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  1. Wealth
August 11, 2016

Sellers creating a contract race are playing property Russian roulette

By Spear's

Edward Burton describes the benefits and pitfalls of manufacturing competition between buyers and explains why you should look a ‘stalking horse’ in the mouth.

During this Olympic summer, the races taking place are not just confined to the track in Rio. The contract race is a feature of the conveyancing process in England and Wales which can be just as stressful for buyers, sellers and solicitors as the 100m final is for the athlete.

A contract race is created when a seller (other than in an auction), deals simultaneously with more than one prospective buyer in a conveyancing transaction. Contract races become more common when there is increased competition among buyers to buy a property.

There are specific guidelines for solicitors about what to do if this situation occurs. Where a solicitor acts for a seller of land, they are required to inform a buyer immediately of the seller’s intention to deal with more than one buyer. The solicitor will need the seller’s consent to disclose the information, since this is confidential to the seller. If they cannot disclose the information because the seller will not agree, then the solicitor would need to cease acting for that individual.

As can be imagined, the pressure that this can put on a transaction process can be considerable, and there are various advantages and disadvantages for both buyer and seller in proceeding this way.

For a seller, sending a contract to another party and telling the initial purchaser that this has been done can be an effective way to push a reluctant or nervous purchaser to commit to an exchange. We have had experience of this recently when acting for a second buyer in a contract race – the initial buyer had been in place for some weeks and proceeded to exchange very shortly after the second contract was issued. However, issuing a second contract can have the opposite effect and deter an initial buyer who may feel put under undue pressure by a seller – the seller is then dependent on a second new buyer being satisfied with the due diligence conducted and willing to proceed. This can be a high risk strategy particularly in a more muted market.

A buyer considering entering into a contract race should think carefully before proceeding.  It may be that the seller is seeking to use the second buyer as a ‘stalking horse’ to pressure the initial buyer to exchange. The second buyer in this situation may incur search, legal and survey fees in respect of a transaction which the seller is not fully committed to (other than to induce exchange from another party). It can therefore be an expensive and ultimately fruitless undertaking.

Generally, contract races are accompanied by considerable time pressure with exchange often required by the second buyer very quickly adding still further to the complexity of the process. However, where a buyer really wants a property – the risk of a contract race may be the only option available.

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Entering into a contract race should be considered carefully by both buyer and seller and as with all races – not everyone can take home the prize.

Edward Burton is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP.

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