Progressing to exchange of contracts - Practice, method, and...

Learning Outcomes

This article outlines the practice, method, and authority for exchange of contracts, including:

• Solicitor’s practical duties before exchange: verifying readiness, resolving outstanding title and search issues, and synchronising related transactions to avoid negligence.
• Legal requirements for a binding exchange under s 2 Law of Property (Miscellaneous Provisions) Act 1989: identical signed contracts incorporating all terms, and proper client authority to sign or exchange.
• Methods of exchange and the undertakings required by Law Society formulae A, B, and C, with variations for electronic deposit transmission.
• Client authority, professional risks of unauthorised exchange, and proper management of undertakings in line with the SRA Codes.
• Binding consequences of exchange: passing of equitable interest, risk and insurance under the Standard Conditions of Sale, and deposit handling (stakeholder versus agent).
• Deposit arrangements (including reduced deposits), special conditions, and lender requirements (including certificates of title) to ensure safe progression to exchange.
• Post-exchange consequences and typical remedies for delayed completion (contractual compensation, notice to complete), and common pitfalls such as exchanging on the wrong contract version or without cleared funds.

SQE1 Syllabus

For SQE1, you are required to understand the practice, method, and authority for exchange of contracts, with a focus on the following syllabus points:

• Solicitor’s duties before exchange, including ensuring readiness and obtaining express client authority
• Methods of exchange: in person, by post, and by telephone using Law Society formulae A, B, C
• Pre-exchange checks: title investigation, searches and enquiries, mortgage offer acceptance, deposit availability, insurance arrangements, and chain synchronisation
• Legal requirements for a binding land contract under s 2 LP(MP)A 1989 and the need for identical signed contracts
• Binding consequences of exchange: equitable interest, risk passing, insurance obligations, and deposit handling
• Professional conduct: undertakings, acting for borrower and lender, conflict risks, and exchanging without authority
• Law Society Code for Completion by Post (context for post-exchange completion steps)
• Special conditions for deposit and risk; stakeholder versus agent roles for deposits
• Lender requirements and certificate of title in the context of readiness to exchange

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 main legal effect of exchange of contracts in a property transaction?
   1. The buyer becomes the legal owner
   2. The parties become legally bound to complete
   3. The deposit is refunded to the buyer
   4. The seller can withdraw without penalty
2. Which of the following is a required step before a solicitor exchanges contracts on behalf of a client?
   1. Obtain written client authority
   2. Complete post-completion searches
   3. Register the transfer at HM Land Registry
   4. Pay Stamp Duty Land Tax
3. Which Law Society formula is most commonly used for exchange of contracts by telephone when each solicitor holds their own client’s signed contract?
   1. Formula A
   2. Formula B
   3. Formula C
   4. Formula D

4. True or false? A solicitor may exchange contracts without the client’s express authority if the client has verbally indicated they are ready.

Introduction

Exchange of contracts is a critical milestone in property transactions. It is the point at which the parties become legally bound to complete the sale and purchase on the agreed terms. Before exchange, either party can withdraw without liability. After exchange, the contract is enforceable, typically with a deposit held and a fixed completion date. The legal framework is underpinned by s 2 Law of Property (Miscellaneous Provisions) Act 1989, which requires the land contract to be in writing, incorporate all agreed terms, and be signed by the parties; exchange of identical signed parts satisfies these requirements. For practice, you must understand how solicitors progress safely to exchange, the authority and undertakings involved, and the immediate consequences for risk, insurance, and deposit handling.

The Role of the Solicitor and Client Authority

Before exchange, the solicitor must ensure that all pre-exchange steps are complete and that the client has given clear, informed authority to proceed. Exchanging contracts without proper authority is a serious breach of professional duty and may result in liability for negligence. Authority should be explicit, ideally in writing, and should cover not only the decision to exchange but also authority to sign the specific agreed form of contract and to use a particular exchange method (especially if Formula C is contemplated in a chain).

Key Term: client authority
The client’s clear, informed instruction (preferably in writing) to the solicitor to proceed with exchange of contracts on the agreed terms, including authority to sign and, where necessary, to use a particular Law Society exchange formula.

A prudent solicitor will:

• Explain the binding effect of exchange and confirm the agreed completion date and deposit arrangements.
• Verify that the signed contract reflects all agreed terms, with any special conditions included.
• Record the client’s authority on the file, including any authority to vary standard exchange undertakings (e.g., using electronic transfer for the deposit).

Professional conduct also requires careful management of undertakings. Undertakings given during exchange must be capable of performance; failure to honour an undertaking is professional misconduct.

Pre-Exchange Checks and Readiness

The solicitor must confirm that all due diligence is complete and that both the client and the transaction are ready for exchange. This includes:

• Satisfactory investigation of title and resolution of any issues
• All pre-contract searches and enquiries completed and reviewed
• The contract (including any special conditions) is in final agreed form
• The deposit is available in cleared funds
• The client has arranged buildings insurance to commence from exchange
• The mortgage offer (if applicable) is in place and accepted
• The completion date is agreed and realistic
• Chain transactions are identified and arrangements made to synchronise exchange and completion

Key Term: readiness for exchange
The state in which all pre-exchange requirements have been satisfied, and the client is fully informed and prepared to be legally bound.

Additional readiness points that frequently arise in practice:

• Lender requirements: If the purchase is financed, report to the lender and ensure the mortgage offer is valid and any conditions are manageable. Many lenders expect a certificate of title to confirm good and marketable title and readiness to complete.
• Deposit mechanics: Confirm whether the deposit will be held as stakeholder or agent (default under the Standard Conditions is stakeholder, unless the seller has a related purchase). If a reduced deposit is agreed, ensure an appropriate special condition is included.
• Occupiers: Where any non-owning adult occupier resides, secure their written confirmation to vacate or include appropriate contractual arrangements, to avoid overriding interests and completion delays.
• Chain synchronisation: Where sale and purchase are interdependent, synchronise exchange and completion dates to avoid leaving the client with two properties or none; failure to synchronise can amount to negligence.

Key Term: certificate of title
A formal report by the conveyancer to the lender confirming good and marketable title, readiness to complete, and requesting funds. Its timing and accuracy are central to readiness for exchange.

Methods of Exchange

There are several methods by which contracts can be exchanged. The method chosen depends on the circumstances and the parties’ preferences.

In Person

Both solicitors meet, check that the contracts are identical and signed, and physically exchange them. This method provides maximum certainty but is less common due to practicalities.

By Post

Each solicitor sends their client’s signed contract to the other by post. The exchange is effective when the last part is posted. This method is slower and less secure than others, and is rarely used in practice due to uncertainty.

By Telephone Using Law Society Formulae

The most common method is exchange by telephone using the Law Society formulae, which set out undertakings to ensure a binding exchange even when contracts are not physically swapped immediately.

Key Term: Law Society formulae
Standardised procedures and undertakings for exchanging contracts by telephone, ensuring a binding exchange and proper handling of contracts and deposits.

The main formulae are:

• Formula A: Used when one solicitor holds both signed contracts.
• Formula B: Used when each solicitor holds their own client’s signed contract (most common).
• Formula C: Used for chains of linked transactions requiring simultaneous exchange.

When using any formula, the solicitors must make a clear attendance note of the exchange conversation, capturing the date and time of exchange, the formula used, any agreed variations (such as electronic funds transfer in place of a cheque), the completion date, deposit arrangements, and the identities of the solicitors involved.

Key Term: release (Formula C)
An unconditional and irrevocable undertaking to exchange later that same day if called back within a specified time; used to build simultaneous exchange through a chain.

Variations to formulae may be expressly agreed, for example:

• If the deposit is sent electronically (permitted under the Standard Conditions and required under the SCPC), record that the undertaking to send a cheque is varied to electronic transmission that day.
• If exchange occurs late and physical posting cannot happen until the next day, record the agreed variation to send the signed parts and deposit on the next working day.

Worked Example 1.1

A solicitor for the buyer and a solicitor for the seller each hold their client’s signed contract. They agree all terms and the completion date. They exchange contracts by telephone using Formula B. What must each solicitor do immediately after the call?

Answer:
Each solicitor must insert the agreed completion date, hold their signed contract to the other’s order, and send it (with the deposit, if acting for the buyer) to the other solicitor that day, as per the undertakings in Formula B.

Worked Example 1.2

A solicitor receives a last-minute request from the client to change the completion date after contracts have been exchanged. What should the solicitor advise?

Answer:
Once contracts are exchanged, the completion date is binding. The solicitor should advise the client that neither party can unilaterally change the date without the other’s agreement, and withdrawal may result in loss of deposit or damages.

Worked Example 1.3

You are acting for a buyer in a three-link residential chain. All parties want to exchange simultaneously. The chain agrees to use Formula C. How should you proceed during the release phase, and what must be recorded?

Answer:
Call the next solicitor in the chain and confirm that each holds a part signed by their client. Give an unconditional and irrevocable release to exchange if called back within the specified time that day. Record each release conversation (time, parties, release window), the agreed completion date, deposit arrangements, and any variations (e.g., use of electronic transfers), then complete exchanges back through the chain.

The Binding Effect of Exchange

Once contracts are exchanged, the parties are legally bound to complete on the agreed date and terms. The buyer acquires an equitable interest in the property, and the seller holds the legal title on trust for the buyer until completion. The risk of damage to the property usually passes to the buyer at exchange under the Standard Conditions of Sale (unless the contract provides otherwise), and the buyer should insure immediately from exchange.

Key Term: binding contract
A contract that is legally enforceable, obliging both parties to complete the transaction or face legal consequences.

Risk and insurance:

• Under the Standard Conditions of Sale (Fifth edition – 2018 Revision), risk generally passes to the buyer on exchange, and the seller is under no contractual duty to insure unless required by a special condition or lease terms. The buyer should insure from exchange to protect their and their lender’s interests.
• In practice, the seller may retain their insurance until completion (often required by a mortgage), and the contract provides that any reduction in the buyer’s insurance pay-out owing to the existence of the seller’s policy is adjusted through the purchase price to avoid prejudice. Special conditions can require the seller to maintain insurance and assign policy rights in the event of pre-completion damage.

Pre-completion occupation:

• If the buyer is permitted to occupy before completion, the contract should state they do so as licensee (to avoid acquiring a possessory status), and the insurance and risk arrangements must be clarified.

Deposit and security:

• The buyer is usually required to pay a deposit (commonly 10%). If the buyer defaults after exchange, the deposit may be forfeited. If the seller defaults, the buyer may seek damages or specific performance.

The Importance of Written Client Authority

Solicitors must always obtain clear, preferably written, authority from the client before exchange. This authority should confirm:

• The client has read and approved the contract and all terms
• The agreed completion date is acceptable
• The client understands the legal consequences of exchange
• The deposit is available and insurance is arranged
• Any chain dependencies and readiness to proceed

Exchanging without this authority is a breach of the SRA Code of Conduct and may result in a claim for negligence if the client suffers loss. Oral indications of readiness are not sufficient; the authority should be documented, including authority to sign the contract or sign on the client’s behalf.

Key Term: notice to complete
A contractual notice (under the Standard Conditions or SCPC) served when completion is delayed, making time of the essence and requiring completion within the specified working-day window; non-compliance entitles the aggrieved party to terminate and pursue remedies.

Exam Warning

Exchanging contracts without the client’s express, informed authority is a serious professional breach and may result in disciplinary action or liability for client losses.

The Law Society Code for Completion by Post

When exchange and completion are not in person, the Law Society Code for Completion by Post is often adopted. This code sets out the undertakings and procedures for completing the transaction by post, ensuring that funds and documents are handled securely and efficiently. Although it governs completion (not exchange), its use should be anticipated at exchange because the undertakings you give then must be compatible with how completion will be conducted.

Key Term: Law Society Code for Completion by Post
A standard set of undertakings and procedures for completing property transactions by post, protecting both parties and their solicitors.

Professional Conduct and Risks

Solicitors must comply with the SRA Code of Conduct at all stages. Key risks include:

• Exchanging without proper client authority
• Failing to check that all pre-exchange steps are complete
• Not using the correct Law Society formula or failing to comply with undertakings
• Exchanging on the wrong version of the contract or with inconsistent terms
• Giving undertakings that are outside your control (e.g., unqualified promises to pay a deposit when you have not received cleared funds)
• Failing to synchronise related transactions where instructed to do so
• Acting where a conflict exists (e.g., borrower and lender with incompatible instructions), and proceeding without resolving the conflict

In borrower–lender matters, ensure compliance with the lender’s handbook and provide a certificate of title only when you are satisfied it is safe to lend. Where joint borrowers or non-owning occupiers are involved, ensure appropriate advice is given and consents obtained before exchange to avoid later completion failures.

Worked Example 1.4

Your buyer client proposes a 5% deposit. The Standard Conditions provide for 10%. How should you proceed?

Answer:
Agree a special condition varying the deposit to 5% and confirm that the deposit will be held by the seller’s solicitor as stakeholder (the default under the Standard Conditions unless the seller has a related purchase). Obtain lender consent if relevant and ensure the reduced deposit does not compromise the client’s security if they default.

Consequences of Exchange

After exchange, neither party can withdraw without incurring penalties. The buyer is usually required to pay a deposit (typically 10%), which may be forfeited if the buyer fails to complete. If the seller defaults, the buyer may claim damages or seek specific performance.

Key Term: deposit
A sum (usually 10% of the purchase price) paid by the buyer on exchange of contracts as security for completion.

Key Term: stakeholder
The person (often the seller’s solicitor) holding the deposit on trust for both parties; the funds may not be released to the seller until completion or otherwise as the contract permits.

Key Term: agent
A person holding the deposit for the seller alone, with authority to release the deposit to the seller (for example, on a related purchase); this is less secure for the buyer and typically only applies if expressly agreed (e.g., where the seller has a related UK purchase under the Standard Conditions).

Under the Standard Conditions of Sale:

• The deposit is ordinarily held as stakeholder. This protects both parties and avoids premature release to the seller.
• Where the seller has a related UK purchase, the contract may allow deposit to be held as agent for the seller (enabling onward use of funds), but this increases the buyer’s exposure if the seller later defaults. Any departure from stakeholder should be carefully considered and documented.

Delay and remedies:

• If completion is delayed, contractual compensation may be payable. Under the Standard Conditions, either party may be liable to pay compensation at the contract rate for late completion. Under the Standard Commercial Property Conditions, only the buyer is liable to pay compensation to the seller for delay.
• A notice to complete can be served to make time of the essence. Non-compliance allows rescission and additional remedies (e.g., forfeiture of deposit if the buyer defaults). The deposit must be topped up to 10% if a reduced deposit was paid at exchange and a notice to complete is served.

Worked Example 1.5

Immediately after exchange, a fire damages the property. The contract incorporates the Standard Conditions and contains no special conditions regarding insurance. Who bears the risk, and what practical steps follow?

Answer:
Risk has passed to the buyer on exchange, so the buyer should claim under their insurance. The seller is under no contractual obligation to insure. If both parties insured, the contract provides price adjustment to avoid prejudice from dual insurance. If the buyer had not insured, they bear the loss.

Worked Example 1.6

You are asked during the exchange call to undertake that the deposit will be sent “tomorrow without fail,” but your client has not yet transferred funds. What is your professional position?

Answer:
Do not give an unqualified undertaking outside your control. Undertakings must be performed within the agreed time, and failure is professional misconduct. Either vary the formula to reflect electronic transfer when received, or postpone exchange until the deposit is in cleared funds.

Key Point Checklist

This article has covered the following key knowledge points:

• The solicitor must obtain clear, preferably written, client authority before exchange of contracts, recording the authority on the file.
• The contract must incorporate all agreed terms and be signed; ensure identical signed copies are exchanged in compliance with s 2 LP(MP)A 1989.
• All pre-exchange checks (title, searches, enquiries, deposit, insurance, mortgage offer, occupiers, lender certificate of title) must be complete.
• Related transactions must be synchronised; failure to synchronise when instructed can amount to negligence.
• The main methods of exchange are in person, by post, or by telephone using Law Society formulae A, B, or C; record the exchange and any agreed variations.
• Exchange creates a binding contract—equitable interest passes to the buyer; risk usually passes to the buyer under the Standard Conditions; the buyer should insure from exchange.
• Deposit handling should be clarified: stakeholder (safer for buyer) versus agent (less secure, typically where the seller has a related purchase).
• The Law Society Code for Completion by Post governs completion; undertakings at exchange should anticipate its use.
• Professional conduct requires careful management of undertakings and conflicts; do not exchange without proper authority or cleared deposit funds.
• If completion is delayed, contractual compensation and notice to complete may apply; remedies differ under the Standard Conditions and SCPC.

Key Terms and Concepts

• client authority
• readiness for exchange
• Law Society formulae
• release (Formula C)
• binding contract
• Law Society Code for Completion by Post
• certificate of title
• deposit
• stakeholder
• agent
• notice to complete