Buying or selling a home is an exciting yet often stressful process with lots of legal procedures to navigate. Two of the most important stages are exchanging contracts and completion. Understanding the key differences between these is essential for UK home buyers and sellers.
Why Understanding Contract Exchange and Completion Matters
When undertaking any residential property transaction in the UK, whether you are the buyer or seller, it's crucial to understand the legal processes involved. The two most significant milestones are exchanging contracts and completion.
Being aware of the precise differences between these two events allows buyers and sellers to:
- Set clear expectations on timeframes and responsibilities
- Reduce legal risks and avoid potential issues
- Ensure the transaction goes smoothly from offer to completion
- Know when they can legally commit to the move
- Plan properly around deposit payment and completion monies
Without this understanding, delays, complications and disputes are more likely to arise. This can lead to a stressful and negative experience for all parties.
For these reasons, buyers and sellers should take the time to learn about the purpose and key distinctions between contract exchange and completion.
What is Exchanging Contracts?
Exchanging contracts represents a major step forward in the home buying/selling process in the UK. This stage makes the transaction legally binding for the first time.
The exchange of contracts occurs before the completion date is due to take place.
Once contracts have been formally exchanged between the lawyers of the buyer and seller, both parties are legally committed to complete the purchase. If either withdraws from the transaction after exchanging, the other side has the right to take legal action and claim damages.
Exchange of contracts significantly changes the status of the deal. Up until this point, either the potential buyer or seller can pull out without legal consequences. Exchanging contracts removes this flexibility and creates mutually binding obligations to complete.
Some key things to know about exchanging contracts:
It Makes it Legally Binding
As mentioned, exchange of contracts makes the transaction legally binding on both parties for the first time. Up until this milestone, either side can walk away penalty-free if they change their mind or a better offer comes along. After exchange, this is no longer the case.
The Buyer Pays the Deposit
On the day of exchange, the buyer will transfer a deposit to the seller, usually around 10% of the agreed property price. Payment of this deposit makes the buyer’s commitment concrete. If they pull out later, the seller keeps the deposit.
Point of No Return
Exchanging contracts represents the “point of no return” in the buying/selling process. Once done, both parties are locked in and the sale becomes a binding commitment that must be completed.
Timings
The exchange happens before the agreed completion date. Any preparations such as surveys, searches, mortgage approval and investigations of title have to be concluded before exchange.
The completion date is usually agreed and set into the contract, unless it is, for instance, a new build property, and completion is on notice. The time between exchange varies greatly; exchange and completion can take place on the same day or weeks apart, depending on the particular circumstances of the transaction and requirements of the parties. A new build property completion on notice can take place months, and sometimes even a year or so, later than exchange.
Exchange Does Not Mean Completion
While exchange is a major stepping stone, it does not yet complete the sale. Full completion happens later on the official completion date. Up until then, the property still belongs to the seller, although the contract usually requires the buyer to be responsible for the insurance on the new property from exchange.
Overall, exchanging contracts represents a vital legal milestone in any UK residential transaction. It transforms the sale from a non-binding agreement in principle into a binding contractual commitment that both buyer and seller must fulfil.
Completion Day
If exchanging contracts makes a property sale legally binding, completion is the process that physically transfers ownership from seller to buyer. This happens on the pre-agreed ‘completion day’.
On completion day, the remaining balance of the purchase price is paid by the buyer. Once this payment has cleared, the seller is legally obligated to provide vacant possession of the property and hand over the keys, unless, of course, it is a purchase of a tenanted property.
Some key aspects of the completion stage:
Outstanding Money is Paid
The buyer must transfer the outstanding amount owed on the property price to their solicitors along with any costs, fees, duties and land registry fees well in advance of completion.
The buyer’s solicitors will then transfer the balance of the purchase price to the seller’s solicitors on completion. This is the full price minus the deposit amount already paid when contracts were exchanged. Funds need to be cleared in the seller’s solicitors account for completion to take effect. Only then will the seller’s solicitors authorise the release of keys.
Ownership Transfers
Once completion monies are settled, ownership of the property legally switches from seller to buyer. The property now belongs to the buyer.
Seller Vacates
On completion day, the seller is contractually required to hand over vacant possession of the property. This means they must move all possessions out and hand over the keys.
Buyer Can Move In
Following payment and the seller vacating, the buyer obtains the keys. They are now free to move into the property, which belongs to them. Responsibility for maintenance, council tax, utilities etc switches to the buyer.
Sale Complete
Completion marks the end of the residential transaction. The sale is legally finished, with the property changing hands in exchange for the full purchase price. Both buyer and seller have fulfilled their contractual obligations.
In summary, completion is the crucial end stage that legally finalises the property sale. All obligations are discharged and the buyer takes over ownership from the seller.
Key Differences Between Exchange and Completion
While exchange of contracts and completion are both essential milestones in residential transactions, there are some notable differences between the two events:
Making the sale legally binding: Exchanging contracts makes the sale legally binding, while completion actually finalises the transfer of ownership.
Timing: Exchange happens before completion. It paves the way for completion further down the line.
Deposit vs remaining amount: The buyer pays a deposit on exchange, whereas on completion they pay the outstanding amount to complete purchase.
Ownership: At exchange, ownership remains with the seller. Only at completion does ownership transfer from seller to buyer.
Obligations created: Exchange creates obligations to complete the transaction. Completion discharges those obligations when the property changes hands.
Right to Occupy: The buyer does not have the right to occupy the property after exchange; this only happens after completion.
Withdrawal: After exchange, parties cannot withdraw without consequences. Before exchange there is flexibility to pull out.
Sale Status: Exchange moves the sale from non-binding agreement towards a binding contractual commitment. Completion fulfils this and finalises the transaction fully.
Risks: Exchange introduces contractual risks if one party later withdraws. Completion eliminates these risks as the contract is discharged.
So in summary, while exchange makes the sale binding, only at completion does the full transfer occur. Exchange paves the way, completion crosses the finish line.
Why Careful Completion Planning is Vital
Due to the decisive nature of completion day, it is essential for buyers and sellers to plan properly for this milestone event.
For sellers, preparation might involve:
- Arranging removal vans and storage
- Redirecting mail and utilities
- Cleaning the property thoroughly
- Ensuring keys are ready for handover
- Vacating early so there is time to resolve any issues
Equally, buyers should make certain:
- Sufficient funds are available well in advance of completion day
- Removal vans are booked for moving in
- Insurance is arranged to start from exchange
- They obtain all keys, fobs, garage remotes from the estate agent
- They immediately change locks if needed for security
Delays or problems on completion day can cause major headaches. For instance, keys not being available or work still being done on the property. Similarly, a lack of cleared funds on the buyer side could prevent completion taking place.
Careful preparation and planning removes such risks and sets both parties up for a smooth final handover. This ensures the residential property transaction completes seamlessly.
Using Contract Exchanges and Completion Dates Flexibly
While there is a conventional procedure of exchanging contracts prior to completion day, the parties involved have some flexibility on timings:
Longer Intervals
If more time is required to arrange things, exchange and completion can be a long time apart, for example, 3-6 months. This provides an extended period for the buyer to sort their affairs.
Simultaneous Exchange and Completion
In lower risk situations, exchange and completion can happen on the same day simultaneously. While this would not be appropriate for every transaction, it can be used where a delay between exchange and completion might have costly implications, or all parties are in funds and ready to proceed.
So, while there is a typical order of exchange followed later by completion, the key dates can be structured flexibly to suit both parties if need be.
The only absolute requirement is that contracts must have been exchanged before completion can go ahead. Completion without any prior contract exchange is not possible under UK property law.
Conveyancers - A Vital Role Managing Exchange and Completion
As buying/selling residential property involves substantial sums of money and complex legal requirements, most people use professional conveyancing solicitors to handle their transaction.
These qualified legal experts take responsibility for progressing the sale from offer to completion.
Concerning exchange and completion, conveyancers handle key aspects such as:
Agreeing dates: Liaising between the parties to set suitable dates for both contract exchange and completion day. Taking into account needs on both sides.
Preparing contracts: Drafting and approving the detailed contract paperwork to be signed and exchanged. Ensuring the contracts accurately reflect the terms agreed.
Facilitating exchange: Managing the formal exchange of the finalised contracts. Ensuring both parties sign and transfer the deposit on exchange.
Completion preparations: Advising their clients on financial, practical and legal preparations needed for completion day. Checking funds will be available.
Completion procedures: Overseeing the completion procedures. Ensuring the balance is paid, keys handed over, and sale legally finalised.
Legal knowledge: Applying their specialist legal knowledge around property sales to ensure exchange and completion unfold correctly and limit any risks.
In practice, conveyancers handle the end-to-end legal work and liaison between the buyer, seller and estate agents to ensure a smooth exchange and completion. Relying on experienced conveyancing solicitors reduces risks and stress for buyers and sellers.
Exchanging contracts and completion are pivotal milestones when buying or selling property in the UK.
Understanding the legal and practical differences between these two stages is essential for all parties involved in residential transactions.
The Key Takeaways
- Exchange makes the sale legally binding but doesn't finalise it
- Completion legally transfers ownership and completes the sale
- The deposit is paid on exchange, outstanding amount on completion
- Exchange happens before completion
Being aware of these nuances provides home buyers and sellers with clarity on the process. It enables them to set expectations, meet obligations, reduce risks and avoid legal issues.
Find a Trusted Conveyancer at Howells
With this knowledge, all those involved in UK residential transactions can navigate the journey smoothly. Exchanging contracts and completing successfully leads to happy buyers, sellers and conveyancers.
To find out more about our conveyancing services or to request a FREE quote, please phone 02920 404020 or email info@howellslegal.com.
