Subject to Contract - what is it and why is it important?

Almost all of us, at some point in our lives, will be involved in a conveyancing transaction. After an initial offer for a property is accepted, the property will be listed as “Sold-Subject to Contract”.


Subject to Contract - what is it and why is it important?This means that although there is a deal in place to sell the property, the sale is conditional on the legal process being finalised, and it is possible that the property could come back on the open market if the transaction breaks down. The term is also used in other areas of law to signify a deal has been agreed in principle, but the legal paperwork is being finalised before it becomes final and binding.

In conveyancing, subject to contract allows the respective parties to instruct solicitors and commence the conveyancing process. For the Buyer, this means undertaking searches and finalising a mortgage, whilst the seller can begin to prepare to leave the property and start searching for a new property to live in after completion. Because the offer is subject to contract, the parties can, if necessary, continue to negotiate. Sometimes the price offer initially agreed will be slightly different to the price paid, to take into account survey results or other concerns raised during the process. Once contracts are exchanged, which is literally what happens, the parties are locked into the transaction, and negotiations can only continue about matters which do not affect the substance of the transaction. In addition, at exchange, the parties are bound to complete the contract on a specified date, with financial penalties if they don’t comply.

On the other hand, a disadvantage of the subject to contract stage is that either party can, in theory change their offer at any time, thus putting the transaction at risk unless the other side agrees. These circumstances are known as “gazumping”, which is where the seller accepts a higher offer pushing the original buyer out of the chain. The opposite is known as “gazundering”, which is where the buyer lowers their offer at the last minute in the hoping of saving money. Whether this is likely to occur is very much down to the attitude of the parties and whether either party wants to risk the transaction in order try and influence the price. In a steady property market, where the parties both feel that the offer is reasonable, they may prefer to carry on and complete the transaction rather than drawing out matters further, especially where the conclusion of one matter is dependent on a related sale or purchase.

In summary, subject to contract enables the parties to conclude an agreed transaction, while allowing any party to withdraw, without penalty if the circumstances change. It is therefore a way of encouraging the parties to conclude the transaction in a timely manner, whilst recognising there is important work to be done to protect the legal positions of both parties ahead of the transaction being concluded.

Further Reading

 

 
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