“Exchange” is a crucial step in the conveyancing process you need to know about. What happens at “Exchange of Contracts”? When are you actually bound to purchase a property? What do you need to do? Is it different for auctions vs private treaty sales? I answer all these questions and more in this video.
Watch now: https://youtu.be/awiGKfwIwhA
TRANSCRIPT:
This is one of a series of videos I will be presenting on buying a property from the perspective of the purchaser setting out small-ish chunks of the legal process involved, which is also known as “conveyancing”. Today I’m going to explain the critical step in securing the property you wish to purchase, which is known as “exchange of contracts” or simply, “exchange”. This is the act through which you actually enter into a legally binding contract to purchase a property. And it doesn’t just involve signing some paperwork… Now, in Australia, the laws around property purchases are state-specific so if you are interested in buying a property located in NSW, this video is for you!
The first point to note is that this video series deals with residential property only, such as a house, unit or block of land and not with any type of commercial property.
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A quick disclaimer that my videos are general and informational in nature only. They are not intended as legal advice, nor should you rely on them as such. Please see the full disclaimer in the description box below.
Okay, so you have found the one. The question is, at what point do you enter into a contract to purchase a property that binds you and the seller, known as the vendor? When you agree on a price? When you sign the contract? Well, the answer actually depends on whether you are purchasing the property by auction or by private treaty.
If you are purchasing a property at an auction and you are the successful bidder, you are bound to enter the contract when the auctioneer’s hammer falls and they confirm the property has been sold to you. Immediately afterward, you and the vendor sign separate but identical contracts which you are both bound to – i.e. you have both entered the contract.
On the other hand, if you are purchasing a property by private treaty, you enter the contract when you ‘exchange contracts’ which is a little different to how you exchange contracts at an auction.
So what is exchange? For a private treaty sale, the contract is made in duplicate and both contracts must be identical. You sign one of the duplicate contracts as purchaser and the vendor must sign the other one. You and the vendor don’t need to sign the contract in front of each other. Generally, each of you will sign your contract in front of your respective lawyers or the real estate agent, who may witness your signature (though witnessing is not mandatory).
However, with a private treaty sale, you have not necessarily exchanged contracts simply because you and the vendor have each signed a contract. One more step needs to take place first, i.e. the actual ‘exchange’ of the two contracts. The vendor ends up with your signed contract and you end up holding the vendor’s. So how is this done?
It depends on whether you are exchanging contracts the traditional way – physically in paper, or the digital way with an e-Contract on an electronic platform. I’ll explain a physical contract exchange first and then the increasingly common digital method.
If the contracts are in a physical form, before the contracts can be exchanged, both signed contracts need to be checked, page by page to ensure that they are actually identical. I can’t stress enough how crucial it is that both contracts are identical. They must have exactly the same terms, conditions, attachments, details, amendments, etc. This can stretch to hundreds of pages!
But it’s important because, generally, if one of the contracts has been changed in any way, it may be argued that ‘exchange of contracts’ has not occurred, and the whole sale may fall through. It’s particularly important in a situation where one party has perhaps changed their mind and no longer wants to go ahead with the sale or purchase and is looking for a potential way out of the contract…!
So you might ask, how can it be possible for two contracts that start out identical to end up different. And there are many possibilities – it may occur, for example, if there has been a misunderstanding and one of the lawyers or real estate agents makes a hand written amendment to one contract thinking that the other duplicate contract will also be changed in the same way – a scenario might be that the real estate agent asks you to sign your contract and you explain to them that it was agreed between the lawyers that one of the terms in the contract should be struck out or that there was agreement that you could pay a smaller deposit, etc. and the real estate agent goes ahead and makes a hand written amendment to the contract to reflect this but the same hand written amendment is not made to the vendor’s signed contract. This could end up being a big problem. It means that the contracts will not be identical which may mean that the contracts were not exchanged at all.
The problems that can arise around the contracts being identical at exchange are largely solved with the introduction of exchanging electronically on a platform designed for this purpose. Generally, this will involve the vendor’s solicitor uploading one electronic contract (make sure it’s the version that has all the correct negotiated amendments made to it!). That contract is then sent to the purchaser’s solicitor via the platform. The purchaser’s solicitor will then arrange for their client – you – to securely sign that contract electronically via an email link using your smartphone or tablet or similar device. The vendor does the same, and when both the vendor and purchaser have each signed the electronic contract in this way, the vendor’s solicitor can click an “exchange” button on the platform and voila! – you have exchanged contracts and the contract is now legally binding on both parties.
However, a crucial step and condition of exchange going ahead is the payment of a deposit. Whether you are purchasing a property at auction or by private treaty, you must also pay a deposit at the time of exchange of contracts. I have a video dedicated to deposits so please check that out! It’s linked below.
To summarise, at exchange of contracts you and the vendor sign identical contracts which are exchanged, you pay a 10% deposit and usually hand over a s66W certificate waiving your cooling off rights, which, to keep this brief, I discuss in another video.
Now what happens after exchange of contracts? Do you receive the keys to your new property? Can you now take possession of the property because you have bought it? The short answer is no. Buying a property is a process. So stay tuned for the next video in this series…
As always – please remember “SUBSCRIBE” and hit the “Like” button if you liked this video, please share it and if you’d like to make an appointment to engage our services, please follow the link in the description box to contact me and if you have any topics you’d like me to address in future videos, please leave a comment in the comment section as I’d love to hear from you. I hope you found this video helpful and thank you for watching.