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

Learning Outcomes

After reading this article, you will be able to explain the practical steps and legal requirements for progressing to exchange of contracts in property transactions. You will understand the solicitor’s duties, the importance of obtaining client authority, the main methods of exchange (including Law Society formulae), and the legal consequences of exchange. You will be able to apply these principles to SQE1-style scenarios and avoid common pitfalls.

SQE1 Syllabus

For SQE1, you are required to understand the procedures and legal requirements for exchange of contracts in property transactions. Focus your revision on:

  • The solicitor’s duties and the need for clear client authority before exchange
  • The main methods of exchange (in person, by post, by telephone using Law Society formulae)
  • The steps and checks required before exchange (including readiness and due diligence)
  • The binding effect of exchange and the consequences for the parties
  • The professional conduct rules and risks of exchanging without proper authority

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. For SQE1, you must know the practical steps, legal requirements, and professional obligations involved in progressing to exchange, as well as the consequences of exchange for both parties.

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.

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.

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

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.

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.

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.

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.

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 (unless the contract provides otherwise).

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

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

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.

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.

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

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.

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 Point Checklist

This article has covered the following key knowledge points:

  • The solicitor must obtain clear, preferably written, client authority before exchange of contracts.
  • All pre-exchange checks (title, searches, enquiries, deposit, insurance, mortgage) must be complete before exchange.
  • The main methods of exchange are in person, by post, or by telephone using Law Society formulae.
  • Exchange creates a binding contract—neither party can withdraw without penalty.
  • The Law Society Code for Completion by Post and the SRA Code of Conduct must be followed to avoid professional breaches.

Key Terms and Concepts

  • client authority
  • readiness for exchange
  • Law Society formulae
  • binding contract
  • Law Society Code for Completion by Post
  • deposit
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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Senior Associate at Trilegal