Condition Precedent or Subsequent

There are two types of conditional contract:

• a contract subject to a condition precedent: this means that the contract does not come into effect until the terms of the condition have been met; and
• a contract subject to a condition subsequent: this means that the contract comes into effect immediately on exchange, but can later be terminated if the terms of the condition are not satisfied.

There may be significant tax consequences depending upon whether or not a contract is subject to a condition precedent or a condition subsequent. This is because exchange of contracts where the condition is a condition precedent will not lead to a transfer of the beneficial interest in the property to the buyer until such time as the condition is fulfilled. Where, however, the condition is a condition subsequent, the beneficial interest in the property will transfer to the buyer immediately on exchange, as in the case of an unconditional contract, although the beneficial interest will then transfer back to the seller if the contract is subsequently terminated following nonsatisfaction of the condition.

Main conditional contract issues

The main issues that arise in relation to a conditional contract are:

• whether the contract should be subject to a condition precedent or a condition subsequent (normally, the decision will be made in the light of the tax consequences of each alternative);
• what the condition(s) should be. Conditional contracts are normally entered into where planning permission is required (particularly where the property is being sold at a price which reflects a use which does not currently have planning permission) or, in the case of the sale of a leasehold property, where landlord’s consent is required for the transfer or assignment of the lease. Other conditions may include the obtaining of a liquor or other licence or the obtaining of a third party consent (e.g. a mortgagee or the Charity Commission). In residential transactions, the buyer may wish to exchange contracts subject to obtaining satisfactory replies to his searches, or a satisfactory survey result, although this is not normally to be recommended, given the difficulty of specifying the meaning of “satisfactory” in a residential context. In large commercial development transactions, there may be a long list of conditions, including not only the requirement to obtain planning permission but also road closure orders, acquisition of third party land required for the development, satisfactory arrangements to be made with third parties having rights of light, etc;
• the precise requirements for each condition to be satisfied. If a condition requires the grant of planning permission, should that be outline or detailed permission? What conditions may or may not be acceptable to the parties? Must both parties approve the planning permission, or only one of them? What form should the application for planning permission take? Should the condition not be deemed to be satisfied until after the expiry of a period of time (such as three months) following the grant of permission to allow for a third party challenge to the permission?

• whether the contract should terminate automatically if the condition(s) is/are not satisfied by a specified date, or whether the contract should continue, notwithstanding that the condition(s) has/have not been satisfied until one of the parties terminates the contract;
• how long a period should elapse before the contract terminates (or is capable of termination), and whether that period should be extended in certain circumstances (for example, where the condition relates to the grant of planning permission, the parties may wish to extend the period if an appeal is lodged, or if a third party challenges the planning permission);
• which party is responsible for satisfying each of the conditions and what obligations that party has in relation to each condition;
• whether the party who is not responsible for satisfying a particular condition should be required to assist the other party in relate to satisfying the condition, and if so, at whose expense;
• whether one or more of the conditions should be capable of being waived, and if so, which of the parties should be entitled to waive each such condition (although a party for whose sole benefit a condition has been included can waive it unilaterally, it may be difficult, in a complex contract with several conditions, to determine, in relation to each condition, whether it is for the benefit of one or both parties, so a specific right to waive is desirable);
• if the condition(s) is/are not satisfied and/or a party terminates the contract, what consequences should arise? In every case, the buyer should be required to remove any entries made by him at the Land Registry in relation to the property, but additional obligations may be required in a particular case.

Great care should be taken when drafting a conditional contract, as it is only too easy for disputes to arise as to what was intended by the parties. A particularly common area for dispute is that relating to whether a condition can be waived and whether or not a condition has been satisfied.

Note that an option (either a put option, where the seller can require the buyer to purchase the property, or a call option, where the buyer can require the seller to sell the property, or a put and call option) may be an appropriate alternative to a conditional contract in certain cases.