On the face of it, the process sounds remarkably simple – you have found a home you want to buy, so make an offer and are pleased to receive the vendor’s indication of acceptance of that offer. The purchase goes ahead, right?
If only the world were quite such a simple and straight forward place! The sad fact is that one out of every five accepted offers fail to proceed to a formal exchange of contracts and the final purchase of the property (according to research done a few years ago by the Office of Fair Trading). Why is that?
Despite the common-sense understanding of “an offer” and its “acceptance”, English law recognises no legally binding agreement of sale or purchase until the formal exchange of contracts. The period between your accepted offer and the exchange of the formal contracts, therefore, is something of a no-man’s land, during which either you, as the purchaser, or the vendor, may pull out of the agreement.
A number of problems may arise from this uncertain state of affairs:
• Time and delays – just as offer and acceptance constitute no legally binding agreement, neither is there any time limit on the interval until the exchange of contracts (which is the legally binding agreement). If all goes well, it may take as little as 8 weeks – otherwise it might take considerably longer;
The same research by the Office of Fair Trading, for example, found that about a third of all residential property transactions took 10 weeks or longer from an accepted offer to the exchange of contracts; some 50% of purchases, however, proceeded to an exchange of contracts after less than 8 weeks of an offer being accepted;
• Expense – for the buyer, this can be a worrying period, without the assurance of a formal agreement to the sale, not least because he or she will invariably be spending money in advance of the expected purchase. Solicitors fees, searches and surveyors fees, for example, are likely to be incurred during this uncertain period between an accepted offer and exchange of contracts;
• Gazumping – the uncertainty of this no-man’s land also exposes the prospective buyer to the threat of “gazumping” by the vendor. This occurs when the vendor has already accepted your offer but disregards that acceptance in order to accept a better offer received from a different buyer;
• Stakeholding – there is very little the buyer can do to protect himself against such dangers, although some estate agents have explicit policies on gazumping and require sellers to agree to turn down any subsequent offer after accepting a buyer’s offer;
A further measure of security proposed by other estate agents is designed to bring an element of formality to the otherwise informal agreement of offer and acceptance. In such cases, the agent acts as a “stakeholder”, receiving a deposit (typically, 1.5% of the purchase price) from both the vendor and the purchaser. If either party subsequently withdraws from the sale or purchase, the other party is entitled to both deposits. A financial inducement is thus introduced to encourage both parties to adhere to the original terms of the offer and its acceptance.