THE CONTRACT
Interest clause (SHOWN AS CONTRACT RATE)
This clause is the one most clients query – do not worry, this is a penalty clause for a failure to complete
Once exchange of contracts has taken place, should either party fail to complete on the completion date, then the non-defaulting party is entitled to claim interest from the defaulting party for every day (including non-working days) that completion delayed, at the contract rate. This rate is generally between 4% and 5% above the base lending rate of the seller's solicitors bankers. A rate any higher than this should not be accepted. In our example contract we use the Law Society Rate, which is 4% above the Bank of England base rate. The formula for calculating the daily rate of interest under a conveyancing contract is :- (sale price – deposit actually paid over to seller or seller's solicitor) /100) * contract rate) / 365.
What happens to your deposit on exchange
On exchange of contracts an amount of money is paid over by the buyer's solicitor to the seller's solicitor to secure the contract - this is the deposit. This money must be collected by the buyer's solicitor from his client prior to exchange. If the buyer then fails to complete the contract on the completion date, the seller's solicitor will serve a Notice to Complete, requiring the buyer to complete within 10 working days (this is the notice period according to the standard conditions of sale - it may be varied in individual contracts). If the buyer fails to complete prior to expiry of the notice period then the seller may rescind the contract and retain the buyer's deposit.
According to the standard conditions of sale (and in this respect they are rarely, if ever, varied), the deposit should be equal to 10% of the purchase price (and if using the 4th edition standard conditions, 10% of any amount paid for chattels also).
The seller should insist that a full 10% is actually paid over on exchange where possible, however in practice the full amount will not always be available, for example where the buyer is borrowing more than 90% of the purchase price by way of a mortgage, or he is using the deposit from a linked sale property as the deposit on his purchase and is buying for a higher price than he is selling for (therefore 10% of the sale price will not equal 10% of the onward purchase price). Where a full 10% is not available on exchange, the buyer is still liable to the seller for a full 10% in the event that the buyer fails to complete, however the seller will usually have to sue the buyer for the difference between 10% and the amount actually paid over on exchange, since this difference will not be held by either party's solicitor.
There are two ways in which the seller's solicitor can hold a deposit - as stakeholder or as agent.
The former is by far the most common, and means that the deposit must be held by the seller's solicitor until the completion date. Note that where completion does not happen on the completion date as a result of the buyer's default, the seller is entitled to have the deposit released to him. If the deposit is paid to the seller's solicitor as agents then they are entitled to release it to the seller prior to completion. This is generally unacceptable since if the seller were to take the deposit then fail to complete, the buyer may find it difficult to recover it.
The deposit will normally only be paid over as agents if the seller is developer who is a member of the NHBC and the funds are required to paid for the work required to complete the development. If the developer is registered with NHBC then the deposit is insured in the event that the developer becomes insolvent prior to completion (this insurance is subject to NHBC's terms and they should be consulted).
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