When we can we Exchange? And what is Exchange anyway? (And why do we need it?)
Exchange is shorthand for Exchange of Contracts. The contract is the legal agreement for the sale and purchase of the house. There are two copies. One copy is signed by the buyer; one is signed by the seller.
At the stage where both parties wish to be legally bound by the agreement, a completion date is fixed and the two copies of the contract are physically swapped between their respective solicitors. The buyer also pays a deposit of around 5% - 10% of the purchase price. At that stage, contracts are said to have been exchanged (there's a certain logic to all this, you see), and the agreement is binding and cannot subsequently be altered save with the agreement of both parties.
The binding nature of the contract means that all the investigation work (both legal investigations and searches, and also any physical survey) has to be completed before contracts are exchanged. All the buyer's solicitor's enquiries have to be satisfactorily answered prior to exchange. It's too late to query anything after contracts have been exchanged. For good or ill, you're stuck with the transaction.
Weirdly enough, once contracts have been exchanged, the law treats the buyer as owner of the property for some purposes. One effect of this is that if the seller attempts to pull out of the contract, the buyer can force the seller to proceed with the agreement. That's unusual in English law: generally, the remedy for breach of contract is financial compensation. Another effect is that the buyer becomes liable to insure the property as from the date of exchange of contracts, unless this is specifically excluded by the contract. (It often is. Especially if the property in question is a flat where the freeholder is responsible for insuring the whole building of which the flat forms part.)
If the property is destroyed after exchange of contracts and before completion, the seller may still require the buyer to complete the purchase. So: you need to have buildings insurance on risk with effect from the date of exchange of contracts.
One other factor to consider before exchanging contracts: the mortgage. If you are buying a property with mortgage finance then it's very risky to exchange contracts until your solicitor has received a copy of the formal mortgage offer and supporting documentation. The 1-2-3 here is usually that you apply for your mortgage. You fill out the forms, produce the supporting evidence of means and identity and pay the arrangement and/or survey fee. The lender then approves the loan in principle, subject to survey, often pretty quickly. The lender's valuation survey on the property may take perhaps another week. Then the mortgage documentation is processed centrally and sent out to the buyer's solicitor and that can take one or two more weeks.
There's no law that prevents a buyer from exchanging without first having obtained a firm mortgage offer. But the risk is that if the mortgage offer doesn't materialise the buyer may have insufficient funds to complete the transaction on the date fixed when contracts were exchanged. This can be embarrassing for the buyer: he/she is liable to forfeit the deposit to the seller (who can then sell the property elsewhere) and may in addition be liable for the financial losses directly caused to the seller and to all the other parties in the chain of transactions.
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