Key Takeaways

  • A conditional contract becomes binding only when specified conditions are met within a set timeframe.
  • These contracts are common in real estate, insurance, and business transactions, especially when risks or contingencies exist.
  • Conditional contracts can be categorized by condition precedent, subsequent, or concurrent.
  • Specific legal and practical clauses must be drafted with precision to ensure enforceability.
  • Situations like planning permissions, mortgage approvals, and satisfactory inspections commonly trigger conditions.
  • Conditional contracts are not always appropriate and can pose risks if not aligned with parallel agreements.A conditional contract, also called a hypothetical contract, is a contract agreement that only requires performance once the delineated conditions are met. This legal agreement requires prior performance of another agreement or clause in order to be enforceable. If the other agreement or condition is performed, then the conditional contract is enforceable and the parties are bound to carry out the terms of the contract.

Both the buyer and the seller can request conditions to be included in the offer to a conditional contract. A conditional contract is legally binding if formed under contract law requirements.

A condition of a conditional contract can also be a specific event, as long as the occurrence of which, when the agreement was formed, was uncertain. There is usually a time frame included in conditions.

Conditional contracts may be used to sell real estate, vehicles, equipment, and other personal property. Some parties do not want to enter into conditional contracts because they do come with risk and possible uncertainty and will only enter into them if absolutely necessary.

A conditional sale of property contract will grant possession of a piece of property to the buyer but will only grant and transfer legal ownership when the agreed upon sale price is paid in full. The seller holds title if the buyer is making periodic payments over time.

However, there are certain situations where conditional agreements are insisted upon:

  1. Buyer has not been able to do property research
  2. Buyer has not conducted a home survey
  3. Some of the mortgage arrangements have not been finalized yet
  4. If the parties are waiting on a planning or sale permission from another party
  5. If Charities Act permission is required
  6. If a matter such as acquiring the estate is delaying the parties

A condition must be clear and precise. Without clear and certain terms, the contract may be deemed void. Drafting these agreements is complex, especially if involving valuable property such as land or structures. Poorly drafted documents can lead to issues down the line.

What to Include for a Conditional Contract Concerning a Mortgage:

  1. The name of the lender
  2. The amount of the advance
  3. The time limit by which application must be determined
  4. Should the buyer be entitled to withdraw from the contract if the mortgage offer is subject to certain conditions or a retention is to be made

Common Types of Conditions in a Conditional Contract

Conditional contracts often rely on the following types of conditions to become binding:

  • Condition Precedent: A specific event must occur before the contract becomes enforceable. For example, the buyer securing financing.
  • Condition Subsequent: The contract is initially valid but can be terminated if a specified event occurs after formation.
  • Concurrent Conditions: Each party’s obligation is conditional upon the other’s performance at the same time.

In property transactions, condition precedents are the most common—such as obtaining planning permission or satisfactory inspection reports. Each condition should be clear, objectively measurable, and time-bound to avoid enforceability issues.

What to Include for a Conditional Contract Concerning a Survey of the Land:

  1. Name of the surveyor
  2. What type of survey
  3. Which defects revealed by the surveyor would entitle the buyer to bring the contract to an end, time limit for obtaining the survey

An Option Agreement

A type of conditional contract is an option agreement. The option is given to a party to buy a particular property within a particular amount of time.

If a party does not “call” on the other party to sell them the property or buy the property at the set price within the option period, it lapses. When this happens, both parties fall into the position they were in before the option agreement was entered into.

An option must put any interested party on notice that there is an option in place. For example, a bank which has a mortgage on a property.

Differences Between Conditional Contracts and Option Agreements

While both conditional contracts and option agreements deal with future obligations, they differ significantly in structure and intent:

  • Conditional Contract: Both parties are immediately bound to the contract, but the obligation to perform arises only when the condition is fulfilled.
  • Option Agreement: One party is granted the exclusive right—but not the obligation—to enter into a contract within a specified period. The other party is typically bound not to sell to others during this time.

This distinction is critical in real estate and commercial deals. An option provides flexibility for the buyer without immediate commitment, whereas a conditional contract implies mutual commitment subject to contingencies.

Where Conditional Contracts Should NOT Be Used

If parties are waiting for permission to sell, buy, etc., it might be a better idea to wait for the permission instead of entering into a conditional agreement. Parties should consider their best options. Conditional contracts should never be entered into if there is another unconditional contract regarding the sale or purchase.

If the conditional contract was deemed void, was breached, or was not performed for some other reason, the related unconditional transaction would still have to proceed due to contractual obligations and might run into some problems due to the incomplete conditional contract. It could even lead to a breach.

Examples of Conditional Contracts in Practice

Conditional contracts are frequently used across various industries:

  • Real Estate: A buyer agrees to purchase a property contingent on receiving mortgage approval or planning permission.
  • Business Transactions: A business acquisition might be conditional upon regulatory approval or satisfactory due diligence.
  • Insurance: Conditional insurance contracts require the policyholder to meet specific terms (like premium payment or risk disclosures) before coverage activates.

These real-world examples demonstrate the flexibility and complexity of conditional contracts, reinforcing the need for clarity and legal oversight during drafting and execution.

Legal Risks and Best Practices for Conditional Contracts

Using conditional contracts requires caution. Poorly drafted conditions or failure to satisfy them can lead to legal disputes, including claims of breach or contract termination.

Risks to consider:

  • Ambiguity in Conditions: If conditions are unclear or subjective, courts may rule the contract unenforceable.
  • Overlapping Obligations: If another contract is unconditional, a conditional agreement may cause conflicting obligations.
  • Failure to Meet Deadlines: If a condition isn’t met within the agreed period, the contract may lapse, potentially disrupting the transaction.

Best practices include:

  • Clearly define every condition and deadline.
  • Specify who is responsible for satisfying the condition.
  • Include fallback provisions or dispute resolution clauses.
  • Avoid using conditional contracts when a definitive transaction date is crucial.

Consulting a qualified attorney during drafting can significantly reduce these risks. You can find experienced legal counsel on UpCounsel to assist with conditional contract matters.

Frequently Asked Questions

1. What makes a conditional contract enforceable? A conditional contract is enforceable once the specified conditions are fulfilled. The condition must be clear, measurable, and included in the agreement.

2. Can a party withdraw from a conditional contract? Yes, if the conditions are not met within the specified timeframe or if the contract allows for withdrawal upon certain outcomes.

3. Are conditional contracts legally binding? They are not binding until the specified condition(s) are met. Once triggered, the parties are legally obligated to perform their duties under the agreement.

4. What is the difference between a conditional contract and a letter of intent? A letter of intent outlines the intention to negotiate or proceed with a deal, while a conditional contract legally binds the parties upon fulfillment of the condition.

5. When should you avoid using a conditional contract? Avoid using one when the transaction involves fixed deadlines, when parallel contracts exist, or when the triggering conditions are too uncertain or unmeasurable.

If you need help with a conditional contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.