When parties exchange contracts, this marks the point at which the contract terms become legally binding, even if the transaction itself is not occurring simultaneously with the exchange.
Contracts are typically exchanged with their counterparts. This means that each party signs their own copy of the contract and returns it to their solicitor. The solicitors then all date their respective signed documents simultaneously, formalising the exchange and making the contract terms binding on the parties. Copies of each counterpart document are then sent by post to the other solicitors involved. As a result, there is never a single copy of the contract that is signed by all parties. Instead, there are multiple copies of the same document, each signed by one party, which together constitute the complete agreement.
Exchange can be carried out in one of three ways, commonly referred to as Formula A, Formula B, or Formula C. The method chosen for the exchange depends on how the counterpart documents are held and by whom. The most frequently used method for exchanging contracts is Formula B.
In Formula B, each solicitor holds a signed copy of their client’s contract. During a telephone call with each other, they date the contracts, confirm the completion date, and declare that the exchange has occurred under Formula B at the time of the call. Subsequently, they must post their respective contract to each other on the same day.
If one solicitor holds all the signed counterparts at the time of exchange, this is known as Formula A. In this scenario, the solicitor holding the documents dates them and sends the part signed by their client to the other parties via post.
Formula C operates similarly to Formula B, where each solicitor holds their own signed counterpart contract. However, Formula C allows solicitors to temporarily release their contracts to each other for a specific duration. This approach is particularly useful in chain transactions, which are common in residential property deals. In these situations, solicitors can obtain a temporary release on one of their contracts. If they call back within the agreed timeframe to formalise matters, the other parties are obligated to enter into the contract. This process ensures that clients can proceed with exchanges on their other contracts without risk of delays or complications in the chain, such as a purchaser backing out of a sale.
It’s important to note that solicitors must always obtain their clients’ consent before exchanging contracts.
For advice regarding property sales or purchases or specific guidance on the exchange of contracts, please reach out to our property experts.
