Webinar
Conditional Contracts
Conditional Contracts
Conditional Contracts are a much used method for buying and selling development land.
They secure commitment from Owner and Developer, but also give certainty to make sure that the Developer has answers to any queries about the land and the Owner gets the right value of the land. Conditional Contracts provide a structured process for land to be bought and sold, accepting that if the conditions are not met then the parties walk away.
In the webinar, we will cover What can constitute a condition? How does a conditional contract differ from an Option? And How prescriptive should the contract be?
We will answer queries often raised by landowners and developers and give tips on what you should consider when entering into a conditional contract.
You can view past webinars at SHMA®ON DEMAND or read the latest news and views from Shakespeare Martineau.
Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us.
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Webinar transcript
(Please note this is auto-generated and un-edited)
0:40
Hello, I'm Louise Ingram, I'm a partner in the residential development team of Shakespearian Martineau. Welcome to today's webinar which is on Conditional Contracts for Development. Just before I begin you'll notice that on your screen there is a Q and A button. Please feel free to click on that icon if you've got any questions, and after the webinar, I will come back to you as soon as I can. My contact details are obviously on the screen as well. So please feel free to get in touch with me directly, if you prefer, and after the event to too, if you've got any questions.
1:18
So a good starting point for this seminar is really why to use a conditional contract. In short, it's to give certainty to both parties, and the seller knows that they've got somebody to sell to, and they've got terms that are fixed. By it, knows that they secured that land, they can feel free to go ahead, satisfy the condition, spend some money, and doing that without worrying that the land is still on the market that they might lose out to somebody else. So, the conditional contract itself will set out a framework for satisfying that condition and derby timeframes and obligations set between the parties to make sure that that condition is satisfied as soon as possible so that you can then move forward to complete.
2:04
And there is a compulsion to complete if the condition is satisfied, and that really is the main difference between an auction agreement and a conditional contract. So with conditional contrast, if that, if that condition is satisfied, both parties have to complete that transaction with an option, one party has power really over the other. If it's a put option, than the seller has control, because they can cook the land to the fire, and it's in their discretion if they do that. Whereas a call option is the buyer can call for them to be transferred to them, but in either of those instances, the party doesn't have to serve that notice, and so the auction is only an opportunity to sell or an opportunity to buy. It doesn't give the compulsion that this conditional contract will will have.
2:54
I'm often asked, What can be a condition? And, in reality, absolutely, anything, as long as it's agreed between the parties than anything, can be a condition to a traditional contract. So, it's very white in its application. The usual examples are the Planning Commission has to be granted, That might be the cell editing the mission, or it might be the the buyer obtaining that kind of permission. More often than not, it's the buyer. You might have a condition that ground investigations have to be obtained and they have to be satisfactory, or you might have an issue with a tenant on the site, which needs to be nice. They need to vacate, or you might even have an illegal occupants that you're trying to try to remove and you got to go through a procedure for that to happen. And until that happens then, condition, the condition wouldn't be satisfied, and completion wouldn't take place.
3:48
You may have slightly more unusual conditions. I had one recently where there wasn't a condition for our planet permission to be obtained. But after that, they then had a condition that the buyer needed to obtain funding, and, because of the organization, as a charitable organization, they were unable to apply for that funding until they got the planning permission. So, effectively, there were two conditions to that contract to. Either one of them weren't satisfied than condition wouldn't happen. You might also have a condition where the seller needs to find a different property to move to and until they do that, they don't want to be compelled to sell this property because effectively, it's either their home and she their likelihood that they need to move elsewhere. So, they're slightly more than usual. inside the most usual conditions are the commission needs to be obtained all that ground investigation has to take place.
4:47
A conditional contract really should be as strict as possible. It needs to be clear what is to be achieved and when that's to be achieved by.
4:58
Depending on who has a condition to satisfy that the person who has that condition satisfies likely towards the contract, to be as flexible as possible, to give them as much time and as much opportunity to satisfy that condition.
5:11
Whereas, the other party is going to want it to be as tight as possible, it needs to have certainty the contrast to really be as effective as possible, And some examples of that, The price needs to be certain. So, either a fixed price, or for there to be a set formula, and that formula to be easy to apply so that you don't end up having a dispute right at the end, when you satisfy the condition. And then you're arguing over how much money is going to be paid. The deposit in a conditional contract would usually be held to stake holder by the seller. Solicitors Assets, held. it will only be released if completion takes place.
5:52
Should the condition not be satisfied? That actually, that deposit, will be returned to the buyer, the parties and walk away. So again, that's another difference, really, with an option agreements, where an option a payment would be made to the seller, and they would have that payment free to use it for whatever they like. And then if completion takes place, that'd be a further payment. So, what we also then have to decide, is, what has to happen for the condition to be satisfied? That needs to be clear and precise. You don't really want one party to have discretion on whether or not they think the condition has been satisfied. That needs to be clear parameters for the condition to be satisfied. And also, if it's not agreed that is being satisfied within a decent period of time, then there should be dispute provisions as well.
6:46
City is also required in terms of the timeframes, so there must be set timeframes for the conditions are satisfied, the steps. Potentially, there might be steps that have to be taken, and they step should be clear, again, with your timeframes, and also the timeframe for completion of the condition has been satisfied. That must also be clear and precise, just so that everybody knows where they are.
7:11
Timeframes for conditional contract, you'd expect to be relatively short, because the centers and get candy money, unless the contract completes. You wouldn't expect them to be hanging on, found into a contract, without any financial compensation, for a long period of time and say, that's the difference, ready. And another difference, with option agreements, where the pavement is ready for, a land being tied up, the southern not being able to do anything. else with the land, during that period of time. But they've had a payment for that. And just really mention here on long ... updates and particularly kogod 19 clauses. Obviously, well, an unusual circumstances.
7:53
Normally, I wouldn't be sat in my home doing this webinar to you in your home and so even conditional contracts, the world of conditional contracts has had an impact with covert as well. And there are a lot of deeds of variation taking place for existing contracts. So that extension of time, of being given, for the fact that we are in, in the, in the midst of a pandemic. We're also finding that, when we're entering into new conditional contracts, we're also putting these clauses in, because I think everybody's eyes to the possibility of something outside of everybody's control, which can impact whether or not a condition can be satisfied.
8:33
So, even when you get to those clauses and there are a lot of them around, at the moment, they again, needs to be clear and precise, they need to say, what circumstances arise for, that to be triggered? And if ... Clause is triggered that effectively, there's a pause on the timeframe within the agreement, and that causes there until such time as the pandemic is, is, is over or for there to be prescribed and things to have happened. So for example, if it was something to do with access into it, onto sites, whilst we were all on a very strict locked down, nobody would have been able to get onto site to do. For example, the ground investigation. However, wouldn't say that part of the restrictions were lifted than a cobra clause, which related to the ground investigation report, would, would come to an end, at the time period, will then run because somebody would be able to go out onto site to do their site to destination.
9:33
Really, some just very short tips on when you're entering into a conditional contract, whether that's for the seller or for the buyer. A citizen number of times, clarity is key. You need to make sure it's clear. You don't want to dispute at any point, but definitely not when the condition has been satisfied. You don't want to delay incompletion, aquia, what was, or wasn't intended, by the causes of the contract.
9:57
So, really, just make sure that you are clear, and everything that's been agreed between the parties makes it into that document.
10:06
Owners, conditions are quite often used, and it's perfectly reasonable for those to be used in a conditional contract.
10:12
They obviously relate to when the condition is for planning permission to be obtained, the onerous conditions, and must, must be reasonable, and they can't can't effectively give one policy inability to wriggle out of the contract. So they need to be, they need to relate to what is intended by the parties on that land. So rather than use a long list, your most list have them we've got a long list of potential onerous conditions. It's best not to just put all of them in.
10:47
Do consider what is relevant to your actual site, and the intentions for that land limits them as much as possible to make sure that actually got less look at at the end when you're considering if a condition has been satisfied. And also making sure that there is less than a Site Recovery inquiry. The Party you, some examples you might have as a seller selling, might want a condition saying that there's no impact on their retained land. That's perfectly reasonable if they need to be able to access it. And a condition on the Planning Commission prevents access or prevents the current use of that land. However, if the seller wants to go one step further and says that it's onerous conditions as any impact on that land, including any impact and value, that would be more difficult because there's likely to be an impact on the value of the land. As there's going to be a development site next door. So, I would say that as as a white owners condition on that basis would be unreasonable.
11:47
On the flip side, if you're a buyer, you might want a condition that ensures that you can use whatever materials you want. Now that, that's fair enough, because there could be a cost implication. But, if, if a condition requires certain materials to be used because it's the local to the area, or it fits better with the existing developments, then that would be reasonable, provided that there isn't a significant impact on value. Otherwise, it could amount to giving discretion ready to whether or not that condition has been satisfied.
12:25
Finally, just a shorter one, automatic Extensions, really just give thought to whether this is needed, and most contracts, I would say, is needed. But, if it's actually, the time period has been given, which would account for sufficient time for getting a planning application through potentially dealing with any appeal or non determination appeal, If actually you've given a couple of years for that condition to be satisfied. It might be unreasonable to then have it extended beyond that period. If, if, if actually certain things happen happens, so just bear in mind is essential. Is it necessary for that to take, to be in each and every agreement you enter into.
13:11
So, in summary, it's best to be clear, it's best to be balanced and it's best to communicate.
13:20
In these instances, if people want to get into contract very quickly, because they get very, very keen to get a transaction through but you just need to make sure that actually the contract does do what you wanted to, for both parties, continue to communicate during the period that the condition is in place. So, that each, each party knows where we are and knows how soon it is before that condition will be satisfied. Or, also, if things aren't going well, keep that communication up because and then the expectations of each party's and managed as well. So, that's it from me. Just, I put on the screen, we, you may be aware that the firm is running a free legal help line. We are giving 20 minute consultations, either by phone or by video link, just to make sure that people are able to get access to advice during these very unusual times.
14:15
And if, if you have any questions for me or for anybody in the team in relation to what I've covered today or any of the real estate issues, please feel free to either use your Q and A link or just drop me an e-mail or give me a call and I'll be happy to help you if I can. Finally, please do visit our ... on demand pages. On our website, you can get access to all of our previous recordings including this one will be there in time as well and also SHMA talks. And we've got lots of stuff on Twitter and lots of from LinkedIn at the moment, as I'm sure you're aware. So, please do keep in touch. We are here to help if we can. And finally, thank you so much for joining me today.
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