Workshop: Property: mitigating the risks of conditional contracts

During many residential transactions you will most likely use a standard contract precedent incorporating the standard conditions of sale and, in most circumstances, this will present little or no problem for the transaction that you are dealing with. However, there are some circumstances in which you may feel it is necessary to add further conditions to a contract. For example, it may be necessary to obtain a Third Party Consent to the transaction before it can go through and this requirement can form a condition in a contract. In this situation, if by the completion date the consent of the Third Party is not obtained, then it may be possible for the buyer to withdraw from the contract and subsequently, the transaction.

Conditional contracts are not generally desirable, especially when acting for a seller and, if possible, when acting for a seller you should try and avoid entering into a conditional contract if at all possible. This type of contract can also present difficulties if you find yourself in a chain of transactions and, in such circumstances, they most definitely, should be avoided at all costs. The obvious risk in this situation is being obliged to complete on a purchase when not being able to meet the conditions of the sale.

If you do find yourself in a situation where a conditional contract is unavoidable then special consideration should be given to whether the terms being negotiated are conditions or warranties. A condition is a term of the contract that, if breached, would give the non-defaulting party the right to either terminate the contract, as well as claim for damages. A warranty, however, if breached does not give the non-defaulting party the right to terminate the contract but would still entitle that party to damages for loss. It is important to note that simply stating that a term is a condition or warranty will not necessarily make it so. In some circumstances, the remedy for a breach of a term in the contract may depend on the effect of the breach on the non-defaulting party. For example, if the breach has the effect of preventing the non-defaulting party from obtaining the benefit of the contract, such as being able to complete a purchase of the property, then that term is most likely to be treated as a breach of a condition. If the breach, however, does not prevent the transaction from proceeding but may have some other lesser effect then it would be treated as a breach of warranty and only damages may be claimed by the non-defaulting party.

It is important to consider the circumstances of the transaction carefully when contemplating a conditional contract and you should give extra careful consideration to what the remedy of a breach of that condition will be; you may consider adding to the clause in the contract the remedy that would be sought for a breach of that term. You should also look out for loopholes which may enable an escape for the other party or for your ?own client.

You should also give consideration to whether or not there is a mortgage lender involved. If, for example, you are making a contract conditional upon obtaining property searches, then you should have in mind the lender's requirements in any special conditions and also in the Mortgage Lender's Handbook when contemplating what remedies should be available for your client. If there is a situation whereby a lender will withdraw their offer of mortgage then this should be a situation whereby your client can withdraw from the contract. In some circumstances it may be prudent to involve the mortgage lender in the drafting of the conditions in order to seek their approval, this will not always be necessary as you will be instructed to act on behalf of the lender to ensure that their security is perfected.

In conclusion, there is a place in residential conveyancing for conditional contracts though I would hope that their use is few and far between. As a conveyancer, we should be able to establish that all searches and necessary consents have been obtained prior to exchanging contracts. By ensuring that this is the norm, we will be able to avoid situations which may result in litigious action.