What is the exchange of contracts?

A property is listed for sale and those interested buyers start speaking with the agent to negotiate an agreed price. After taking instructions from a vendor the agent indicates that the offer has been accepted, but does that mean it’s “a deal’? 

It is accepted in New South Wales residential conveyancing that there is no agreement until the formal exchange of written contracts. The exception is property sold by way of auction in which case the agreement is binding between the parties on the fall of the hammer.

The law as to the requirement for the exchange of contracts was laid down by the Court in Eccles v Bryant and Pollock [1948] Ch 93 where it was said: 

“When parties are proposing to enter into a contract, the manner in which the contract is to be created so as to bind them must be gathered from the intentions of the parties, express or implied. In such a contract as this, there is a well-known, common and customary method of dealing; namely, by exchange, and anyone who contemplates that method of dealing cannot contemplate the coming into existence of a binding contract before the exchange takes place.

It was argued that exchange is a mere matter of machinery, having in itself no particular importance and no particular significance. So far as significance is concerned, it appears to me that not only is it not right to say that the exchange has no significance, but it is the crucial and vital fact which brings the contract into existence.

As for importance, it is of the greatest importance, and that is why in past ages this procedure came to be recognised by everybody to be the proper procedure and was adopted. When you are dealing with contracts for the sale of land, it is of the greatest importance to the vendor that he should have a document signed by the purchaser, and to the purchaser that he should have a document signed by the vendor. It is of the greatest importance that there should be no dispute whether the contract had or had not been made and that there should be no dispute as to the terms of it. This particular procedure of exchange ensures that none of those difficulties will arise.”

The process of exchange occurs when the vendor and purchasers contracts have been signed, dated and ‘exchanged’ with one another (the buyer’s contract issued to vendor’s solicitor and visa versa). On some occasions the real estate agent will effect the exchange of contracts, although more commonly it is the vendor’s lawyer who does so.  

The exchange of contracts is the crucial and vital fact which brings the contract into existence, so buyers and sellers alike must be wary that there is no ‘deal’ until exchange.

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