Progressing to exchange of contracts - Contracts: Standard C...

Learning Outcomes

This article outlines the incorporation and regulation of the Standard Conditions of Sale (SCS) and Standard Commercial Property Conditions (SCPC) in property sale contracts, including:

• Incorporation of SCS and SCPC and the matters they regulate
• Default rules on deposits, stakeholder versus agent holding, and deposit reuse in a chain
• Timing of risk transfer, insurance obligations, and treatment of insurance proceeds and dual insurance
• Completion mechanics, compensation for delay at the contract rate, calculation methods, and the effect of serving a notice to complete under SCS versus SCPC
• VAT treatment under the SCPC and optional Part 2 conditions (e.g., non-taxable supply, TOGC) contrasted with residential practice
• Remedies for misrepresentation or misdescription, rescission, damages, specific performance, and forfeiture or return of deposit on default

SQE1 Syllabus

For SQE1, you are required to understand the application of the Standard Conditions of Sale (SCS) and Standard Commercial Property Conditions (SCPC) in property transactions, with a focus on the following syllabus points:

• The purpose and structure of the Standard Conditions of Sale (SCS) and Standard Commercial Property Conditions (SCPC)
• Key provisions relating to deposits, risk, completion, and remedies for breach
• The process and consequences of exchange of contracts
• The allocation of risk and insurance obligations
• The procedures for delayed completion and contractual remedies

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 is the usual amount of deposit payable under the SCS and SCPC, and how is it typically held?
2. When does risk in the property pass to the buyer under the SCS and SCPC?
3. What is the effect of serving a notice to complete under the standard conditions?
4. How do the SCS and SCPC differ in their approach to compensation for delayed completion?

Introduction

The Standard Conditions of Sale (SCS) and Standard Commercial Property Conditions (SCPC) are widely adopted sets of contractual terms used in property transactions in England and Wales. The SCS is primarily used for residential sales, while the SCPC is tailored for commercial property. Both provide a clear, predictable framework for exchange of contracts, completion, and remedies, reducing the need for bespoke drafting and minimising disputes.

The Role of Standard Conditions in Property Contracts

Standard conditions are incorporated into most property sale contracts to ensure clarity and fairness. They set out the rights and obligations of buyers and sellers, covering key issues such as title, deposit, risk, completion, and remedies for default. By using these conditions, parties benefit from established legal principles and avoid unnecessary negotiation over routine matters. In practice, exchange is commonly effected using the Law Society’s formulae for telephone exchange, ensuring a binding contract once both solicitors have authority and the parts are dated and completion date inserted.

Key Term: Standard Conditions of Sale (SCS)
A set of pre-drafted contractual terms, currently in its fifth edition, used mainly in residential property transactions to govern the sale and purchase process.

Key Term: Standard Commercial Property Conditions (SCPC)
A set of standard terms, currently in its third edition, designed for commercial property transactions, addressing additional complexities such as VAT and occupational leases. SCPC Part 2 can be expressly incorporated to deal with specific commercial issues (e.g., VAT).

Structure and Key Provisions of the SCS and SCPC

Both the SCS and SCPC are divided into three main parts: the particulars of sale (front page), the standard conditions (middle section), and special conditions (back page). The particulars record the transaction details, the standard conditions apply unless specifically varied, and special conditions address transaction-specific issues, including any adjustments to deposit arrangements, completion time, or VAT.

Key Term: specified incumbrances
Adverse matters that will bind the buyer (e.g., easements, restrictive covenants), identified in the contract to make clear what the buyer takes subject to.

Deposits

Under both the SCS and SCPC, the buyer is usually required to pay a deposit of 10% of the purchase price on exchange of contracts. The deposit is typically held by the seller’s solicitor as stakeholder unless the contract provides otherwise. As stakeholder, the holder is neutral and cannot release the deposit to the seller until completion or default; this protects both sides.

The SCS permits reuse of the deposit down a residential chain where the seller has a related purchase of a property in England and Wales that will be used as their residence—so long as each deposit is held on equivalent stakeholder terms. If the parties agree a reduced deposit, the standard conditions still treat the buyer as liable for the full 10% if they default. Under both sets, a deposit can be varied by special condition; reducing it increases the seller’s exposure if the buyer fails to complete, and sellers typically seek protective terms (such as top-up to 10% upon service of a notice to complete).

Key Term: stakeholder
A neutral party (often the seller’s solicitor) who holds the deposit on trust for both parties until completion or default.

Key Term: agent (for deposit)
If the deposit is held as agent for the seller, it may be released to the seller before completion, increasing risk for the buyer.

Key Term: contract rate
The interest rate used to calculate compensation for delayed completion under the standard conditions. If not specified, the default is the Law Society’s interest rate (typically 4% above base rate), but the precise rate may vary over time.

Completion and Risk

The standard conditions specify the completion date and the process for transferring title and funds. Time is not automatically of the essence of the completion date, but late completion triggers contractual compensation. Importantly, risk in the property (i.e., responsibility for damage or loss) passes to the buyer on exchange of contracts under both SCS and SCPC. The buyer must insure from exchange.

In practice, sellers often maintain their own building insurance until completion, particularly if required by a mortgage or lease covenants. Dual insurance can depress a payout under one policy because of the existence of the other; the standard conditions address this by providing for a price adjustment to compensate the buyer if their insurance payment is reduced due to the seller’s policy. If a special condition obliges the seller to maintain insurance, the seller must pay any policy monies to the buyer or assign the rights to the buyer on damage before completion.

Key Term: risk
The responsibility for loss or damage to the property; under SCS and SCPC, this passes to the buyer at exchange of contracts.

Buyers sometimes seek early occupation between exchange and completion. Under the SCS, early occupation is treated as a personal licence with restrictions (e.g., no alterations, pay outgoings, and a fee at the contract rate on the balance). The SCPC does not include a default licence; in commercial deals, any pre-completion access or occupation is handled by bespoke special conditions.

Remedies for Delay and Default

If completion does not occur on the agreed date, the standard conditions provide for compensation at the contract rate on the balance of the purchase price (excluding chattels). Under the SCS, either party may be liable to pay compensation for delay. Under the SCPC, compensation is payable only by the buyer, reflecting commercial market practice.

Either party may serve a notice to complete, making time of the essence and requiring completion within 10 working days. However, there is an important procedural distinction: under the SCS, the notice to complete is served after the contractual time for completion has passed (commonly after 2 p.m. on the completion date unless varied). Under the SCPC, the notice may be served at any time on the completion day, even before 2 p.m. Service is governed by the contract’s notice clause (e.g., deemed receipt rules for post, DX, fax, or email, if authorised). The party serving a notice must be ready, able, and willing to complete.

If the buyer fails to complete within the notice period, the seller may rescind the contract, forfeit the deposit, and claim damages. Often the notice requires the buyer to top up any reduced deposit to the full 10%. If the seller fails to complete, the buyer may rescind and recover the deposit with interest and consider damages, or seek specific performance if damages are inadequate.

The standard conditions also contain “non-merger” clauses to preserve rights after completion for matters intended to survive (e.g., covenants to discharge a seller’s mortgage, VAT obligations). Remedies for misrepresentation or misdescription are limited by the standard conditions: rescission generally requires fraud, recklessness, or a substantial difference in quality, quantity, or tenure from what the buyer was led to expect; otherwise, damages may be available if the error or omission causes a material difference in value.

Key Term: notice to complete
A formal notice served by a party ready, able, and willing to complete, requiring the other party to complete within 10 working days, after which the contract may be rescinded for non-compliance.

Key Term: misdescription
A contractual error concerning the property’s quality, quantity, or tenure; under the standard conditions, only material discrepancies justify damages, and rescission is limited to fraud, recklessness, or substantial divergence from expectation.

Special Conditions

Special conditions are used to vary or supplement the standard conditions for the specific transaction. Common examples include:

• Varying the deposit amount or requiring a top-up to 10% on service of a notice to complete
• Adjusting the completion time (e.g., earlier than 2 p.m. for a long chain)
• Obligations for the seller to maintain insurance and pay or assign any policy proceeds to the buyer
• Residential chain conditions allowing pass-through of a stakeholder deposit (SCS)
• VAT treatment on commercial sales (SCPC), including incorporating Part 2 Condition A1 (sale not a taxable supply) or A2 (transfer of a going concern), to avoid unexpected VAT on top of price

Key Term: special conditions
Bespoke clauses supplementing or varying the standard conditions to address transaction-specific points (e.g., deposit variation, time for completion, insurance, VAT).

Application in Residential and Commercial Transactions

The SCS is used for most residential sales, providing a familiar and efficient process for solicitors and clients. It uses an inclusive VAT price clause for the purchase price and contents price. The SCPC is used for commercial property and is more detailed about VAT, tenanted property management, and rent reviews between exchange and completion. Under SCPC Part 1, VAT at the standard rate is payable by the buyer where the supply is standard-rated (e.g., a sale of a new commercial building). Part 2 conditions can be incorporated where relevant:

• Condition A1: sale does not constitute a taxable supply and the seller will not opt to tax (protects the buyer from unexpected VAT)
• Condition A2: transfer of a business as a going concern (TOGC) such that no VAT is charged on completion if conditions are met (includes buyer’s VAT registration and option to tax where required)

Either set may be adapted by special conditions to suit the needs of the parties. In both, once exchange occurs, either party’s withdrawal exposes them to contractual remedies.

Worked Example 1.1

A buyer is purchasing a residential property for £400,000. The contract incorporates the SCS. The buyer can only pay a 5% deposit on exchange. The seller agrees to accept the reduced deposit.

Answer:
The SCS allows the parties to agree a reduced deposit, but the seller should be advised of the increased risk if the buyer defaults. The contract should specify the reduced deposit and may require the buyer to pay the balance up to 10% if completion is delayed or the buyer defaults. On service of a notice to complete, a top-up to the full 10% is typically required.

Worked Example 1.2

A commercial buyer exchanges contracts under the SCPC for a retail unit. The property is damaged by fire before completion.

Answer:
Under the SCPC, risk passes to the buyer at exchange. The buyer is responsible for insuring the property from exchange and must complete the purchase even if the property is damaged, unless the contract provides otherwise. If a special condition obliges the seller to maintain insurance, any pre-completion claim proceeds must be paid to the buyer or assigned, and dual insurance reductions give rise to a price adjustment.

Worked Example 1.3

On a sale with SCS, completion is set for Friday. At 2:05 p.m., the buyer’s funds have not arrived. The seller wants to serve a notice to complete. On a similar sale using SCPC, the seller anticipates delay at 11 a.m. and wants to serve the notice immediately.

Answer:
Under the SCS, the notice to complete is served after the time specified for completion has passed (commonly after 2 p.m. on the completion date unless varied by special condition). Under the SCPC, the notice can be served at any time on the day of completion, even before 2 p.m., provided the serving party is ready, able, and willing to complete. In both cases, the notice sets a period of 10 working days; if the buyer defaults, the seller may rescind, forfeit deposit, and claim damages.

Worked Example 1.4

Under the SCS, completion is delayed by 3 days. The purchase price is £500,000 and a deposit of £50,000 was paid on exchange. The contract rate is the default rate (assume 4% above base, and base is 5%). How is compensation calculated?

Answer:
Compensation is calculated on the balance of the purchase price (excluding chattels) after deducting the deposit. Balance = £500,000 − £50,000 = £450,000. Contract rate = 9% per annum. Daily rate = £450,000 × 9% ÷ 365 ≈ £110.96 per day. For 3 days, compensation ≈ 3 × £110.96 = £332.88 (rounded per contract terms).

Exam Warning

Under both the SCS and SCPC, risk passes to the buyer at exchange of contracts. Failure to advise the buyer to insure the property immediately may result in professional negligence if loss occurs.

Revision Tip

Always check whether the deposit is held as stakeholder or agent. If held as agent for the seller, the buyer may have difficulty recovering the deposit if the seller defaults.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The SCS and SCPC provide standard terms that govern formation, completion, risk, and remedies in property sales.
• The buyer usually pays a 10% deposit on exchange; deposits are held as stakeholder by default and may be reused in a residential chain under the SCS.
• Risk passes to the buyer at exchange under both sets of conditions; buyers should insure immediately; special conditions can make the seller maintain insurance and assign policy proceeds.
• Delayed completion gives rise to compensation at the contract rate; the SCS imposes compensation liability on either party, while the SCPC imposes it only on the buyer.
• A notice to complete makes time of the essence for completion within 10 working days; procedural timing differs: SCS after the completion time, SCPC anytime on the completion day.
• Remedies include rescission, forfeiture or return of the deposit, damages, and in appropriate cases specific performance; misrepresentation or misdescription remedies are limited by the standard conditions.
• In commercial deals, SCPC Part 2 conditions can be used to structure VAT (e.g., non-taxable supply or TOGC); absent these, VAT may be payable in addition to price.

Key Terms and Concepts

• Standard Conditions of Sale (SCS)
• Standard Commercial Property Conditions (SCPC)
• stakeholder
• agent (for deposit)
• risk
• notice to complete
• contract rate
• specified incumbrances
• special conditions
• misdescription