Suspensive Conditions

Suspensive Conditions

Posted on August 27th, 2009 Huis-Huis No comments

Suspensive conditions are all about waiting

Suspensive conditions are just words. But because these specific words might very well be in your contract of sale when you buy or sell real estate, it is important to know what the function of a suspensive condition is, and exactly how the suspensive conditions in your offer to purchase will affect the sale of your property.

“Sticks and stones may brake my bones, but words can never hurt me“, is a myth properly debunked where suspensive conditions are concerned. The wording of suspensive conditions are very important to both buyers and sellers of immovable property.

In this article we’ll discuss the specific type of contractual condition called suspensive conditions. The name is very descriptive of the function of this contract condition, as you’ll see once we’ve explained, but if you’re not familiar with contracts and legal speak, it’s function really isn’t that easy to guess just by the name.

What does a suspensive condition do?

A “suspensive condition“, where real estate sale contracts are concerned, is a clause in a the contract of sale that has the effect of suspending the property sale transaction until a specific event occurs. In other words, a suspensive condition makes the contract of sale wait upon the occurrence of a determined future event.

When a contract is subject to a suspensive condition, the legal consequence is that the contract only becomes finally binding on the parties (comes “into effect“) once the suspensive condition is met to the letter. If the suspensive condition is not met, or not fully met, the contract simply cancels and falls away, without prejudicing the seller or purchaser, because the binding contract of sale does not come into operation until the suspensive condition is met – it simply becomes void.

If the sale “falls through” as a result of a suspensive condition (which often happens), the seller will have to find another purchaser for the property, unless the purchaser decides to continue with the sale by waiving the suspensive condition that was included for his/her benefit in writing. This, however, could constitute a new offer to purchase, so the buyer may adjust his/her offered purchase price and/or any other conditions of the sale.

If, however, the suspensive condition is met, the contract of sale becomes binding on both parties and the purchaser is obliged to pay the agreed purchase price and stick to all the other conditions of sale. The buyer cannot then insist on a reduction in the purchase price, or change the contract of sale in any other way.

Even though a contract which is subject to a suspensive condition is not immediately finally binding on the parties (a binding contract of sale does not exist), a binding contractual relationship does come into existence between the parties as soon as the contract is signed. This means that neither of the parties can back out of the agreement of sale while the contract is still suspended subject to the fulfillment of the suspensive condition.

Suspensive conditions delay ownership transfer

A contract of sale that includes suspensive conditions inherently delays the transfer of ownership. The contract only becomes binding on both parties only once the suspensive conditions are fulfilled, so the conveyancer cannot start the transfer process until those suspensive conditions have been met.

When a suspensive condition is included in a contract of sale, it is extremely important to specify a deadline for the suspensive condition to be fulfilled. Forgetting to state a deadline for your contract of sale’s suspensive conditions will lead to uncertainty and can cause tension between the parties to a sale of real estate.

If no date or time frame is mentioned for the fulfillment of the suspensive condition, common law will apply. And the legal position, in that case, is that the suspensive condition must be fulfilled “within a reasonable period“. But what a “reasonable period” means is always doubtful, difficult to determine, and dependent on the specific circumstances.

You can limit the transfer delays resulting from suspensive conditions by limiting the time assigned to fulfilling the conditions. Just remember that stuff takes time to happen. Don’t doom your sale of property to failure by cutting the time frame for suspensive conditions too close.

Suspensive conditions disadvantage sellers

It is important to note that suspensive conditions are almost always included in real estate sales agreements for the benefit of the purchaser. And therefor, only the purchaser can waive those suspensive conditions.

Sellers are disadvantaged by contracts of sale that contain suspensive conditions, because they are committing to a sale that may very well never take place. Their property is kind of caught in a bubble until the condition is met or the deadline lapses. This can waste valuable marketing time and make them “lose” other potential buyers.

Sellers can leave the back door open a crack, by including a ratification clause in the contract of sale. This clause will allow the sellers to keep marketing the property while the parties to the subject-to sale wait for the suspensive conditions to be fulfilled.

It could happen that the seller receives a more favourable offer from another buyer during this period. The ratification clause, or 72-hour clause, allows the seller the right to accept the new offer, provided the seller gives the first buyer 72 hours to match the new offer or to waive the suspensive conditions in their existing agreement of sale.

Note that the ratification clause requires the seller to include a suspensive condition in the second agreement of sale that suspends that contract, subject to the cancellation of the first one.

Suspensive conditions are everywhere

Most contracts of sale for immovable property contain suspensive conditions of some kind. They’re actually bloody hard to avoid! That’s why it is so important for everyone to understand what suspensive conditions do.

Some examples of suspensive conditions in contracts of sale for immovable property include “subject to financing”, “subject to sale of other property”, “subject to cancellation of preceding sale”, “subject to building inspection” or any other contract clauses that suspend the sale of the property untill a certain condition has been met.