Is Exchange of Contracts Legally Binding?
Once you've exchanged signed contracts, both parties have committed to the deal and there is no going back.3 min read
Is exchange of contracts legally binding? The short answer is yes. Once you've exchanged signed contracts, both parties have committed to the deal and there is no going back.
What is Exchange of Contracts?
Contracts exist for a variety of reasons, but the most important time you might encounter an exchange of contracts is when buying or selling property.
Once the seller has accepted an offer on their property, there are a few issues worth addressing:
- Arranging the mortgage
- Conducting a property survey
- Completing property searches
From a seller's perspective, the quicker you exchange contracts, the sooner you know for sure that the buyer can't pull out of the deal without suffering serious financial penalties. That certainty alone places you in a better position because you can move forward with purchasing your own property knowing that your existing one is in the process of being sold.
Unlike other types of contracts, there's no risk involved for the seller if they choose not to move forward with the sale after the exchange of contracts. There's also no fixed timeframe between the contract exchange and the transaction's competition. Instead, the agreed upon date is one that is convenient for both parties involved.
According to Section 2 of the Law of Property Act of 1989, an agreement to purchase property must be in writing and include all of the agreement's terms. The contract must be signed by each party. In most cases, contracts for property leases or purchases are prepared in two identical copies: one to be signed by the buyer and another for the seller. Creating two copies signed respectively is not required, however, as some agreements consist of a single contract with all binding signatures added.
After the contracts are signed by each party, it's time to exchange them. In some cases, each party's lawyer will discuss and complete the exchange. Once the completion date is entered on the contract, the agreement is considered exchanged and legally binding.
The exchange represents a contract's completion. As such, the contract is considered legally binding from that point on and it is difficult for the buyer or seller to back out of the transaction. Either party can face financial penalties if they fail to complete their responsibilities by the agreed upon competition date. For example, the buyer might lose their deposit or have to pay additional compensation suffered by the other party.
Most contracts state that time isn't of the essence for giving the defaulting party time to rescue the transaction. Instead, the contract is usually terminated automatically. The innocent party must serve a notice to the defaulting party to speed up the process of rescuing the agreement.
Steps to Take Before the Exchange of Contracts
The contract between a property's buyer and the seller is signed only when:
- The mortgage offer has been received and verified.
- The property survey is completed, and any necessary actions are taken.
- Both parties and their lawyers have arranged for the deposit payment.
- The lawyer has completed all searched and is satisfied with the outcome.
- The deposit is ready to be paid.
- All legal work has been completed.
- All parties are ready to proceed with the transaction.
At this stage, the lawyer might prepare a final contract which both the buyer and seller sign. The contracts are exchanged and both parties are legally bound by the agreement for the sale of the property to move forward.
When Should You Exchange Contracts?
Unfortunately, a purchase can fall through at any time when you're in the process of buying property. In most cases, the purchase falls through because the seller changes their mind. You may also place the seller in a difficult position if you pull out of the sale.
For these reasons, it's in everyone's best interests if the exchange of contracts happens as soon as possible. Keep in mind, however, that the exchange should only take place if all major issues have been addressed.
Until the exchange occurs, neither party is legally obligated to buy or sell the property. Either one can pull out of the transaction without penalty. Only when the contracts are exchanged is the deal considered legally binding.
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