conditional contracts

Conditional Contracts

You can use the material that follows to give yourself an overview of the issues to consider and when you’re ready to do something specific, get qualified legal advice. Okay? In a conditional contract, the vendor is obligated to sell the property to me at the agreed price, provided I can satisfy certain conditions. The most common conditions are as follows.

‘Subject to finance’

A ‘subject to finance’ clause is standard in contracts for property purchase in many states of Australia. It stipulates that the would-be purchasers have 7–30 days in which to arrange finance for the purchase. If they can’t arrange finance under terms and conditions suitable to them, they have the right to terminate the contract. In some states, vendors will require the purchasers to obtain finance prior to entering into a contract. However, the precise terms are something you can negotiate and need to discuss with your lawyer.

‘Subject to due diligence’

This clause stipulates that you have a defined period of time in which to make all the enquiries and searches you need to confirm the value and viability of the property with ‘due diligence’ or care (that is, to your satisfaction). This includes building inspections and reports, plus anything else you think is fundamental to the feasibility of the project including environmental approvals and so on. This would be a good discussion to have with the engineer on your external A Team. Example: standard finance clause ‘This contract is subject to and conditional upon the Buyer obtaining sufficient finance to complete the purchase of the subject property on or before the ________day of __________. Should the Buyer be unsuccessful in obtaining finance required to complete and proceed with the settlement of this matter then it shall advise the Seller or the Seller’s Solicitor in writing on or before the ________ day of ____________ that this matter is now at an end and all monies paid by the Buyer by way of deposit are to be refunded to the Buyer in full.’

 ‘Subject to council approval’

This clause stipulates that the purchase is conditional upon your ability to obtain the necessary development approvals for your planned use of the property. You may need to specify particular approvals and the terms and conditions on which they will be satisfactory to you. The provisions for approvals vary from state to state, so we have our legal representative draw the contract up for us, with a ‘material change of use’ clause. A material change of use would include rezoning and/or development.

A good vendor’s solicitor will put a time limit on you lodging an application, say 30 days. When I negotiate such a contract, I tend to specify the time frame to suit me, for example, ‘subject to approval for subdivision within 120 days.’ You may be required to demonstrate that you have complied with the timetable by showing the vendor’s solicitor a copy of your lodging application.

I often use a ‘subject to council approval’ clause to buy time to negotiate terms and conditions with the council. This is vital if you are purchasing a site for development and are relying on a particular council approval. If the development needs to be advertised (as many councils now require this and time is allowed for objections to be lodged), it can take 3–6 months or longer to obtain full approval.

The contract should specify what happens if approval is not received within the specified time (you can ask for an extension) or is refused (the contract is terminated, and you get your deposit back). You will also need to negotiate what happens if you get approval and then decide not to proceed for some reason: the vendor’s solicitor may stipulate the interest in that approval and all the plans will transfer back to the vendor.

>>> Coming Next: Negotiating Contracts

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The team@Custodian