Key Takeaways

  • A conditional contract is a binding agreement where the rights and obligations only become enforceable once a specific condition is satisfied.
  • Common conditions include payment in full, planning approval, financing arrangements, or regulatory approvals.
  • Conditional contracts can benefit both buyers and sellers but also carry risks such as delays, uncertainty, or potential loss of investment.
  • These contracts are widely used in real estate transactions, business sales, and development projects.
  • To protect both parties, contracts should clearly define triggering events, timelines, remedies for non-fulfillment, and termination rights.

To define conditional contract is to set the terms under which a business gets possession of goods before completing the sale through the full payment for the goods. A conditional contract allows the seller to retain ownership of the goods until the purchaser makes the payment in full, while the purchaser can set up shop, so to speak, with office furniture, equipment, tools, and office supplies and make payments over time.

A conditional contract, also called a hypothetical contract, is a binding legal document that includes a clause stipulating the prior performance of another agreement before it can be enforceable. What this means is that, in the case of a purchase of office equipment, a party may contract to buy the equipment, but the terms of that contract are not considered met until another condition, i.e. payment of the sales price in full, as well as finance fees and other charges, is complete. If the purchaser fails to make payments, the seller may take back the equipment, which it still legally owns, and keep any security deposit that may have been provided per the terms of the contract. The purchaser cannot assert ownership because it has not fulfilled the conditions of the agreement.

When a Conditional Contract Make Sense

Payment is not always the only condition set forth in a conditional contract, and both the buyer and the seller can both set conditions that the other party must meet. These could include things like a timetable for delivery dates to comply with construction schedules, the condition of the goods, or any other factor either party deems important.

For the most part, conditional contracts are not the best way to proceed for either party. They both assume a level of risk.

  • For the seller, it means that their goods could be subject to damage or that they are, in a sense, extending credit to the buyer rather than getting the full payment at the time of the sale.
  • On the purchaser’s part, it could mean that they are laying out an extra in finance charges, which might be money better spent on inventory, advertising, or other daily business expenses.

However, there are times when conditional contracts are beneficial:

  • When the buyer needs the equipment or goods to begin operations but is still in the process of finalizing mortgage agreements, waiting on business loans or other considerations where cash flow could be a problem.
  • Where a contract is dependent upon outside entities, such as a planning commission, making a final determination on the suitability of the property.
  • When negotiations with a landlord are proceeding in good faith, but not yet finalized.
  • Where legal matters are slowly working their way through the judicial process, yet the outcome is for the most part already decided, i.e. an inheritance.

Common Uses of Conditional Contracts

Conditional contracts are widely used in industries where future events impact the enforceability of agreements. Examples include:

  • Real estate transactions: Purchases often depend on planning permission, satisfactory surveys, or financing approval before completion.
  • Business acquisitions: A buyer may agree to purchase a business only if due diligence findings are satisfactory or certain licenses are granted.
  • Construction and development: Developers commonly use conditional contracts when projects depend on government or planning approvals.
  • Sales of goods: In conditional sales agreements, the buyer may take possession of goods immediately but ownership transfers only after full payment.

These uses demonstrate that conditional contracts allow parties to move forward while managing uncertainty.

How to Protect Yourself

Regardless of whether entering into a conditional contract makes sense or not, neither party should ever agree to a conditional contract that is dependent upon conditions of a related conditional contract being met.

If for any reason, the dependent conditional contract fails to become enforceable, then it could create a domino effect that sends ripples through all related transactions, especially those that would have to proceed due to contractual obligations. This could lead to a breach of those contracts, resulting in possible financial liability and responsibility for rectifying other damages.

It’s also advisable to explore other options before proceeding with a conditional contract. For instance, if a determining factor is a decision by a planning commission, it might be best to delay things until a decision comes through. No matter how certain things may appear, there is always the chance a new development could arise that would cause further delays or scuttle the review process completely.

It might also be a good idea to insert a timetable that outlines when conditions pass the point of impossibility. Although it might be a huge disappointment to have months or years of planning end up going nowhere, the alternative of being straddled with obligations that cannot be met could be much worse.

When it comes to conditional contracts, the most important thing to always remember is that haste is the enemy, and laying out the precise events that trigger each condition on which the contract is based is always the best approach.

Risks and Challenges of Conditional Contracts

While conditional contracts provide flexibility, they carry inherent risks:

  • Uncertainty and delays: If conditions like planning approval or financing are not met on time, the transaction may collapse, leading to wasted costs.
  • Loss of bargaining power: One party may become locked into a long conditional period, preventing them from seeking other opportunities.
  • Financial exposure: Buyers may invest in surveys, legal fees, or preliminary work that becomes sunk costs if the condition fails.
  • Complex enforcement issues: If conditions are poorly drafted, disputes can arise over whether the event has been met, triggering costly litigation.

To reduce these risks, parties should include precise timelines, specify who bears responsibility for pursuing conditions, and define what happens if conditions are not fulfilled.

Key Clauses to Include in Conditional Contracts

Drafting clarity is essential for enforceability and risk management. Important clauses to consider include:

  • Definition of conditions – clearly describe the event or action required (e.g., “grant of full planning permission without onerous conditions”).
  • Obligations to pursue conditions – set out who must act to achieve the condition and the level of effort required (reasonable efforts vs. best efforts).
  • Longstop date – a deadline after which either party can terminate if the condition is not met.
  • Deposit and refund terms – outline whether deposits are refundable if conditions fail.
  • Termination rights – specify remedies available if conditions are not satisfied within the agreed timeframe.

Including these clauses helps ensure the contract is workable, reduces ambiguity, and protects both parties from undue risk.

Frequently Asked Questions

1. What is a conditional contract in simple terms?

A conditional contract is an agreement that only becomes legally binding once a specific condition is fulfilled, such as full payment or planning approval.

2. How is a conditional contract different from a standard contract?

In a standard contract, obligations take effect immediately, while in a conditional contract they are delayed until certain events occur.

3. Are conditional contracts legally enforceable?

Yes. Conditional contracts are binding once the agreed condition is met, provided the contract is properly drafted and signed.

4. What happens if the condition in a conditional contract is not met?

If the condition is not satisfied by the agreed deadline, the contract usually lapses or terminates without liability, unless otherwise specified.

5. Where are conditional contracts most commonly used?

They are most often used in real estate transactions, business sales, construction and development projects, and conditional sales of goods.

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