Conditions Precedent – What is it and what does it mean?
In real estate or commercial purchase contracts, “Conditions Precedent” are specific conditions or requirements that must be fulfilled or satisfied by either the buyer or the seller (and in some cases both) before the contract becomes legally binding and enforceable.
These conditions act as prerequisites or contingencies that protect the interests of both the buyer and the seller and ensure that certain key elements are in place before the transaction can proceed.
The fulfillment or waiver of the condition precedents, or subject clauses, is normally referred to as “subject removal.” A common example of a condition precedent is: “the Buyer’s obligation to complete the purchase of the Property is subject to the Buyer being satisfied with the results of a physical inspection of the Property on or before [month, day, year].”
Conditions Precedent may vary depending on the specifics of the contract, but common examples include:
Financing: This condition requires the buyer to secure financing or a mortgage for the purchase of the property before the contract is finalized. If the buyer fails to obtain the necessary financing within the specified timeframe, the contract may be terminated without any penalties.
Inspection/Site Investigation: This condition allows the buyer to conduct a property inspection of the land, building or equipment by a qualified professional to determine whether the condition or state of the asset being acquired is satisfactory. If significant issues are found during the inspection, the buyer may request repairs, negotiate the purchase price, or even withdraw from the contract if the seller refuses to address the concerns.
Title Investigation: This condition involves a title search to ensure the property’s title is clear of any liens, charges, encumbrances, or legal disputes. The sale can only proceed if the title is free and marketable or if contractual language is included to address the discharge of any financial charges or encumbrances.
Zoning/Bylaws: The contract may include conditions that require the seller to obtain any necessary zoning approvals, building approvals or permits or other local government approvals for the property.
Third-Party Consents or Approvals: In some cases, the contract may stipulate that the purchase is contingent on obtaining consents or approvals from third parties, such as government authorities or regulatory bodies. Another example is where a business is occupying leased space and the consent of the landlord is required to a change in tenant. A further example is where a franchise is being purchased and the consent of the franchise system to a transfer of the franchise is required.
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