Real Estate condition clauses can be the difference between a successful transaction and a buyer or seller nightmare. When considering clauses to include, it is important to understand the implication of the verbiage contained within, as well as what happens upon condition expiry. It is important to understand the difference between a condition precedent vs a condition subsequent.
This post will attempt to break down the various types of conditions, and their implications in Ontario Real Estate.
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What is a Condition?
In Real Estate, a condition is a circumstance which may affect the outcome of the Real Estate Transaction. Conditions are used to avoid a Binding Sale being formed at time of agreement. This is usually due to circumstances yet to be discovered. For example, a Real Estate Agreement of Purchase and Sale may include a condition to have an inspection satisfactorily performed. This inspection clause could allow the Buyer to cancel the agreement or the Seller to make conditions if the inspection is found not to be satisfactory. One of the most prominent default conditions is found in the Title Search clause, which would allow the Buyer certain recessions if title issues (such as easements) are found before the requisition date.
Condition Precedent
A Condition Precedent is a circumstance or event which is required before subsequent circumstances will occur. In a condition precedent, the contract will come to an end should further action not be taken.
Most “standard” conditions in Real Estate are condition precedents by nature. An example of a Condition Precedent is:
Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than ________ on the ______ (a.m./p.m.) day of ________________ , 20 _____ , that this condition is fulfilled, this Offer shall become null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option by notice in writing to the Seller as aforesaid within the time period stated herein.
Without the buyer taking action, typically via delivering a Notice of Fulfillment (OREA Form 124), or a Noice of Waiver (OREA Form 123) the contract shall be deemed to be at an end, and the Buyer’s deposit is refunded.
The use of Condition Precedents in Real Estate is far more common than their Subsequent counterparts (see below). This is usually to ensure that sales do not become firm & binding without the express consent of the buyer. It can also be used to ensure the Buyer understands the ramifications of fulfillment.
It should be noted here, however, that use of a specific type of condition does not absolve either party of responsibility, or REALTORs of the duty of care as described in the Code of Ethics.
Notice of Fulfillment vs Waiver
In Real Estate, conditions can either be filled or they can be waived. The sad reality of trading today is that most Agents will use either a Fulfillment or a Waiver interchangeably, and not understand the far-reaching legal implications of doing so.
For a transaction that completes smoothly, there is essentially no difference. However, should the transaction complicate itself, the difference could have serious ramifications.
A Notice of Fulfillment (OREA Form 124) essentially notifies the other party that the condition described therein has been fulfilled. In other words, the party with whom the condition rests (usually the Buyer) has performed all adequate steps to satisfy themselves with respect to the condition. In the event future discoveries are made after the condition is filled, the general understanding is that Buyer should or ought to have known about them, unless proven otherwise.
Fulfillment of conditions is not a “get out of jail free card” for the opposite party. Should it be discovered that facts were obscured or hidden, the Seller could still face legal consequences.
Notice of Waiver
In contrast, a Notice of Waiver (OREA Form 123) notifies the opposite party that the condition has been waived. The Buyer (in our scenario) is choosing to forgo due diligence required to properly satisfy themselves with respect to the condition. This can be in whole or in part. For example, a financing condition might be waived if the Buyer has been approved for the loan, conditional on the appraisal. The Buyer’s confidence that the property will appraise as purchased may be enough to convince them to waive the condition.
Should it later be discovered that a material circumstance has changed the viability of the transaction, a waiver could inhibit the Buyer’s recourse.
It is important to note that the form on which the fulfillment/waiver is delivered is not evidence enough. A Buyer cannot deliver a fulfillment and rely on the form title should the transaction go awry. Fulfilling a clause without completing the necessary steps could have serious consequences later on.
The notice of Fulfillment (or waiver) is signed by the party on whom the condition rests to complete. This is typically the Buyer but can be the seller in some situations. Unlike an irrevocable, the notice fulfills the condition without the need of confirmation or acceptance by the other party, assuming the Notice is delivered in accordance with provisions in the agreement.
Condition Subsequent
A Condition Subsequent is a condition in which the contract is terminated should an event occur.
In Real Estate, condition subsequents typically render the agreement void should notice be given.
An example for a Condition Subsequent is:
Upon receipt of the above notice, this Agreement shall be null and void and the deposit shall be returned to the Buyer in full without deduction. If no such notice is received within the above time limit, then this term of contract shall be deemed waived by the Buyer and this Agreement shall remain valid and binding whether or not such Charge/Mortgage has been arranged.
For example, a common condition in Commercial Real Estate transactions is delivery of documentation pertinent to the subject property. This can be a Rent Roll, copies of financial statements, property tax bills, and the like. A common condition subsequent obligates the Seller to provide the buyer with copies “within X business days”. Unless the Buyer gives notice to the seller that documents delivered were not sufficient (by the X day), the condition is deemed to have been fulfilled.
Do you have questions about a Condition Precedent vs Condition Subsequent? Contact Us
