Exchange of contracts is arguably the most important part of the conveyancing process. It is the point that signifies both parties are fully committed. It is also the point where financial penalties can be imposed if the transaction doesn’t happen. Taking all this into consideration it is no surprise that it appears the exchange of contracts is about to go digital.
Going digital should help both solicitors and property buyers and sellers by making the process of exchanging contracts quicker and easier.
The name comes from the fact that years ago solicitors would meet in person and physically exchange contracts. However, today the exchange is made over the telephone.
The exchange of contracts marks the point at which both parties involved in a property transaction are legally bound to complete the transaction. It sets the completion date and confirms all the legal paperwork has either been put in place to complete the sale or guarantees it will be in place on the agreed date.
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 states the contract being exchanged must be in writing and signed. The contract must also either incorporate all the agreed terms in a single document, or, if both parties sign their own versions, both documents will need to contain all the agreed terms so that the contracts can be exchanged.
While lawyers have long been looking at the ways digital options can improve the service they offer their clients, the need to work remotely during Covid-19 appears to have been an accelerant. The Law Society and other legal groups have been instrumental in supporting the digitisation of the legal profession, publishing guidance on many of the innovations involved even though the law on certain aspects hasn’t yet been formulated.
Conveyancing – the legal term for buying and selling residential properties – is an area of law that is actively looking for innovative new ways to make transactions quicker and easier for clients. They are being supported by The Law Society’s Conveyancing and Land Law Committee (CLLC).
The CLLC has been looking at how they may be able to modernise the Law Society Formulae for Exchange for some time. However, with all the recent activity around Stamp Duty Land Tax, they felt it was not the right time to introduce new ideas. As the property market is showing signs of slowing, the CLLC feels this is the right time to share their thoughts.
Their draft protocol covers the key areas that need to be addressed before exchange of contracts, how to agree the text, the deposit amount and whether the deposit is to be paid or ‘held to order’ (it also provides some clarity around the status of deposit monies when they are ‘held to order’).
They have also considered whether contracts should be signed and exchanged physically or electronically and if it is to be electronically, how the signatures should be recorded and dated and, critically, the exact moment at which the resultant contract is entered into.
It is felt this proposal is likely to be a short to medium term solution. Given the pace technology is moving, it will need to be updated as even more advanced technologies like blockchain, smart contracts and fully digital qualified electronic signature (QES) begin to impact the market.
The Law Society recently launched a consultation to give everyone in the legal profession to comment on their proposal. They expect to be able to report on the feedback they receive and set out the possible next steps towards implementation in the New Year.
The likelihood that the exchange of contracts will go digital has increased the focus around how best to use technology to improve all aspects of the conveyancing process.
Electronic signatures are now commonplace in all areas of law and business. This is arguably a positive outcome from the COVID pandemic given people had to have the ability to sign legal documents remotely.
Electronic signatures sealed their position when the Land Registry officially accepted digital signatures in 2020 and their popularity has only increased. They not only save signatories a large amount of time and effort but signing documents electronically is also safer than signing them physically thanks to the many secure legal software solutions law firms now use.
Another positive outcome from the pandemic is the way we all now use video meetings on a daily basis.
Until 2020 most client conversations took place either in face-to-face meetings or over the phone. Today you can set up a video call almost immediately. This enables clients to discuss concerns and outstanding issues more efficiently which means deals can keep moving. Moreover, as these platforms also include the ability to instantly and securely share documents, paperwork can be transferred between parties during these conversations.
Technology is also helping improve the compliance aspect of a property transaction. Digital money laundering and identification checks again make the process easier and quicker box for both parties and their lawyers.
Predictably, AI is also starting to make inroads into conveyancing.
While there are still concerns around allowing AI to draft complete contracts, AI can produce a first draft of a document for a lawyer to work on. Again, this will help to speed up the conveyancing process. Perhaps a more exciting use for AI will be using its potential to complete the required land registry searches. And AI can be trained to recognise and ‘read’ specific documents and identify possible risks within the content to alert the lawyer to check their red flags.