction of title
• contract for sale
• lease
• exchange of contracts
• completion
• transfer deed
• official copies
• epitome of title