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Date for CGT on residential sale

Does clause re tenant move it to completion date?

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Client sold a residential property. Exchange of contracts was just before 5 April 2020. Completion was early September. 

My understanding is that the normal rule is that exchange of contracts is the disposal date unless the contract is conditional. The property had a tenant at time of sale and the following clause was included in the contract

The Seller shall give the Buyer not less than 10 working days' notice (including the day on which it is given) of the completion date.

In the event that the Tenant who is in occupation of the Property has not vacated the Property by [specified date about six months later] either of the parties hereto may rescind this Contract by notice to the other in which the deposit paid hereunder shall be repaid to the Buyer

This was to allow the lease to run out and the tenant did vacate. Does this clause move the CGT date to the completion date (meaning all the radical changes post 5/4/2020 apply, including the 30 day reporting rule) or can we still use exchange of contracts?

I have already set in motion the ability to make a 30 day report in case that applies here. 

Replies (41)

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Psycho
By Wilson Philips
21st Sep 2020 15:19

I'm not a lawyer, but I suspect that there is a problem with the "may". If Completion had been conditional on the tenant moving out I would say that the later date would have applied. However, based on the wording above it seems that the contract may have been completed even if the tenant had not vacated. So I'm leaning towards a pre 5 April tax point. It will depend on whether a mere entitlement to resile from a contract can be treated as a condition precedent.

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Replying to Wilson Philips:
Stepurhan
By stepurhan
21st Sep 2020 15:19

I did think this might be one to refer back to the lawyers. Being pre 5 April (full letting relief and last 18 months instead of last 9 for PPR) makes a BIG difference to the gain so worth paying to confirm.

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Hallerud at Easter
By DJKL
21st Sep 2020 15:33

"may rescind this Contract" to me indicates there is a a contract to rescind.

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By Montrose
21st Sep 2020 16:09

The question whether this is a conditional contract may be judged by whether the vendor can him/herself ensure that the condition is satisfied. So a contract conditional on the vendor vacating it is not treated for CGT as subject to a condition.
For HMRC views see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14270

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Replying to Montrose:
Psycho
By Wilson Philips
21st Sep 2020 16:33

I disagree. Contracts can be conditional on the purchaser (or someone else) doing something.

Further, in the example in the very guidance that you cite neither vendor nor purchaser would be able to ensure that the condition is satisfied.

In this case, I would say (as I did earlier) that if the contract stipulated that it would be fulfilled only if the tenant were to vacate the property by ddmmyyyy then that would likely be a conditional contract. On the other hand, if either party simply has an option to walk away, I'm not so ready to say that would amount to a condition of the contract.

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Replying to Wilson Philips:
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By Montrose
21st Sep 2020 16:47

I don't see what there is to argue about. My use of the word"may" is an example of what is not a conditional contract, not a sole determinant. .

I expressed no view as to how the particular problem would be solved, although I now incline to the view that this does not qualify as a conditional contract, rather than one which includes machinery for rescission.

The confirmation that vacant possession is available is something wholly within the power of the vendor, and although that must follow it is not triggered by the availability of vacant possession.

One way to look at the problem is to ask once the contract is completed, when was the supposed condition satisfied?

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Replying to Montrose:
Psycho
By Wilson Philips
21st Sep 2020 16:51

I was (as you were) linking your first and second sentences and disagreeing in particular with the second.

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Stepurhan
By stepurhan
21st Sep 2020 16:49

Thanks for the responses. Given the amount at stake I think it would be prudent to recommend geting a lawyer to confirm, but I am glad to see the tide of opinion turning towards the date with the lower gain. It is always nice to get the answer you were looking for, though I was prepared for the less happy conversation if things went the other way.

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By Wycher
21st Sep 2020 17:15

Excuse me if i am being ignorant but if the owner continued to receive the income from the property tenant upto September, presumably then for capital gains purposes the sale date is September?

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Replying to Wycher:
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By Wanderer
21st Sep 2020 17:20

Wycher wrote:

Excuse me if i am being ignorant but if the owner continued to receive the income from the property tenant upto September, presumably then for capital gains purposes the sale date is September?

Your basis for that conclusion?
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Replying to Wanderer:
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By Wycher
21st Sep 2020 18:21

apparently stupidity but there you go

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Replying to Wycher:
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By Rweaver
21st Sep 2020 17:45

Wycher wrote:

Excuse me if i am being ignorant but if the owner continued to receive the income from the property tenant upto September, presumably then for capital gains purposes the sale date is September?

My favourite post this year.

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Replying to Rweaver:
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By Wycher
21st Sep 2020 18:23

Glad to be of assistance we all need something to laugh about in these trying times and if you enjoy laughing at other people then congrats.

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Replying to Wycher:
Psycho
By Wilson Philips
21st Sep 2020 17:46

I wouldn’t call you ignorant (that’s the preserve of the ruder members of this site) but I do believe that you’re wrong in thinking that is relevant to the tax point.

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Replying to Wilson Philips:
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By Wycher
21st Sep 2020 18:26

Yes you are correct in fact Basil's point below clarifies the position quite nicely. Out of interest under the new rules what are the procedures where the original tax date was say 10th April 2020, therefore return due within 3o days (realise there was an extension) then the contract was rescinded in September as tenant did not vacate and buyer exercised option. Assume would have to write requesting refund.

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Replying to Wycher:
Psycho
By Wilson Philips
21st Sep 2020 19:33

The 30-day time limit is from date of completion (otherwise you would frequently have the situation where the tax is due before the seller has the funds with which to pay it).

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By fawltybasil2575
21st Sep 2020 18:17

@ stepurhan (OP).

The principle behind conditional contracts, in relation to Capital Gains, is at S.28(2) of TCGA 1992, here:-

“(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied”.

The words “and in particular if it is conditional on the exercise of an option” hold the key. The “it” is the rendering of the contract a binding one. The exercising of an “option” therefore is effectively that “binding” process, which turns a potential contract into a binding one. The condition referred to in your question, to the contrary, enables a party to RESCIND an otherwise binding contract, ie effectively turning a “positive into a negative” – that rescission cannot be considered to comply with the “binding” process (indeed it is the reverse thereof).

IMHO you are on safe ground in treating the contract as having taken place in 2019/20: it would nonetheless be prudent to include an appropriate “white space” note on the 2019/20 Tax Return.

Basil.

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Replying to fawltybasil2575:
Stepurhan
By stepurhan
22nd Sep 2020 08:57

Appreciate your detailed responses as always basil.

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By Tax Dragon
22nd Sep 2020 10:18

It's very subtle, isn't it?

In what sense is a rescissible contract binding?

Answer (possibly): only when the contract at no point can be rescinded, because the condition that would enable rescission is never met.

I realise that that possibly puts me slightly at odds with Basil, if I have understood him correctly, or maybe we say the same thing in very different ways. Anyway, we agree on the answer to the question in the OP: it would appear that the condition in question does not make the contract conditional within the meaning of s28.

Other parts of the contract may. "The Seller shall give the Buyer not less than 10 working days' notice (including the day on which it is given) of the completion date." Is there an end date? Could the Seller have delayed such notice for, say, two years? Was there another condition? This, we are not told.

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Replying to Tax Dragon:
Stepurhan
By stepurhan
22nd Sep 2020 10:25

I could not see an end date other than the "tenant must vacate by" date mentioned above. Given the tenant not vacating was what triggered the right to rescind, I assume that both considered that an end date for practical purposes.

As I said I would earlier, I have advised the client to confirm the understanding with his lawyer. For fairly obvious reasons I did not want to share more of the contract than was necessary for the immediate question, so there may be other factors in there the lawyer will notice that I have missed. (I don't think there are, but IANAL).

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Replying to stepurhan:
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By I'msorryIhaven'taclue
22nd Sep 2020 11:03

Surely rescission clauses are commonplace in such property sale contracts. A quick google informs me that under Standard Conditions of Sale the right to rescind is available in cases of misrepresentation, where a licence to assign is not forthcoming, and where either the buyer or seller fails to comply with a Notice to Complete.

Evidently a non-standard but nevertheless common clause in property sale contracts "allows the seller the right to rescind if he is unable or unwilling to answer a buyer's query".

If you accept that, in practice, none of the above clauses set back the contractual date then I guess it's a shorter mental leap into a tenant vacating clause.

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Replying to Tax Dragon:
Stepurhan
By stepurhan
22nd Sep 2020 10:25

I could not see an end date other than the "tenant must vacate by" date mentioned above. Given the tenant not vacating was what triggered the right to rescind, I assume that both considered that an end date for practical purposes.

As I said I would earlier, I have advised the client to confirm the understanding with his lawyer. For fairly obvious reasons I did not want to share more of the contract than was necessary for the immediate question, so there may be other factors in there the lawyer will notice that I have missed. (I don't think there are, but IANAL).

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By fawltybasil2575
22nd Sep 2020 11:49

@ Tax Dragon (your 10.18 post).

I fully understand your comments. If however one hones in on the words (in the legislation) “the exercise of an option”, then I believe that, there being NO “option” (ie neither an option to buy nor indeed an option to sell) in the contract, then there can be no “conditional” element, in the contract, as defined in that legislation.

Of course, if the contract includes one or more OTHER clauses which do(es) fall within the narrow definition of an “option”, then this would entirely change my view. However, one assumes that stepurhan would have referred to any such other clauses, in his initial question.

If stepurhan has any doubt in relation thereto, then (as he rightly points out) lateral thinking prescribes that a letter to the vendor’s solicitor is appropriate – I would suggest along the lines of:-

‘With reference to the contract prepared by you for the disposal of . . . . . , may I ask your view as to whether this represents a “conditional” contract in terms of the specific legislation in S.28(2) TCGA 1992; and, if so, what date you consider is the correct disposal date for taxation purposes (given that of course a disposal date on or after 6 April 2020 would render the disposal liable to be reported imminently to HMRC under S.14 Finance Act 2019) – on my own reading of the legislation the disposal date for CGT purposes is the contract date of xx/xx/xxx and thus falls within the 2019/20 tax year, but since you prepared the contract you will clearly have a more informed view)’.

I'msorry . . . 's helpful and informative 11.03 post appears to support the view that the disposal date falls within 2019/20.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
22nd Sep 2020 14:21

I like simple. My simple reading is that it is not the contract itself that is conditional; rather, the condition attaches solely to the clause that permits rescission. As that condition is not satisfied, rescission under the clause never becomes an option and ergo the contract (so far as relayed to us) remains (unconditionally) binding at all times.

You can hone in on the parenthisised "it" and "the exercise of an option" within s28 all you like, skipping merrily past the opening "and in particular" as you do so. I have learnt from... Duggimon? SteveHa? - another wise and insightful contributor, anyway - that sometimes it's as helpful to take a step back and read a provision in the round as it is to hone in on (and possibly read too much into) individual words and phrases within the provision (whilst possibly excluding other words from full consideration). I wonder, and of course I intend no offence in saying this, whether that might also be a useful lesson for you to take on board, as (still intending no offence) you do seem on occasion prone to over-hone. (In my case, the error is often to over-exclude, though I wonder whether in reality there's much of a difference between these two possible errors.)

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Replying to Tax Dragon:
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By Tax Dragon
22nd Sep 2020 14:26

I'd add that, even if the condition was satisfied and unilateral rescission thus became an option, the contract remains binding unless rescinded - which may be closer to the point you were making.

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Replying to Tax Dragon:
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By fawltybasil2575
22nd Sep 2020 16:42

Forgive me but, with respect to a hugely knowledgeable member, you have misunderstood my approach.

One “hones in” on particular words AFTER concerted study of the whole section
/subsection.”; and then selects those words which one considers are must important. This is fundamental to the correct approach to all legislation.

Regards.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
22nd Sep 2020 17:50

Nothing to forgive, Basil. The misunderstanding of your approach, as you say, was mine. I understand and thank you for your clarification and will bear it mind next time.

While I still think that generalising from parenthisised words that set out, as stated, a particular instance of the rule [or, in your terms, honing in on such words as being the most important] is dangerous (it may lead to too narrow an interpretation of the section), on this occasion, and in light of your clarification, I suspect our interpretations are not wholly (or even significantly) divergent. As we reach the same conclusion for the case in point, I am happy to leave it there.

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Stepurhan
By stepurhan
22nd Sep 2020 15:23

Ignoring for the moment that this is my own question, I must say that the thoughtful answers and debate shown here are why I persist with AWeb, even if I don't always find is as helpful as it once was.

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By unearned luck
24th Sep 2020 00:12

I wonder if the discussion on rescission is not relevant to the problem and that commentators have been led astray by concentrating on the second of the two clauses given in the question.

The first of two clauses quoted seems to me make the contract conditional. If the vendor never gives notice to the purchaser of the completion date there will never be a completion date and the contract can never be performed. It might have been better from the purchaser's point of view if the clause had simple required the vendor to inform the buyer whether or not the tenant had vacated and completion fixed for the day following the expiry of the tenant's lease.

The condition was/will be satisfied when the vendor gave/gives notice of the day he wants the completion to be on. Therefore it's a 2020/21 sale and a CGT return and tax will be due not less than 44 days after the notice is given.

We've not seen the whole contract but it might be the case that on a proper construction of it, its subject matter is the house with VP, which again would make the contract conditional (this time the condition was satisfied when the tenant left).

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Replying to unearned luck:
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By Tax Dragon
24th Sep 2020 07:48

I would hope that stepurhan would come back to tell us the answer provided by the legal advisor.

The point you make had occurred to me, which is why I asked about the end date. But taking the approach to interpretation which Basil has laid out, the intention of the document was to create a mutually binding contract and honing in on the words "shall give" we find evidence of bindingness.

But I do hope the solicitor's reply explores this question and that stepurhan passes on the answer on this point too.

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Replying to Tax Dragon:
Stepurhan
By stepurhan
24th Sep 2020 10:37

If they actually consult their legal adviser as I said they should and they pass their advice back to me I will share.

If they do not do that at least I have covered myself by telling them they should.

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Replying to Tax Dragon:
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By unearned luck
25th Sep 2020 00:59

I agree that "shall" means "must" and thus appears to make a binding contract. But requiring a party to do something is bootless unless it comes with a deadline by which it must be done and there appears to be no deadline by which the vendor must deliver his notice of the date of completion.

There is clearly a conditional contract when the event is not under the control of either party (eg if the contract dependent on the tenant vacating) and this might be the case - see my final para above. But is less clear when the event is under the control of one of the parties (as is the case here if one looked at the first clause alone). But on balance I think that giving the vendor the right to choose the completion date without giving a time limit makes it conditional.

Its a good job that the OP has lobbed the problem back to the sols.

Is Jerome v Kelly relevant?

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Replying to unearned luck:
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By Tax Dragon
25th Sep 2020 07:44

IANAL. (The one thread where we really need Justin...)

It seems to me (applying logic, not knowledge, and recognising that logic seems to have no place in law... in short I fully expect I'm wrong) that a contract that one party cannot enforce is not a contract at all. (Enforceability being the twin sister of bindingness - please substitute the correct words if you know them.)

So, continuing my journey down this branch line of logic, I would expect that either contract law imputes the ability for the purchaser to force the seller to sell [i.e. insist on the "shall"] or it voids the contract. And as the contract was completed, I doubt the latter.

There's a third possibility in logic, which is the the document creates one-sided enforceability - in effect a put option. If that's how the law recognises it, then you are of course correct - this is the particular case in s28. This seems to me the least logical thing for the law to do... so it's probably what it actually does.

I'm out of logic. We need someone with knowledge. (I started reading Jerome v Kelly, but I couldn't reconcile it with Crowe v Appleby or the one whose name temporarily escapes me (Brown?) with the five landholders that pooled and depooled their land... some things I just can't get my head round. Feel free to explain the relevance of the case.)

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Replying to Tax Dragon:
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By Tax Dragon
25th Sep 2020 07:56

And even options surely have to have end dates in law?

It's a weird one, because as I said somewhere both parties clearly intended to be bound by contract from the date the document was signed.

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Replying to Tax Dragon:
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By Tax Dragon
25th Sep 2020 11:05

PPS... I knew I'd read something like this somewhere...

In Eastham v Leigh, an agreement for a building lease required the builder to construct an office block on the landowner's property, whereupon the landlord was obliged to grant a long lease to the builder. The Court of Appeal held that this was a binding contract to grant and acquire a lease on performance of the terms agreed to by the company. Russell LJ said:

"I cannot accept that it is correct to say that, because the grant of the lease was dependent upon the fulfilment by the tenant of those obligations which constituted the consideration for the grant of the lease, the contract to acquire can properly be described as a conditional contract at all."

It seems that a performance term within the contract ("shall give notice") does not make the contract conditional.

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Replying to Tax Dragon:
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By Tax Dragon
25th Sep 2020 11:06

Here endeth the soliloquy.

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Replying to Tax Dragon:
Hallerud at Easter
By DJKL
25th Sep 2020 11:47

Nor would there not be a contract were payment to be made in stages over multiple years.

Some years ago I negotiated a contract for the sale of some land which due to buyer funding wobbles required a last minute redraft such that instead of the full settlement of the £220k price £150k was to be paid to us upon disposition/transfer of title and £70k was to be paid to us upon some future event, (purchaser reselling/obtaining planning/raising finance using the subjects as security etc)

Because the variation was last gasp, with stuff flying between me and our solicitors and me and the purchasers, with our incorporating into the deal security over the subjects re the £70,000, interest on the £70,000 etc, I missed the fact that we had omitted a longstop date for the £70,0000 (mea culpa, but also our solicitors ought to have spotted)

This lack of certainty re when we get the £70k in no way reduced the contract, nor did it make it conditional, all it did was make recovery of the £70,000 still due under the contract uncertain.

I am still waiting years later for the £70,000 thought I do get interest at 3.5% over base every year which is at least something.

Contract if I can vaguely recall my time at Aberdeen Uni (remember I am Scottish, so you may have some variants from what I was taught) surely just requires offer/acceptance/consensus/consideration (that last not actually requiring it has been paid merely that at some point, maybe currently unascertained, it will be paid)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
25th Sep 2020 11:53

Not quite.

One might as well say that a contract which requires the purchaser to pay the seller (as most contracts will) is never completed until payment is made. It would be nonsensical to say that all such contracts are conditional. As I said above, I would consider such condition - if it is in fact a condition - to be a condition subsequent. It doesn't make the contract itself conditional, but allows the aggrieved party to sue for breach if the obligation is not fulfilled. Which of course is far easier is to do if there is a longstop date.

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By Tax Dragon
25th Sep 2020 12:05

Isn't that where I got to (albeit far more circuitously)? So what's the "not quite"?

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Replying to unearned luck:
Psycho
By Wilson Philips
24th Sep 2020 08:54

Very good points.

It may depend on the rest of the contract wording but the Completion date point sounds more like a condition subsequent.

But the contract may well stipulate elsewhere that contract is dependent on vacant possession and the clause above simply confirms that either party can walk away if VP is not obtained.

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Replying to Wilson Philips:
Stepurhan
By stepurhan
24th Sep 2020 13:13

The contract that I've seen did not specify Vacant Possession was required. All I have is that this clause indicates that it was wanted.

As I said, more here if my client takes legal advice and passes it on to me.

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