REAL ESTATE

LARGE GROUP 1
Student Guide

Taking Instructions

Context

This Large Group takes you through the initial stages of a real estate transaction
involving the transfer of a freehold registered property from a seller to a buyer. In the
process of taking instructions from the client, you will identify some key issues about
the client and the property, some of which (such as those relating to professional
conduct) may need to be addressed at the outset and some of which will need to be
followed up in later stages of the transaction.

A property lawyer needs to ask the right questions in the early stages of the
transaction because if important issues are missed, the client may end up with a
property that has a defective title, or which cannot be used for the purposes the client
intended, or one that is not worth what the client paid for it.

Real estate is the term that lawyers use to describe property that consists of land and buildings, to
distinguish it from other types of property such as physical goods and intellectual concepts. Land and
buildings come in all shapes and sizes, from flats and houses to fields, factories, shops, and nuclear
power plants. No two pieces of real estate are the same. Real estate clients are also very varied:
clients house, or his business premises will have very different priorities from a client who wants to
invest in or develop a property to raise income and/or a capital profit. Some clients want outright
ownership and prepare to pay the purchase price upfront; some clients only want the building for a
limited period and prefer to pay as you go rental agreement. Nevertheless, whatever shape and size
the property and regardless of how and why the client wants it, there are recognised procedures for
buying and selling, and leasing land and buildings in England and Wales which lawyers are expected
to follow.

Outcomes

By the end of this Large Group, you should be able to:

1. Explain to a client the basic procedure for transferring a freehold registered

property from a seller to buyer.

2. Identify issues of professional conduct that may arise when you are instructed on
a new real estate transaction.

3. Identify and give advice to a client on the financial aspects of a real estate
transaction, including legal costs, funding and property taxation.

863143242.docx 111 © The University of Law Limited

1. Introduction to the module
Freehold (Units 1-5B), leasehold (Units 6-9), Consolidation (Unit 10)

Two-hour open book exam, 10 MCQs (20%) and one (sub-divided)

compulsory written answer question (80%)

Advance Facts for written answer question

One hour Mock and specimen assessment in the Course folder

2. Outline of a conveyancing transaction

The process of transferring title to property is called conveyancing. There are two milestones in
transaction:

2.1 Two milestones:

1. Exchange of contracts
Most buyers need some time between exchange of contracts and completing in order to make their
final preparations. The contract records the agreed terms and can be relied upon if anything goes
wrong in the period between exchange of contracts and completion.

2. Completion
Completion is the stage when the bulk of the purchase money is paid, and the documents are
completed to transfer the property to the buyer. It is not compulsory to have a gap in time. Exchange
of contracts and completion can take place simultaneously.

Caveat emptor (‘let the buyer beware!’)

The buyer shouldn’t enter the contract until after they have carried out numerous searches,
enquiries, and a survey of the property. This means that the seller isn’t obliged to disclose
information about the property other than limited matters of title and wouldn’t be liable for any
defect in the property which may come to light later. Therefore, the onerous is on the buyer to
discover as much as possible about the property before exchanging contracts and committing to the
purchase.

2.2 Three stages:

(i) Pre-exchange stage (i.e., pre-contract)

The steps in the pre-contract stage reflect the caveat emptor principle. The seller’s solicitor submits a
pre-contract package to the buyer’s solicitor which includes a draft contract and evidence of the
seller’s title. The buyer’s solicitor must check the documents of title very carefully to ensure that:
- Firstly, the seller is indeed entitled to sell the property; and,
- Secondly, that there were no incumbrances, such as restrictive covenants, which would
prevent the buyer from using the property as they intended.

It is important that the buyer’s solicitor is happy with the title before exchange of contracts as the
contract will usually include a provision prohibiting the buyer from raising further queries on the title,
known as requisitions, after exchange.

863143242.docx 112 © The University of Law Limited

However, the buyer’s solicitors concerned will not be limited purely to matters of title. They will also
want to carry out additional searches and enquires about such things as boundaries, access, dispute,
outgoings, and previous works carried out at the property.
The seller is not obligated to answer such enquires but is probably best advised to do so to facilitate
the sale. Any incorrect replies on the part of the seller could lead to the buyer being actioned against
for misrepresentation.

This results of the investigation of title and the pre-contract searches may necessitate changes to the
draft contact. On exchange of contracts the buyer will usually pay a deposit, typically 10% of the
purchase price, although it can be any figure the parties agree. The deposit is usually held by the
seller’s solicitor until completion.

(ii) Pre-completion stage

In the pre-completion stage, it is only when contracts are exchanged that the parties are bound to
complete. The time in between exchange and completion (the pre-completion stage) is spent making
sure all the correct documentation and the completion money is available on the completion date.

The transfer deed will need to be prepared and executed in readiness for completion. This document
will serve to transfer legal title. The buyer’s solicitor will carry out come pre-completion searches to
check that the information obtained pre-contract remains valid and to ensure that they’ll be no
problems registering the buyer’s title at the Land Registry. On completion, the buyer will pay the
balance of the purchase money and the seller will hand over the keys to the property.

(iii) Post-completion stage

In the post-completion stage, both sides must tie up any loose ends. The seller’s solicitor must ensure
that any mortgage on the property on the property is paid off and removed from the title. They will
usually have given an undertaking to do this.

The buyer’s solicitor must:

- Ensure that Stamp Duty Land Tax is paid on the transfer. They’ll have ensured that the buyer
made funds available to this prior to completion; and finally.
- Register their clients as the new owner of the property and register any new mortgage over
the land.

Activity 1 – Problems with Conveyancing

You act for Tom who has been ready to exchange contracts on the purchase of his
new house for several weeks. Tom is paying for the new house by using the money
from the sale of his current flat. The plan is to exchange on the sale of the flat and
the purchase of the house simultaneously.

Tom has phoned you, in a very distressed state, to tell you that the prospective
purchaser of his flat has just said that they can only proceed if Tom reduces the price
by £7,500 as their surveyor says that the flat needs to be rewired.

Which ONE of the following statements is CORRECT?

863143242.docx 113 © The University of Law Limited

A Tom will have to agree to the price reduction on the flat and proceed with the
purchase of the house even though he may not have enough money to
complete the purchase.

B Tom is not obliged to agree to the price reduction on the flat and can recover
his wasted conveyancing costs from the purchaser.

C Tom will have to agree to the price reduction on the flat because he should
have told the prospective purchaser that the flat needed rewiring.

D Tom cannot recover any of his wasted conveyancing costs if the sale of the
flat and the purchase of the house does not proceed.

Tom cannot recover wasted costs if the sale and purchase does not proceed before exchange.
Neither party has any legal rights against the other unless and until contracts are exchanged.

3. Professional Conduct
In any real estate transaction, there will always be a number of preliminary matters to be considered
once the solicitor receives instructions to act. If the solicitor doesn’t obtain clear instructions and
clarify these preliminary matters at the outset, the solicitor (and, more importantly, their client) may
run into severe difficulties later in the transaction.

These difficulties could lead to delay and expense for the client as well as stress and a general feeling
that the solicitor should have anticipated these matters much better.

The first questions should always be:

- Can we act on behalf of this client?
- Can we carry out the client’s instructions?

3.1 The SRA Code of Conduct

SRA | Code of Conduct for Solicitors, RELs and RFLs | Solicitors Regulation
Authority

Two Codes
For solicitors, the starting point (and constant point of reference) must be the rules of professional
conduct laid down by the Solicitors’ Regulation Authority in the:
1. Code of Conduct for Solicitors 2019.
2. Code of Conduct for Firms 2019.

Principles
The SRA codes contain principles, such as:
- Principle 5: Acting with integrity; and,
- Principle 7: Acting in best interests of each client.

They also set out rules describing what firms and solicitors are expected to achieve in order to
comply with the principles. A failure to comply could potentially lead to a negligence claim being
raised by the client.

863143242.docx 114 © The University of Law Limited

Rules
The rules that are most relevant to real estate practice are contained in paragraph 6 in both of the
SRA codes. Paragraph 6 deals with conflicts of interest and confidentiality.

So how does professional issues arise during a real estate transaction?

Activity 2 – Issues of Professional Conduct

Consider what issues might arise and what you should do in the following
circumstances:

1. You are asked to act for the buyer and seller of a flat. The buyer and seller are
friends and have asked you to act for both to save duplication of work. They
hope that this will save them both money and time.
It’s risky due to potential conflicts of interest. You must disclose the situation to both parties, obtain
their informed consent, and consider recommending separate representation to avoid ethical
issues. Therefore, you cannot act for both according to paragraph 6.2 in the SRA.

2. You act for the buyer of a high street shop who is funding the purchase with the
aid of a mortgage. You have been asked to act for the lender as well as the
buyer.
It is challenging to act for both parties due to conflicting interests, but you can act for buyer and
lender. You have to make sure there is a substantially common interest. It is more common
for a conflict of interest as the terms will be negotiated concerning the lending. The solicitor
will have to adhere to 6.2 (a) of the SRA.

3. You act for the seller of a house. You have been asked to send the title
information and a draft contract to several different prospective buyers. The
client intends to exchange contracts with the first buyer who is willing to
exchange but does not want the prospective buyers to know that they are in
competition with each other.
This is known as a contract race. A contract race refers to the situation where multiple prospective
buyers are competing to be the first to exchange contracts with the seller, often without
being aware that there are other buyers in competition. As a solicitor you cannot
mislead or attempt to mislead your client or others according to 1.1 SRA Code of
Conduct. If your client asks to not to disclose information you must cease to act for that
client.

3.2 Conflicts of interest – paragraph 6.2

(i) Acting for buyer and seller

You might be asked to act for both the seller and the buyer in a real estate transaction. The parties
may not see a problem with this because, as far as they are concerned, they have already agreed the
price and they both want the sale and purchase to go through quickly and cost efficiently as possible.

Acting for buyer and seller is governed by paragraph 6 in both codes of conduct which states that,
subject to certain exceptions, a solicitor can’t act if there’s a conflict of interest or a significant risk of
such a conflict.

An exception set out in paragraph 6.2 (a) allows a solicitor to act for more than one party even if
there’s a conflict of interest where the client have a substantially common interest where the client

863143242.docx 115 © The University of Law Limited

have a substantially common interest in relation to the matter and provided that certain safeguards
can be put into place.

However, the Law Society issued guidance in June 2020 saying that this exception cannot be used for
acting for buyer and seller.

Another exception set in paragraph 6.2 (b) allows a solicitor to act even if there’s a conflict of interest
where the clients are competing for the same objective. So, it might be possible, in theory, to act for
two buyers who are competing against each other to buy a property (at the lowest possible price),
but this exception will not apply in a buyer and seller situation.

(ii) Acting for borrower and lender

Acting for more than one party in the same transaction is more common when the parties are the
borrower and the lender. Acting for a lender and borrower is possible, under paragraph 6.2 of the
Codes of Conduct, there is a conflict of interest or a significant risk of such a conflict.

As an exception to the general rule, it might be possible to act under paragraph 6.2 (a) if both the
lender and the borrower clients have substantially common interest in the matter and certain
safeguards are put in place. These safeguards include making sure that all clients have given their
consent in writing to you acting for them and that you are satisfied that it is reasonable for you to do
so.

The solicitor may feel that it is appropriate to act because the parties have a substantially common
interest in wanting the borrower to obtain good title to the property and in ensuring that there are
no problems adversely affecting the property’s value.

In residential transactions the lender will frequently instruction the borrower’s solicitor to act for
them as well as in connection with the grant of the mortgage, particularly where the mortgage is on
standard terms. However, in large commercial property transactions the lender usually has its own
solicitors separate from those of the borrower. This is because the mortgage documents are likely to
be subject to negotiation between the solicitors for the two parties and so will not be on the
standard terms.

3.3 Maintaining trust and acting fairly – paragraph 1

(i) Contract races – paragraph 1.4

Another situation that can cause difficulties for solicitors is where a seller client is selling a property
using a marketing strategy known as contract race. In a contract race a pre-contract package is sent
to multiple buyers who then compete to be ready to exchange contracts first.

This is regarded as a legitimate selling technique so as long as all the prospective buyers know that
they are engaged in a race. But what if the seller instructs his solicitor that he doesn’t want the
prospective buyers to know?
1. Paragraph 1.4 states that, where you act for a seller of land you must not mislead or attempt
to mislead the buyers, either by your own acts or omissions or by being complicit in the acts
of omissions of others.
2. This means that you should inform all buyers immediately of the seller’s intention to deal
with more than one buyer.

863143242.docx 116 © The University of Law Limited

 3. If your client refuses to agree to such disclosure, then you cannot disclose the contract race
to the prospective buyers as you have a duty of confidentiality to your seller client under
paragraph 6.3. Instead, you should immediately stop acting in the matter.

(ii) Undertakings- paragraph 1.3

An undertaking is a statement made by or on behalf of the solicitor or the firm to someone who
reasonably place reliance on it. That the solicitor or firm will do something, cause something to be
done or will not do something.

Paragraph 1.3 of both the SRA Codes of Conduct deals with undertakings and says that solicitors
should perform all undertakings and do so within an agreed timescale. Failure to honour an
undertaking is professional misconduct, so you should always ensure that anything you undertake to
do is within your control.

Activity 3 - Undertakings

You act for Jim, the buyer of a house known as Admiral Park. The contract for the
sale and purchase of Admiral Park was finally agreed last week and the seller’s
solicitor is ready to exchange contracts. You have Jim’s signed contract, but he
has just telephoned to say that there has been a computer glitch at his bank and the
deposit monies required for exchange will not now be transferred into your firm’s
bank account until tomorrow.

The seller is insisting that exchange of contracts takes place today and is threatening
to pull out if it does not. Jim is anxious not to lose the property and has been told by
the seller that their solicitor will exchange today if you give the seller’s solicitor an
undertaking that the deposit monies will be transferred to his firm by close of
business tomorrow. Jim has instructed you to go ahead and exchange contracts on
this basis.

Should you give such an undertaking?

No because the solicitor and firm can be personally liable for such an undertaking as it is legally
binding. Giving such an undertaking would expose your firm to legal risk if the deposit is not
transferred as promised. It counts as professional misconduct. Instead, you should seek a short delay
in the exchange until the deposit is confirmed or negotiate with the seller’s solicitor to find a
solution.

4. Money matters
4.1 Legal costs of purchase
Such costs will include solicitor’s fees, search fees, Stamp Duty Land Tax and Land Registry fees. One
thing a solicitor is obliged to do is to provide the client with the best possible information about the
likely overall cost of their matter at the beginning and at appropriate points throughout the
transaction. This involves clearly explaining your fees when they are likely to change and warning
your client about any other payment for which the client may be responsible. In conveyancing
transaction, this could include payments such as Stamp Duty Land Tax, Land Registry fees and search.

863143242.docx 117 © The University of Law Limited

4.2 Property taxation
The taxes that will be charged on real estate transaction will depend on whether the person you are
advising is the buyer or the seller and whether the property is residential or commercial. Taking a
residential property first, the buyer may have to pay SDLT when he purchases the property. The
seller, who is probably made a capital gain by selling the property for more than he brought it for,
will probably not have to pay Capital Gains Tax on that gain if he has used the house or flat as his
only or main residence.

(i) SDLT/LTT
SDLT is a tax not on document, but on property transactions. It is paid to HMRC usually outline by
bank transfer accompanied by a form called an SDLT1, which provides the necessary details of the
transaction. It must be paid within 14 days of completion and if it is not paid the transfer of the
property to the buyer will not be registered by HM Land Registry.

SDLT is charged using a separate rate of tax per portion of the purchase price. Exactly what is payable
depends on the type of property and the value of the transaction.

Stamp Duty Land Tax in England – SDLT1 to HMRC, payment within 14 days of
completion

Land Transaction Tax in Wales – land transaction return to Welsh Revenue

Authority, payment within 30 days of completion

Activity 4 - SDLT

Calculate the SDLT payable on the purchase of a freehold residential property in

England for a purchase price of £975,000. The buyer, a UK based individual, has
previously owned a property in England but has recently sold it.

The total SDLT due is £38,750.

(ii) Capital Gains Tax – principal private residence relief.

Capital Gains Tax is paid by the seller on any gain realised on the disposal of a capital asset, and this
will include a property. However, a seller of a residential property is likely to be able to claim the
benefit of principle private residence relief if it is the sale of an individual’s dwelling house used as his
only or main residence.

 Only or main residence

To qualify, the seller must have occupied the dwelling house as his only or main residence
throughout his period of ownership.

 Periods of absence
Certain periods of absence are allowed but there are very specific conditions attaching to each of
these periods if time if they are not to be disregarded.

 Gardens of more than 0.5 hectares

If you have a garden of more than 0.5 hectares the gain on the excess is chargeable to Capital Gains
Tax unless the seller can demonstrate to HMRC that the extra garden was necessary for the
reasonable enjoyment of the house.

 Business use

863143242.docx 118 © The University of Law Limited

The relief may be lost on any part of the house used exclusively for business use.

Activity 5

1. You act for Annabel who is selling the house she bought 13 years ago for
£138,000. The agreed sale price is £410,000.

What information will you need to obtain from Annabel before you can
advise her on the tax she will have to pay on her sale?
If Annabel’s sale completes, she will have made a capital gain of £272,000. However, she will not
have to Capital Gains Tax on the gain if she can claim Principle Private Residence relief. We will,
therefore, need to know:
- Whether Annabel lived in her house continuously from 2008.
- Whether she owned and/or lived in more than one house during this time.
- Whether the garden is more than 0.5 hectares; and,
- Whether she used any part of the house for business use.

2. Annabel is intending to buy a new house at the same time as she sells her
current one. The purchase price is £260,000, but Annabel has asked you to
apportion £10,000 to the carpets and curtains.

What information will you need to obtain from Annabel before you can
advise her on the tax she will have to pay on her purchase?
1. Confirmation of the Total Purchase Price: Ensure the total price of £260,000 is accurate and
includes all elements (property, any fixtures, and fittings).
2. Details of the £10,000 Apportionment: Clarify whether the £10,000 for carpets and curtains
is a reasonable estimate for movable items that are not part of the land or property. SDLT is
typically charged on the purchase price of the property, but movable items like carpets and
curtains might be excluded from the tax.
3. Breakdown of Fixtures and Fittings: Understand if any other items (e.g., furniture or non-
permanent fixtures) are being included or excluded in the price for SDLT purposes.

(iii) Taxation of commercial properties

SDLT - different rates and no relief for first time buyers

VAT – see LG5 and Engage 5B

Corporation Tax on income and capital gains made by companies

A buyer of a commercial property, such as an office block, will pay SDLT on the purchase just like a
residential buyer, although there is no special deal for first time buyers and the rates at which the tax
is calculated are different.

863143242.docx 119 © The University of Law Limited

The main difference is that the buyer of a commercial property may have to pay VAT on the
purchase.

A commercial property is likely to be owned by a company, and companies pay Corporation Tax on
their income and capital profits rather than Income Tax and Capital Gains Tax. So, if the property is
rented out, the Landlord will pay Corporation Tax on the rent. Corporation Tax will also be payable
on any gain if the property is sold for more than its purchase price.

4.3 Financing the purchase

 Source of the loan?

For residential purchases, the normal source of finance is a bank or building society. Methods of
finance for commercial properties are more complex.
 Security for the loan?
One thing common to all lending property, no matter where the finance comes from, will be the
lender’s concern to secure the loan against some asset, principally the property itself. The
most usual way of doing this by a mortgage.
 Giving advice – Financial Services and Markets Act 2000
Sometimes a solicitor is asked to advise on the most appropriate form of finance, both for that
particular client and that particular transaction. The question then is whether the solicitor is in the
best position to advise on such matters, and whether there are any restrictions placed on the
solicitor when they provide the financial advice.

The answer depends firstly on whether the solicitor has the relevant expertise to provide the
financial advice and, secondly, whether they’re required, by the Financial Services and Markets Act
2000, to be authorised to provide that advice.

It is vital to know what the Act permits and what it is you are being asked by the client to advise on. If
you are being asked to provide advice on a specific mortgage product then you may need to
authorised to do so by the Financial Conduct Authority or the Prudential Regulation Authority.
However, giving general regarding what type of finance is most suitable is often allowed.

4.4 Money laundering and real estate fraud

Solicitors must watch out for money laundering, mortgage fund and title fraud. Money matters are of
great concern to real estate lawyers because of the possibility of being inadvertently drawn into
committing criminal offences. Guidance for the legal sector published in March 2018 states that:

“According to law enforcement authorities and the national risk assessment, the sale
and purchase of real estate is a common method for disposing of or converting
criminal proceeds.”

(Anti-Money Laundering Guidance for the Legal Sector published by the Legal Sector
Affinity Group 5.6.3.1)

The practice of conveyancing poses particular in three different areas:

 Money laundering
Money laundering is when the proceeds of crime are converted, concealed, or disguised so as to
make it seem as if the proceeds come from a legitimate source.

https://www.youtube.com/watch?v=mqgS2RBVGaM

 Mortgage fraud

863143242.docx 1110 © The University of Law Limited

Mortgage fraud is where a borrower defrauds a lender through the mortgage process.

 Title fraud
Title fraud is where someone gains an interest in real estate by fraud, perhaps by impersonating
someone in the conveyancing transaction, such as the registered proprietor, unregistered proprietor,
unregistered owner, buyer, seller, borrower, lender or even the conveyancer.

Duties on independent legal professionals:

The obligations on all independent legal professionals with regard to money laundering are set out in
the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017. Broadly speaking,
solicitors acting in real estate sale and purchase transactions must.
- Obtain satisfactory evidence of the identity of each client.
- Carry out a risk assessment and thereafter maintain policies and procedures to manage any
identified risk of money laundering and terrorist financing; and,
- Appoint someone within the firm to be the nominated officer to who members of staff can
report any suspicious transactions.

863143242.docx 1111 © The University of Law Limited