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Exchange of contracts — SQE1 Property question

A worked single-best-answer question on exchange of contracts, with why each wrong option is wrong — the way SQE1 traps candidates.

Exchange of contracts

Mia is selling her flat to Noah under a contract incorporating the Standard Conditions of Sale (5th edition) without amendment, and Noah's 10% deposit has been paid to Mia's solicitor on exchange. Mia has agreed to buy a second flat in Leeds, which she intends to let out as an investment; she will continue to live with her parents. Mia's solicitor wants to use Noah's deposit towards the deposit payable on the Leeds purchase.

Can Mia's solicitor use Noah's deposit in this way?

  1. AYes, because under the Standard Conditions the deposit is held as agent for the seller and may be released to her at any time.
  2. BYes, because the Standard Conditions allow a deposit to be used on any related purchase by the seller in England and Wales.
  3. CYes, provided Noah's solicitor is told after the Leeds exchange that the deposit has been passed on.
  4. DNo, because a deposit can never be used in a related transaction unless the buyer's lender consents.
  5. ENo, because the Standard Conditions permit the deposit to be used only on the seller's purchase of another property in England and Wales for her residence, so it must be held as stakeholder until completion.
Show answer and reasoning
E is the best answer. Under the Standard Conditions of Sale (5th edition), the deposit is held by the seller's conveyancer as stakeholder, except that if before completion the seller agrees to buy another property in England and Wales for her residence she may use it as a deposit in that transaction (SC 2.2.5 and 2.2.6). The Leeds flat is an investment, not Mia's residence, so the exception does not apply and the deposit must be held as stakeholder until completion.

Rule: Under the Standard Conditions the deposit is held as stakeholder unless used towards the seller's purchase of another property in England and Wales for her residence.

  • A The Standard Conditions provide for the deposit to be held as stakeholder, not as agent for the seller. (wrong rule)
  • B The permission is limited to a purchase of a property for the seller's residence, which the Leeds flat is not. (right rule, wrong facts)
  • C Notification does not create a right the contract withholds; the use is simply not permitted on these facts. (wrong rule)
  • D The Standard Conditions do permit use for a residential purchase in a chain; lender consent is not the test. (wrong rule)

Source: Standard Conditions of Sale (5th edn, 2018 revision), SC 2.2.5-2.2.6

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