Conditional contracts are agreements that become binding or enforceable only when a specific event occurs. Such documents are used as they can add flexibility and protection to both parties.
Reasons to Consider a Conditional Contract
Managing Uncertainty
Many transactions depend on future events that are outside the control of the contracting parties. Conditions allow the contract to proceed only if those specific events occur.
Reduction of Risk
A party may not want to be contractually bound until appropriate prerequisites/essential requirements are in place. For example: financing approval, planning permission, or inspection search or survey results.
Ensuring Fairness
Conditions would ensure that both parties are only obliged to perform when circumstances are right and the agreed stipulations are satisfied.
Encouraging Performance
Some conditions incite parties to take steps to fulfil the requirement, for example obtaining a licence or permit.
Protecting Against Loss
If the condition fails, the parties are normally released from obligations, preventing financial or legal mischief.
Types of conditions
In practice there are a couple of recognised types of conditions.
Condition Precedent
A condition that must occur before any party’s contractual obligation become enforceable.
Examples:
- A buyer must obtain a mortgage before a property sale becomes binding.
- A contract becomes effective only after regulatory approval.
Effect: If the condition does not occur, the contract does not take effect.
A Condition Precedent could be used where the parties wish to delay the date of the contract/transfer for fiscal purposes.
Condition Subsequent
A condition that, if it occurs after the contract has formed, would terminate the contract or release a party from obligations.
Example:
- A lease that terminates if the property is destroyed or if a required Licence is forfeited.
Effect: The contract is valid until the condition happens.
Condition Concurrent
Conditions that must occur at the same time for the parties’ obligations to be enforceable.
Example:
- Exchange of contracts and transfer of title in property transactions.
Effect: Each party must be ready and willing to perform at the same time.
Transactions where Conditional Contracts may arise.
- Planning permission is required.
- Landlord’s consent for transfer, assignment, or subletting
- Third Party Consent for example: Charity Commission
- Mortgagee consent
- Financial requirements
- Development Conditions: road closures, easements, additional land purchase etc
Benefits of Conditional Property Contracts
Reduced Risk for Buyers
Buyers avoid being trapped into a purchase if key conditions, like mortgage approval or a satisfactory survey, are not satisfied. Protection from financial overcommitment or unexpected property predicaments.
Opportunity to Conduct Due Diligence
Buyers can investigate planning permissions, environmental issues, structural integrity, or legal title without the risk of losing the property to another buyer. Developers often use conditional contracts to secure land while assessing feasibility, e.g. Option to Buy
Financing
Conditions allow buyers to explore the market to secure funding or sell an existing property before committing.
Stronger Negotiating Position
Sellers may accept a conditional offer if it is higher or more attractive overall. Buyers can negotiate better terms knowing they have an exit route if conditions fail.
Clarity and Predictability
Conditions set clear expectations for both parties. Each Party knows what must happen before the contract becomes binding.
Potential Pitfalls of Conditional Property Contracts
Delays and Uncertainty
- Conditions can drag out the timeline, frustrating sellers, and complicating chains.
- Sellers may prefer unconditional offers for speed and certainty.
Ambiguous or Vague Conditions
- Badly drafted conditions can lead to disputes about whether they have been satisfied. Prescribing any kind of subjective test effectively provides the Buyer will the benefit of an Option to proceed with the purchase rather than being a true conditional contract.
Opportunity Cost for Sellers
- While waiting for conditions to be satisfied, sellers may miss better offers. If the deal collapses, they have lost time and momentum.
Legal Complexity
- Conditional contracts require careful drafting and legal oversight.
- More complexity means more room for misunderstanding.
Strategic Withdrawal
- Buyers may use conditions as an easy out if market conditions shift.
- Sellers may feel exposed if the buyer’s commitment is weak.
Third‑Party Dependent
- Conditions tied to planning permission, surveys, or third‑party approvals can fail for reasons outside either party’s control.
Drafting Considerations
- The exact wording of a condition may mean the difference between an agreement becoming unconditional or remaining conditional.
- Is the seller allowed to approve the form of any application? For example, planning application where price is dependent on the form of planning permission or where there will be retained land. Should this approve extend to replacement applications or subsequent alterations to the original?
- A seller may require any application to be in joint names. For example, a planning application so the Seller can continue the process in the event the contract is terminated but the planning procedure remains active. Consideration should be made for the Buyer’s cooperation to enable the Seller, as well as an irrevocable royalty free Licence in favour of the Seller to use any drawings, surveys etc.
- Sensible to particularize what a responsible party must undertake to satisfy any condition. Further an obligation on the other party to assist and co-operate (where appropriate) should be set out, with provision on whom pays for these additional costs. Although a provision to use “reasonable endeavours” is familiar drafting it may trigger disagreement if the condition is not satisfied. Likewise, if planning is refused at first instance should there be an obligation to appeal?, who pays these additional costs? an appeal should only be considered if there is a reasonable prospect of success, but who decides what is reasonable?
- Provide an expert determination clause to expedite resolutions of disputes.
- Avoid drafting any subjective test for satisfaction of any condition to prevent conditional contracts morphing into Buyer’s options.
- Be aware of any standard list “onerous conditions” issued by a party. These may include conditions which would be considered fair and reasonable in most circumstances e.g. planning conditions attached to any planning permission or any payment required to be made etc. Such “onerous conditions” offer a “get out.”
- If you are addressing a planning permission condition, then what approval is acceptable e.g. outline, full etc. Consideration should be made for third party challenges e.g. deemed satisfaction only after the expiry of a period post grant of planning permission to provide for any opposition.
- Avoid obliqueness where there are a number of agreements with over lapping conditions.
- The long stop date by which the condition(s) should be satisfied should provide for an extension where there maybe uncertainty as to timing of satisfaction e.g. if a planning appeal has been submitted or a third-party challenge has not been adjudicated. A seller should insist upon a drop-dead date providing a firm deadline to the agreement.
- If the parties wish to prevent a termination of the agreement where such right arises then there must be an expression provision prohibiting termination in such circumstances.
- Any right to terminate must be clearly expressed and the opportunity to utilise that right will end once any outstanding condition is satisfied even if after the longstop date.
- A party may wish to be able to waiver a condition if that condition is for the sole benefit of one party to the agreement. The party may unilaterally waive that condition which is deemed satisfied for the purposes of the agreement. Whether a condition has a sole beneficiary maybe disputed. Prima facie planning permission benefits the buyer but may benefit the seller if consideration for the transaction takes into the permission. As such clearly stating whether a condition is capable of being waivered would be prudent.
- A seller will want to ensure, if a planning authority requires a s106 Agreement to be entered into prior to the granted of planning permission:
- Any obligations imposed on them are conditional on the grant and implementation of the planning.
- An indemnity is provided by the buyer in respect of all expense, cost or loss incurred by the seller, with appropriate security.
- Full and complete release from all obligations upon their dissension of all their interest in the land taking into account the registration gap at the HMLR.
- The Seller will also require the imposition of obligations upon the buyer arising from any requirement in respect of Community Infrastructure Levy ( CIL) ( or its proposed replacement the Infrastructure Levy – save for the London Mayoral CIL and Welsh CIL) or any other similar or replacement for Cil that may come into force during the lifetime of the agreement:
- Submission of an Assumption of Liability Notice to the collecting authority prior to commencement of the development and warrant not to withdraw the same.
- Not to transfer the assumption of CIL liability
- Obligation to pay all and any CIL due in respect of the proposed development.
- Indemnity against all loss, damages, interest, cost, or expense arising or in relation to CIL together with security for the same.
- The buyer will require either an Agreed Notice or a Unilateral Notice to be registered at HMLR to protect their rights under the agreement. A Mortgagee will normally be able to sell free from the agreement under a power of sale save where that Mortgagee consented to or is a party to that agreement.
