Condition Precedent vs Condition Subsequent

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What is a Condition?

In real estate, a "condition" is a requirement within an Agreement of Purchase and Sale that must be met before the transaction can be completed.

They act as a safety net - for example, a buyer might include a condition that they must get approved for a mortgage a before they are legally bound to close the deal. If this condition is not met, than the deal can be called off without penalty or breach of contract. Essentially, conditions are the 'if this, then that' parts of a real estate contract.

Conditions can protect the Buyer or the Seller, though it's more common to see a condition in favor of the Buyer.

There are two (2) distinct types of conditions, condition precedent and condition subsequent. A condition can technically be written as either a condition precedent or a condition subsequent. In other words, they're not different conditions, they're different methods of fulfillment - action vs inaction.

Condition Precedent

A condition precedent must be fulfilled by a specified deadline, or else the deal will not continue. It is like a prerequisite or a "before" condition. In simpler terms, it means that something specific must happen or exist before the contract can move forward.

For example, in a real estate transaction, a condition precedent could be that the buyer must obtain financing approval from a bank.

Here's an example of a financing condition, written as a condition precedent:

This Offer is conditional upon the Buyer arranging, at the Buyer's expense, a new first Charge/Mortgage satisfactory to the Buyer in the Buyer's sole and absolute discretion. Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provision for the delivery if notice in this Agreement of Purchase and Sale or any Schedule thereto not later than 11:59 PM on December 9, 2023, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction.

You've likely seen this exact clause before. Condition precedent is the most common type of condition in residential real estate contracts.

It requires the buyer to take positive action (provide written notice) within a reasonable time, failing which the agreement will terminate, therefore it's a condition precedent. It requires an event to occur before the agreement can continue, hence precedent (to precede).

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Condition Subsequent

A condition subsequent is the opposite of a condition precedent. Instead of requiring an action to be taken before the contract can move forward, a condition subsequent requires the absence of something in order for the contract to become a binding agreement.

In other words, a condition subsequent sets forth a future event that, if it occurs, will terminate or alter the agreement - It acts as a trigger.

Let's look at the same condition as before, but written as a condition subsequent:

The Buyer may terminate this Agreement through written notice delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than 11:59 PM on December 09, 2023, if a new first Charge/Mortgage, satisfactory to the Buyer in the Buyer's sole and absolute discretion, cannot be arranged by the Buyer, at the Buyer's expense. Upon receipt of the above notice, this Agreement shall be null and void and the deposit shall be returned to the Buyer in full without deduction. If no such notice is received within the above time limit, then this term of contract shall be deemed waived by the Buyer and this Agreement shall remain valid and binding whether or not such Charge/Mortgage has been arranged.

You're less likely to have seen this condition clause written in an offer.

It's identical to the first example in the sense that it provides the buyer with an option to terminate the agreement if they cannot arrange a first mortgage to their satisfaction.

The difference, however, is that it doesn't require the buyer to take action (provide written notice) in order to complete the agreement. It's the opposite.

If the buyer is unable to arrange a first mortgage to their satisfaction, they will need to take action (provide written notice) in order to terminate the agreement.

The difference is whether you want to make the action of providing written notice the trigger for fulfillment or the trigger for termination.

Note: The condition precedent will typically be the better form when including a condition for the protection of your buyer. It errs on the side of caution in the event of a missed deadline.

Removing Conditions

If the condition is a Condition Precedent, it requires the removal of the condition to transition from a conditional agreement to a firm agreement. This subject is also known as "fulfillment of conditions".

There are three methods that can accomplish this: Notice of Fulfillment (NOF), Waiver, or Amendment.

An NOF serves as written notification that a condition has been met, while a Waiver is used to relinquish tor give up the right to use the condition, thus turning a conditional agreement into a firm one without addressing the condition's fulfillment. An Amendment, on the other hand, is a mutually agreed change to the Agreement of Purchase and Sale, which can simply eliminate a condition while still being a valid contract.

For a full discussion removing conditions and determining which method to use, click here.

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Summary

Conditions precedent require an action to be taken before the agreement can continue, while conditions subsequent requires the absence of something for the contract to continue. If you're unsure about how to draft a condition, or about a parties obligation to an existing condition, contact an experienced real estate lawyer.

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