A seller may receive an offer to purchase their property which is subject to certain conditions being fulfilled, this is known as a conditional contract. Here we look at the most common conditions in conditional contracts, the advantages to conditional contracts and the risks to conditional contracts.
Common Conditions in a Conditional Contract
The most common conditions in a conditional contract are:
- planning permission being obtained for development or change of use;
- vacant possession being obtained from an occupier;
- landlord’s consent for the assignment being obtained in the case of leasehold property; or
- the buyer obtaining satisfactory survey/ground reports or search results.
Advantages for a Buyer with a Conditional Contract
The advantages for a buyer of a conditional contract are that:
- the seller is committed to selling the property to the buyer at a set price if the condition(s) are satisfied within a certain time so the buyer has this security before incurring any cost e.g. in applying for planning permission;
- in the case of a planning application, the contract will usually give the buyer control over the nature of planning application; or
- if the condition is not satisfied, the buyer can walk away without incurring the cost of buying the property (although he may have incurred significant wasted costs particularly in the case of a planning application).
Benefits to the Seller with a Conditional Contract
The potential benefit to the seller is that, if the condition is satisfied, they may receive a higher price than if the property had been sold on an unconditional basis.
Risks for a Seller with a Conditional Contract
The risks for a seller are, however, that:
- if the conditions in the contract are not drafted clearly, there can be uncertainty as to whether or not they have been satisfied. Beware any “catch all” provisions (particularly in the case of contracts conditional on planning) or any conditions which must be met to the buyer’s satisfaction. These effectively convert the contract into an option for the buyer to purchase the land if he so wishes.
- the contract should state who is responsible for meeting each condition and should impose obligations on that party to at least use reasonable endeavours to do so.
- how long is it proposed that should be allowed for the conditions to be met? This needs to be a realistic timescale but the contract should specify an end date (often called a long stop date) after which either party can terminate the contract if the conditions have not been satisfied.
- during the contract period a seller may not deal with other parties. A seller should be weary of an unscrupulous buyer who could use the contract as a ploy to prevent other parties from acquiring the land (particularly if the conditions are drafted very widely as mentioned above).
- if the conditions are not satisfied, the seller could be left with nothing, despite having the land tied up for a period of time. A seller should consider the amount of the deposit paid by the buyer on exchange and whether part of this should be retained by the seller if the sale is not completed. (Usually in such circumstances a buyer is entitled to repayment of the whole of the deposit but a seller may be able to negotiate to retain part of this).
- from a tax point of view, the date of disposal will usually be the date on which the contract becomes unconditional (which may be outside the seller’s control) although this is a very technical area and you should check this with your accountant.