EXPERIENCED. CREATIVE. PRACTICAL.
Vancouver 604.628.2800

Separate Consideration for Purchaser’s Conditions Precedent

 

Separate Consideration for Purchaser’s Conditions Precedent
By: Alexander Mackoff, Terra Law Corporation, April 18, 2018

Have you ever seen something like the following buried in a contract of purchase and sale and wondered what it is all about?

If the buyer fails to notify the seller in writing of the satisfaction or waiver of all the buyer’s conditions precedent on or before the condition precedent waiver date, this contract will be null and void. In such event, the buyer’s lawyer is hereby irrevocably directed by the seller and the buyer forthwith to repay the deposit, in full, to the buyer without deduction save for the sum of $10.00 (which will be retained by the seller in any event as consideration for the seller agreeing to not revoke or withdraw this contract prior to the expiry of the condition precedent waiver date, except as may be permitted pursuant to any other provision included in this contract), and thereafter neither party will have any further obligations to the other hereunder.

Why would the buyer pay the seller $10.00 in exchange for the seller not revoking or withdrawing the contract prior to the condition precedent waiver date? The contract has been signed and surely the seller is bound, subject only to the buyer’s conditions, right?

The answer arises from case law that has developed in British Columbia, based on the distinction courts have made between “objective” conditions precedent and “subjective” conditions precedent. Simply put, the theory is that satisfaction of an objective condition precedent can be objectively determined by the court (i.e. did a stated event or state of affairs that does not relate to an exercise of discretion by the party who benefits from the condition, occur or exist), while the satisfaction of a subjective condition is completely within the benefiting party’s discretion. For example:

The buyer’s obligation to complete the purchase and sale of the property is subject to the buyer obtaining a financing commitment of at least $500,000 at an interest rate not to exceed 5% per annum on or before August 1, 2018.

This is an example of an objective condition precedent because it will be readily determinable on August 1, 2018 whether or not the condition precedent has been satisfied. If the buyer has obtained a financing commitment of at least $500,000.00 at an interest rate below 5% per annum, the condition precedent has been satisfied. If not, the condition precedent has not been satisfied.

Conversely, the following is an example of a subjective condition precedent,

The buyer’s obligation to complete the purchase and sale of the property is subject to the buyer obtaining a financing commitment satisfactory to the buyer in its absolute discretion on or before August 1, 2018.

Here, it will not be possible to determine whether or not the condition precedent has been satisfied without reference to the buyer’s subjective state of mind. Ultimately, the satisfaction of such a condition precedent is at the whim of the buyer – there are no outside criteria pursuant to which satisfaction can be determined.

The courts have determined that objective conditions precedent and subjective conditions precedent have very different effects on the enforceability of the contract in which they are included. An objective condition precedent will not prevent the creation of a valid and binding contract whereas a subjective condition precedent may. While the case law is clear that a subjective condition precedent may prevent the creation of a valid and binding contract, the courts have developed two parallel lines of reasoning for why that is the case.

According to the first line of reasoning, if a contract contains a subjective condition precedent, the purchaser has, in fact, been granted a separate option within the contract. Unless that option is supported by separate consideration from the buyer to the seller, it is not binding and the seller can, pending the exercise of the option by the buyer (by the satisfaction or waiver of the subjective condition), walk away.

According to the second line of reasoning, if a contract contains a subjective condition precedent, it isn’t really a contract at all. Instead, the “contract” is really an offer from the seller to the buyer that the buyer can accept by removing the subjective condition precedent or the seller can, pending such acceptance by the buyer, withdraw.

Regardless of the line of reasoning adopted, the end result is the same – there is no valid and binding contract between the buyer and seller (yes, even though the document is called a “contract” or “agreement”, both parties have signed and a deposit has been paid).

As a result, it is necessary for the buyer to pay the seller separate consideration (in the above example $10.00) in exchange for the seller agreeing not to revoke the “option” (if the first line of reasoning is followed) or withdraw its “offer” (if the second line of reasoning is followed) pending the removal of the subjective condition precedent. In essence, a consideration clause like the one above creates a mini prequel contract between the buyer and the seller that allows the buyer to benefit from a subjective condition precedent without giving the seller the option to change its mind and back out of the deal.

Given that it is not always easy to distinguish between an objective condition precedent and a subjective condition precedent, the best practice is always to provide separate consideration in support of a buyer’s conditions precedent to protect against an unhappy seller trying to avoid its obligations by claiming that the buyer’s conditions precedents are subjective and that the contract is unenforceable.


OUR COORDINATES

TERRA LAW CORPORATION
Suite 2800
650 West Georgia Street
Vancouver BC
V6B 4N7

604.628.2800
info@terralawcorp.ca

TERRA LAW CORPORATION

Our office is located in Vancouver, B.C. but we represent clients involved in transactions and projects throughout British Columbia. Terra Law focuses on representing individuals and businesses in complex commercial real estate transactions, financings and developments.


© 2013 by Terra Law Corp. All rights reserved.
Disclaimer | Site Map | Privacy Policy