Conditional Contracts: Everything You Need to Know
A conditional contract, also called a hypothetical contract, is a contract agreement that only requires performance once the delineated conditions are met.3 min read
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:
- Buyer has not been able to do property research
- Buyer has not conducted a home survey
- Some of the mortgage arrangements have not been finalized yet
- If the parties are waiting on a planning or sale permission from another party
- If Charities Act permission is required
- 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:
- The name of the lender
- The amount of the advance
- The time limit by which application must be determined
- 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
What to Include for a Conditional Contract Concerning a Survey of the Land:
- Name of the surveyor
- What type of survey
- 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.
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.
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