What is a conditional contract?
A conditional contract is a binding contract for the sale and purchase of property (used in place of the usual contract on exchange) which is subject to satisfaction of a “condition precedent”.
What are the benefits of a conditional contract?
Applied in the correct circumstances, a conditional contract can be beneficial for both the Buyer and Seller. It can allow for a contract to be entered into whereby works can be done, planning permission obtained or other matters resolved by one of the parties, with the security that the property will be purchased or sold once a task has been completed.
Once put in place, the contract will not complete until the criteria given in the condition precedent has been satisfied.
What criteria can be covered in a conditional contract?
Some of the matters this may allow for include:
A party may need to obtain certain licences or permissions from an external or internal source (for example, a premises licence or planning permission) in order to complete the transaction.
The completion of the contract may be dependent on another agreement. For example, a developer may not wish to complete a purchase until an agreement has been put in place with the local authority or statutory body in relation to the adoption of roads and/or services to the site (section 38 and section 104 agreements etc).
The buyer may wish to have the comfort of obtaining planning permission in the knowledge that if they do so, they may buy the Property, before being contractually bound to complete the purchase. In addition a buyer would also want to make sure that any permission was immune to legal challenge under judicial review. This is perhaps the most frequent use of a conditional contract.
Should I use a conditional contract?
The conditional contract provides one party a set period of time to rectify an issue that may cause issues for them after completion. For example, if a developer completes the purchase of land only to find their planning application has been rejected; they will have incurred the cost of purchase, and then may incur the cost of trying to appeal the planning decision. If the planning is rejected then the developer may be left with an asset that they would struggle to sell or that is not fit for their intended business use.
By entering into a contract that is conditional, the buyer saves the cost of completing the purchase if that condition is not satisfied in time. However, this works both ways. Once the condition has been satisfied the contract becomes enforceable against the Buyer.
For the seller, a conditional contract does not bring security of a sale and they will be unable to sell to other prospective buyers. There is a more significant risk where the issues are beyond the seller’s control or relate to the buyer’s use of the property post-completion. However, the contract may provide for an element of the deposit to be non-refundable and include a “long-stop date”, on which completion must either take place or the contract will cease to be effective, to compensate for this. Once the contract has passed the ‘long-stop date’, the seller will be able to terminate the contract and remarket the property again and, if the deposit or part of it is non-refundable, will have that as some measure of compensation for the “delay”.
Care should be taken to avoid the conditions precedent being unachievable and to allow for (but usually not require) appeals or a chance to rectify matters, should the criteria not be met on the first attempt.
For more information on conditional contracts, please contact Ben Crystal at email@example.com.