When parties exchange contracts, this is when the terms of the contract becoming legally binding even if the transaction is not taking place at the same time as the exchange.
Contracts are often exchanged in counterpart. What this means is that each party signs their own contract and returns that to their solicitor. The solicitors then all date their respectively signed documents at the same time meaning that the exchange has been formalised and the terms of the contract binding on the parties. Copies of each counterpart document are then posted to the other solicitors, meaning that there is never one copy of the contract which has been signed by all of the parties but a number of copies of the same document each signed by one party and which all together constitute the full document.
Exchange is carried out in one of 3 ways:
- Formula A
- Formula B
- Formula C
The method of the exchange depends on how the counterpart documents are held and who by. The most common method to exchange contracts is by Formula B.
Formula B is where each solicitor is holding a signed copy of their client’s contract and during a telephone call with each other they date the contract, confirm the completion date and state that the contract has been exchanged by Formula B at the time of the call. They must then post their respective contract to each other in the post that day.
If one solicitor is holding all of the signed counterparts at the time of exchange, this is known as a Formula A. The solicitor holding the documents dates them and sends the part signed by their client to the other parties in the post.
Formula C is similar to Formula B in that each solicitor is holding their own signed counterpart contract but allows the solicitors to release their contracts to each other for a specific amount of time. This is useful in chain transactions and so is commonly used in residential property transactions where solicitors can obtain a release on one of their contracts, meaning that provided they call back within the agreed time to formalise matters the other parties will be obliged to enter into the contract, to allow them to go and formally exchange on their other contract ensuring that their client does not, for example, exchange on a contract to buy a property to then find that the purchaser of their current home is refusing to exchange on their sale.
Finally, solicitors must always obtain the consent of their clients before exchanging on a contract.