Between Exchange and Completion – What Can Possibly Go Wrong?

Most property transactions proceed first to exchanging contracts.  This is the point at which both the buyer and the seller are committed to the sale and purchase.  Neither party can withdraw without having to pay damages to the other.  However, that is not the point at which ownership of the house or office or whatever it may be actually transfers to the new owner.  That only happens on completion which historically can be as much as 28 days later but in modern transactions is usually about 7 or 14 days later.

Why is there a gap at all?  Well the reasons are:

  1. Historically much of the legal work used to be undertaken at this point confirming the seller’s title, for example, but generally this is now carried out before exchange. If English conveyancing were to move to a Scottish model, conveyancing would essentially move back to this approach.  The buyer would have a right to withdraw without paying damages if the title proved to be defective.
  2. If exchange and complete take place on the same day, there is no commitment on either party until the last moment. If either party pulls out at that point, all the other arrangements will fall apart at potentially a high cost to all the parties with no redress against the defaulting party.  The gap enables final arrangements to be made in the knowledge that the completion date is fixed and cannot be moved except by agreement.
  3. If you are borrowing money to finance a purchase, exchanging and completing on the same day means that you will need to give notice to draw down the funds as much as 7 days before exchange without any certainty that the transaction will happen on the intended date. If you are ready to draw down the funds, it would make sense to exchange contracts anyway.
  4. In a chain transaction, the only way to get everyone ready to move on the same day may be to exchange first and complete later.

There are risks however with this approach.  As the proverb goes, there is “many a slip ‘twixt the lip and the cup”.  In the case of property transactions these are broadly:

  1. Something untoward happens to one of the parties, ranging somewhere from bankruptcy (no legal capacity to sign the documents) to death (cannot do anything until the estate is legally vested in the deceased’s executors).
  2. Finance problems. Bank withdraws funding or fails to get the money over to the solicitor, buyer’s solicitor does not receive completion money in a chain in time to send it on before the latest time for completion (typically 2.00 p.m.)
  3. A dispute arises regarding the property and especially whether the seller has given proper answers to enquiries raised by the buyer.
  4. One party simply unilaterally decides not to complete. Parties (especially those based abroad) who own buy to let properties can be prone to this.

The fact that a contract is in place at least means that there are methods of redress for the innocent party but damages is not a substitute for the transaction actually happening.  The ability to claim damages or charge interest (in the case of sellers) depends upon the person paying actually having the assets available to pay.  A first time buyer who was borrowing on a large mortgage may not have any money other than the deposit (which the seller can forfeit) while a defaulting seller may have nothing except the property itself.  Either way claiming damages is likely to be a lengthy process.

Of course, most property transaction go through without any problems.  But it pays to be aware of the issues before deciding whether to go for a split or simultaneous exchange and completion.