Conveyancing aspects of cross border transactions

Portfolio sales and purchases are becoming increasingly common in the property world, as investors find it harder to find value in the UK market. Practitioners in Scotland may be called upon from time to time to advise on the Scottish property aspects of these transactions. This can be quite challenging since conveyancing procedures in England and Wales vary in a number of areas from the standard procedures adopted in Scotland, and the wording used in English contracts can be difficult to understand. This article attempts to give solicitors an overview of the three main sets of  standard conditions used for the sale of properties in England, and to highlight some areas which require particular attention when dealing with the Scottish end of cross border work.

The National and Standard Conditions of Sale

Under English common law, a seller of property must disclose to the buyer any matters subject to which the property is sold. That is why English contracts for the sale of land are initially prepared in draft and issued by the seller’s solicitor.

Nearly every contract will be based on one of three sets of conditions. The National Conditions of Sale 20th Edition (“the National Conditions”) are the oldest, dating from 1981. Then follow the Standard Conditions of Sale Third Edition, (“the Standard Conditions”) published in 1995 and possibly the most widely used. The most recent are the Standard Commercial Property Conditions of Sale First Edition (“the Standard Commercial Property Conditions”), published in 1999. These are very similar to the Standard Conditions, but tailored for use in commercial sales.

Every English firm dealing with commercial property on a regular basis will have its own set of in-house adjustments to the National or Standard Conditions.

Scope of the Conditions / General Provisions

The National Conditions are very out of date but are still used regularly in contracts. The Standard Conditions and the Standard Commercial Property Conditions are shorter, written in plain English, and generally easier to follow. All sets cover the conveyancing aspects of most categories of sale transaction, including auctions, assignments (assignations) of leases, the sale of tenanted property and the grant of a new lease or sublease.

National Condition 1 (and part of Standard Condition 2) deal with sales by auction, and the mechanics of exchanging (concluding) contracts. They are unlikely to have much relevance to any Scottish transaction.

Standard Condition 1 is more useful, containing notice provisions, confirmation that all sums payable are exclusive of VAT, a prohibition on assigning the contract or subselling the property, and confirmation that joint parties will be jointly and severally liable for performance of the contract. (None of these points appear in the National Conditions.)

Deposit

National and Standard Conditions 2 deal with payment of the deposit, a commercial norm in England. Commonly this runs at 10% of the price, but will tend to be lower if the purchase price is high. The intention is to ensure that the seller benefits from a quick and easily accessible form of compensation if the buyer fails to pay the full purchase price. A deposit need only be paid if there is to be a time delay between signing the contract and completion (settlement) and must be paid at the time when the contract is concluded. Cheques are an acceptable means of payment, but if the cheque isn’t honoured the seller will be able to bring the contract to an end.

The deposit is paid to the seller’s solicitor as “stakeholder”. This means that he or she must hold the money as an independent third party and pay it over in due course to whoever is entitled to it under the contract. Some contracts will try to amend this to require the deposit to be paid to the seller’s solicitor as “agent for the seller”. In that case the money will belong to the seller, even if it is physically held by his solicitor, and payment of the deposit will create a tax point for VAT purposes. If the seller becomes insolvent before completion, the money can be claimed by his creditors, and the buyer will be left with an unsecured claim.

If the contract contains conditions precedent (suspensive conditions), then commonly the deposit will not be payable until these are satisfied and the contract becomes unconditional.

Scottish solicitors tend to try to steer clear of including deposit terms in their contracts, perhaps because of the difficulties inherent in accurately replicating the English position. One way round this may be to weight the deposit payable under the English contract, to include an element for the Scottish properties. Care then needs to be taken to ensure that there are appropriate cross default provisions in both contracts so that failure to complete or settle the Scottish property sales will trigger forfeiture of the deposit under the English contract.

Matters to Which the Property is Subject

An English seller has to disclose all matters subject to which the property is sold. Standard Condition 3, (National Conditions 14 and 15) attempt to set out what this means in general terms. The property will rarely be sold subject to existing mortgages or financial charges, but other than this, the contract tends to be framed as widely as possible, and the standard provisions are often added to. Arguably these clauses will not need to be transported into any Scottish contract.

A clause similar to Standard Condition 3.2/3.3 (National Condition 13 (3)) confirming that the buyer is happy with the condition of the property, could be included, but again is probably not necessary. Nor is Standard Condition 3.4 (dealing with retained land) which refers to matters of purely English law.

Statutory Notices

Care should be taken to synchronise Standard Condition 3.1.4 (National Condition 16) with the position which is to apply to any Scottish property. It is almost always the case that in England the local search (property enquiry certificate) will be obtained by the buyer before the contract is concluded. Standard Condition 3.1.4 makes the buyer responsible for complying with any statutory notices or other public requirements imposed on the property in the period up to the completion date. The position in Scotland is commonly the opposite. (The seller provides the Certificate just before settlement and the buyer has the right to rescind the contract if an adverse statutory notice shows up). If it is agreed to adopt the English provisions for consistency, then the Scottish lawyers should make sure that they are provided with a property enquiry certificate before conclusion of missives.

Title Matters

The technical conveyancing points set out in Standard Condition 4, and National Conditions 9 to 13 and 18 to 20 can be replaced with usual Scottish missive clauses relating to title and the disposition. All that is probably required here is provision to the effect that the buyer is satisfied with the validity, marketability and extent of the title (and with the terms of any burdens or conditions relating to the property). The usual conditions concerning the form of the disposition and providing for delivery of this and other conveyancing requirements on the date of entry should also be included.

Although Standard Condition 4 and National Condition 9 set out a detailed timetable for producing and examining title, in practice most sellers nowadays will require the buyer to be satisfied on title matters before the contract is concluded.

Insurance and Passing of Risk

A significant practical difference between procedures north and south of the border will be evident from National Condition 21 (Insurance). Traditionally insurance risk in England passes to the buyer with effect from the date of exchange (conclusion) of contracts. NC 21 sets out that the seller is under no duty to insure the property after that, and contains no right for the buyer to withdraw from the bargain if the property is materially damaged or destroyed before completion (settlement).

By contrast the Standard Conditions (SC 5.1) adopt the opposite approach – if a sale is governed by this condition then the seller will bear the insurance risk and must make good the damage. The buyer may bring the contract to an end if the condition of the property changes to make it unusable for its purpose. The seller will also be able to rescind the contract if the damage is caused by something the seller could not reasonably have insured against, or if he cannot legally repair the damage. S47 of the Law of Property Act 1925 (which obliges the seller to pay over the proceeds of any insurance policy to the buyer on completion of the sale) will not apply.

Lest any conveyancers be presently breathing a sigh of relief that English practice on insurance seems to be broadly in line with Scotland, that is not the case. By popular request the Standard Commercial Property Conditions revert to the old position (buyer taking the risk). They also contain scope for the parties to agree that the seller’s insurance will run on until completion, which is sensible if the seller is already under a duty, say to its tenants, to insure the property. If damage occurs, the buyer will not be able to rescind the contract, but will be paid the amount of any insurance proceeds received (or the seller will assign its right to claim under the policy).

Standard Commercial Property Condition 9 adds that  insurance risk for chattels (moveable items) should also pass on conclusion of contracts (otherwise it will pass on delivery).

Completion of the Sale

National Condition 5 (Standard Condition 6) supplies a contractual settlement date if no date is fixed by the parties. This will be five weeks after the date of the contract (four weeks if the Standard Conditions apply) or, if later (but only if the National Conditions are used), after the seller provides evidence of his title. Time isn’t of the essence unless the parties choose to make it so by serving a formal Notice to Complete.

Both the National and Standard Conditions (Conditions 22 and 6.8/7.5 respectively) entitle a party (if he is ready to complete) to serve a Notice to Complete, affording the other a fixed period of time (16 working days under the National Conditions, 10 working days under the Standard Conditions) to comply with the contract. If the defaulter fails to complete, the innocent party may end the contract, claim damages, and keep the deposit (if he is the seller), or have it returned with the interest (if he is the buyer).

Although a formal notice will not require to be served under the Scottish contract, it might be preferable if the default periods were to match in both the Scottish and English contracts. This applies particularly if it is intended that a Scottish default might trigger forfeiture of a deposit under the English contract.

Defaulting buyers, more used to dealing with English property, may not appreciate that in Scotland, time is usually made of the essence for payment of the purchase price.

If payment is late, then, whether or not the contract requires it, it might be sensible to serve a formal notice pointing out the seller’s rights.

The Price and Interest

National Condition 5 sets out how the price may be paid – bank drafts and legal tender are both permissible means of payment. Contrast this with the Standard Commercial Property Conditions (SCPC 6.7) which now permit payment only by direct funds transfer, to be received by 2pm (SCPC 6.1.2).

The interest provisions set out in National Condition 7 (referred to as “compensation” in Standard Condition 7.3.2), are self explanatory. The interest rate (known as the contract rate) is almost always set out in the contract to avoid having to refer back to either the Land Compensation Act or the Law Society standard rate.

Under National Condition 7, consignation of the purchase price will stop the running of interest so long as the buyer is not in breach of contract. (The Standard Conditions say nothing about this). National Condition 7 also prevents a seller from collecting interest on the price and keeping the rental income during a default period – he can do one or other but not both. This was almost never accepted by sellers’ solicitors, and the Standard Commercial Property Conditions (CPC 7.3.4) now say the opposite.

Apportionments

Apportionments of rents, service charge and other income and outgoings are dealt with in Standard Condition 6 (National Condition 7). Although NC7 mentions apportioning rates, these are now apportioned by the local authority. Generally, apportionments are made from the contractual completion date even if that is not the actual completion date (with only one or two exceptions). The seller is entitled to keep the income for (and liable to pay the outgoings for) the date of completion itself, unless the contract is based on the Standard Commercial Property Conditions, which permit the buyer to keep the income for the completion date.

Service Charge is apportioned on a best estimate basis. The parties must account to each other for balancing payments within three weeks after the final figures become available. The Standard Commercial Property Conditions (SCPC 6.3.7/9) provide a more detailed method of apportioning service charge for investment properties, which seems to work well in practice and may be worth considering for use in Scottish contracts.

At least two different methods can be used in England to calculate apportionments. There is a Law Society approved method (which involves ascertaining the “rental year” for each lease, and apportioning over the whole of that year) and a traditional or “surveyors” method, which is more akin to the method usually used in Scotland. Enquiry should be made in each case as to which will be adopted.

Licence to Occupy

National Condition 8 (Standard Condition 5) can be a useful practical provision, rarely seen in Scottish contracts. It allows the buyer (at the discretion of the seller) to have early occupation of the property before the actual completion takes place, as a licensee only. No fee is payable but interest must be paid on the purchase price, the buyer must pay outgoings, keep the property in the same condition, and not carry out any development. The Standard Conditions contain similar provisions, but add that the buyer then takes on the insurance risk for the property. They also restrict the buyer from carrying out any alterations while in occupation. The Licence can be terminated by either party on giving seven working days’ notice (five working days if the Standard Conditions are used). Consideration should be given as to whether it might be helpful to have similar provisions in any Scottish version of the contract.

Landlord’s Consent

If the contract is to apply to an assignation of a Scottish lease then National Condition 11 (5) may be relevant.

It obliges the seller to use its best endeavours to obtain the reversioner’s licence (landlord’s consent) at its own cost. The buyer must supply information and references, if reasonable. No timescale is set out for this, but if the seller cannot obtain the consent he may end the contract.

Standard Condition 8.3 is less strict, saying that the seller need use only “all reasonable endeavours” to obtain consent. There is a mutual option to terminate the contract if consent hasn’t been obtained by three working days before the date of entry, or if the landlord imposes an unreasonable condition.

The Standard Commercial Property Conditions go further still, suggesting a four-month postponement of the completion date to allow more time to obtain consent. Some parts of the clause (SCPC 8.3) are not relevant to Scottish leased property (for example the reference to provision of an authorised guarantee agreement) but they provide reasonable guidelines for the obtaining of landlord’s consent, which could be adapted for use in Scotland.

What the Standard Terms Don’t Cover

The Standard Conditions contain few, if any, warranties about matters affecting the property. English solicitors make pre-contract enquiries of the seller to obtain information about matters he knows of which might not be evident from looking at the title deeds or carrying out a survey of the property (eg past flooding or infestations, or notices received from tenants or neighbours). The seller’s answers constitute formal representations about the property, which the buyer relies upon when entering into the contract. The seller can be sued for damages if he gives a false or misleading reply. Additional warranties may be needed in any Scottish version of the contract to cover points which the English solicitors have dealt with by way of pre- contract enquiry. This should be checked in each case, and consideration should be given to obtaining a copy of the pre-contract enquiries and perhaps also to kilting them for use in Scotland.

Finally, the standard form contract terms do not make provision for Conditions Precedent (suspensive conditions), specialist VAT or TOGC provisions (transfer of a going concern), or TUPE provisions (for transfer of any employees). Nor are there any conditions relating to responsibility for environmental matters or clean-up costs. These will need to be added if required, along with any other commercial terms the parties may have negotiated.