What Are Purchase Contract Terms and What Are Conditions?

Boy there sure is a lot of stuff to read in most commercial offers to purchase or lease. And every single line of it is important to read. Always read any offer presented to you from front to back. Always. It is the most boring part of my job but I still do it every time.

Most of the stuff you read in a real estate offer to purchase or offer to lease are Terms. Only a small portion of the average offer is Conditions. So what's the difference? Well, terms are basically the things we agree to do or not to do. I agree to pay you $5,000,000. You agree to give me the building in return. I agree to lease this space for five years. You agree to let me occupy the space as long as I pay rent.

Conditions are things that must be satisfied before the transaction is binding upon the parties. For example most buyers want to ensure they get financing unconditionally approved from the lending institution before they are legally committed to purchasing the property, so they insert a condition "subject to financing". This ensures that they can walk away from the deal with no negative consequences if they are unable to achieve the required financing.

Other common conditions are due diligence whereby the buyer has the right to verify all important information before unconditionally committing to the purchase, and inspection, where a professional combs through the building looking for serious flaws.

What Are Conditions Subsequent and Conditions Precedent?

This can be a bit tricky to pick up but it's not that bad. Basically, in as simple terms as I can put it, if you put a condition subsequent in your deal there is a deal unless something happens. If you place a condition precedent in your deal, there is not a deal unless something happens.

Let's examine this a bit. First, let's start with condition subsequent. As an example, the City is planning on re-zoning an area but it is still early in the process and it may not be approved. I offer to buy your property as long as the zoning change goes through. If it doesn't, then there is no deal. So as long as things happen according to plan we have a deal. That is a condition subsequent.

Condition precedent is the opposite. I want to buy your parcel but the City has no plans to re-zone so I have to go myself to the City and apply for re-zoning. These can be tough to procure. I offer to buy your property if I get the re-zoning. It's tough to say whether or not I will get it, so there is no deal until I am approved. The most common condition precedent is financing. There is no deal if I do not get financing.

Of all the conditions placed on real estate purchase contracts, probably 95% of them are conditions precedent. Conditions subsequent are rather uncommon.

I Want Something Done. Do I Use A Condition or A Term?

And herein lies the issue. But in reality, it usually is not all that tough. Simply ask yourself, if I do not get what I want on this issue, do I still want to purchase or lease the property? Normally, if the answer is yes, use a term. If the answer is no, use a condition.

Let's say you have agreed with the Landlord to rent this perfect property that you have been looking for for a year, but the yard is a bit messy and he has agreed to clean it up - but he may not. Normally you would add a term that the landlord clean it up. If he does not, your lawyer will normally hold back some funds until it is resolved, but you still want to occupy the premises. Term is the way to go.

On the other hand, if the place is a real mess and clean-up is a major effort that would disrupt your business, you may want to make it a condition. This way, if the landlord does not clean up the mess, you can go elsewhere without penalty.

And there we have it in a nutshell. I wish it were that easy in real life. As always consult your professional REALTOR® or your real estate lawyer for more assistance. Contracts are too important an issue to tackle alone.