Sometimes, a buyer and seller wish to enter into an agreement, not knowing with certainty whether they will be in a position to complete the transaction in question. For instance, a buyer of a home may wish to put an offer on a property, not knowing whether their bank will approve this particular acquisition. When a purchaser or seller is contemplating entering into such a transaction, it would be unwise to enter into an unconditional agreement, forcing the transaction on that party without giving them any protection. This holds true for both residential and commercial real estate deals. The purchaser or seller may want to ensure they have a way to void the contract and avoid the requirement to complete a transaction, in the event one of their conditions of entering into a deal are not met.
The function of conditions
In the course of any large transaction such as the purchase of a residential home, the purchase or lease of a commercial property, or even in the acquisition of a corporation, prospective buyers who find a property or business they are interested in purchasing at a price that is agreeable to them will want to have a period of exclusivity, where no other potential purchasers may come and compete with higher offers. By executing an agreement with the parties subject to certain conditions being fulfilled, a buyer can protect themselves from outside offers and maintain exclusivity in their dealings with the seller. The seller cannot entertain any higher outside offers unless the conditional contract has lapsed and the buyer was unable or unwilling to remove the conditions and purchase the property or business in question.
What conditions also do is provide purchasers with a chance to protect themselves from liability or loss that may arise. For example, residential home-buyers often include conditions such as financing and inspection in their agreements with sellers. They would not want to be liable for losses or damages arising from their inability to obtain lender financing to purchase their home. Similarly, a purchaser would not want to purchase a home without first having it inspected for any deficiencies or abatement that needs to be resolved such as asbestos or structural integrity. Similar conditions exist for a commercial real estate transaction as well, but often involve many more conditions that need to be waived as the subject matter of a commercial deal can be much more complex in nature with many more factors that need to be considered. Commercial property may have restrictions, licenses, permits, environmental assessments, liens, and many other issues that may arise. Conditions help provide purchasers with the ability to withdraw from an agreement in the event that certain impediments to the deal cannot be overcome in a manner agreeable to the purchaser.
An even greater level of complexity exists for business acquisition agreements. Factors that need to be ascertained often include the gamut of commercial real estate factors as outlined above, but extensive additional due diligence needs to be completed by a purchaser in these situations. There are many more conditions related to the due diligence the parties may include that need to be removed before they reach an agreement. These may deal with the employees of the company, structure, business contracts, financials, litigation, and a variety of other factors that need to be ascertained and agreeable to a purchaser to make an informed decision when contemplating purchase. Conditions help to provide the two parties move towards an agreement, which is their ultimate goal, while ensuring protection at the same time.
Seller Conditions
While conditions are primarily used by buyers, sellers also use conditions to protect themselves from liability. They are often used when a prospective seller who has found a party interested in purchasing is unsure as to whether they will be able to fulfill certain requirements for the transaction to occur. In the real estate context, this can include subdivision approval, removal of a restrictive covenant, securing a grant of probate, the ability to pay off debt on title, and determining the ability to discharge encumbrances on title. In the commercial real estate context, due diligence conditions are often included for both the tenant and the landlord. Tenants want to ensure the premises are provided to them in the condition represented by the landlord, free and clear of anything that might bring liability to the tenant. On the other hand, landlords might have more extensive due diligence conditions to verify a variety of factors including licenses, permits, credit rating of the tenant, financials, litigation, and any other factor relevant to their ability to be a good tenant and subject to the landlord’s approval. When selling a corporation or business, seller conditions often include accuracy of the representations and warranties of the buyer to make sure they are all brought down, that the buyer has performed all of its obligations, that all buyer consents and regulatory approvals have been obtained, that there are no proceedings to prevent closing, and that there are no prohibitions at law preventing the buyer from closing. In these situations, the seller may need certain things to occur, either fulfilled by the buyer or an outside party, government or administrative body. Conditions like these protect sellers from being forced into an agreement without first reaching these requirements.
If you have any questions regarding contractual conditions, or the purchase of a property, business, or commercial lease, please contact one of Forum Law’s lawyers as soon as possible.
