Suspensive Conditions - Property Transactions
Suspensive conditions in property transactions
What is a suspensive condition?
A suspensive condition is a condition inserted into an Offer to Purchase to protect either the Seller or the Purchaser, which suspends the rights and obligations contained in the contract until the happening or not of a future event. Suspensive conditions are ordinarily linked to a time period. Should the event not happen (within the time period specified), the Offer to Purchase does not become effective and the contract is null and void. This means that the position as at the signature of the Offer to Purchase (the status quo ante) must be restored (for example, a deposit paid by the Purchaser to the conveyancers must be returned to the Purchaser, together with any interest earned on such deposit).
[A resolutive condition is the opposite: the contract comes into being, and on fulfilment of the resolutive condition, the contract fails and becomes null and void and all rights and obligations flowing from the contract will immediately cease.]
Examples of suspensive conditions:
For the benefit of the Purchaser:
1.Mortgage finance (if the bond application is unsuccessful, the contract fails);
2.The sale of the Purchaser’s property (where the Purchaser requires the funds from that transaction to finance the transaction in question);
3.A due diligence period (common in commercial property transactions to allow the Purchaser time to work through the viability of the acquisition).
For the benefit of the Seller:
1.The acceptance of an Offer to Purchase where the Seller has submitted an Offer for a property which has not yet been accepted (if the Seller’s offer is not accepted, the contract fails);
2.A 72 hour clause, where the Offer is subject to the sale of the Purchaser’s property, or where the Purchaser’s property has been sold but is still subject to various conditions.
We will examine the 72 hour clause condition more fully below.
The party in whose favour the suspensive condition is included in an Offer to Purchase can agree in writing to waive reliance on such suspensive condition at any time prior to the lapsing of the time period for the fulfilment of the said condition.
The parties can also agree in writing (by way of an addendum to the Deed of Sale) to extend the time during which the suspensive condition must be fulfilled (but this extension must similarly be prior to the lapsing of the time period for fulfilment).
Where the Offer to Purchase is subject to the sale of the Purchaser’s property, the suspensive condition, or “subject to” clause could generally read something like the following: “This Offer to Purchase is subject to the sale of the Purchaser’s property situate at 43 Avenue Suzanne, Hout Bay, within 60 days of acceptance of this Offer by the Seller.”
It may also read as follows: “This Offer to Purchase is suspensive on the successful conclusion of the sale of the Purchaser’s property at 43 Avenue Suzanne, Hout Bay, within 60 days of acceptance of this Offer by the Seller .”
The two examples above are subtly different: the first example infers that the Purchaser’s property has not yet been sold and the second that the property may in fact have been sold, but that the conditions to which the agreement is subject have not yet been fulfilled and/or transfer of the Purchaser’s property has not yet been effected.
If the Seller accepts the Offer to Purchase (in which either suspensive condition forms part) the Seller has agreed to bind himself to the Purchaser for a period of 60 days (this, in turn means that he cannot sell the property to another Purchaser for the aforesaid period). This is beneficial to the Purchaser, but not necessarily to the Seller, as there is no certainty that the suspensive condition will be fulfilled, whether timeously or at all.
It is here where the property professional should counsel the Seller in adding a 72 hour clause (it has become commonplace that a time period of 72 hours is used, but the period can be any length of time agreed to between the parties). In terms of this clause the Seller is entitled to keep the property on the market for the period in which the Purchaser’s conditions are not yet fulfilled.
The wording of the clause is important and should read something like the following:
“Should the Seller at any time prior to the fulfilment of all the suspensive conditions contained in the Deed of Sale receive another bona fide offer to purchase his property, which offer he, in his sole discretion, finds more acceptable and wishes to accept, then he shall notify the Purchaser of such fact in writing and shall grant the Purchaser a period of 72 (seventy two) hours (excluding Saturdays, Sundays and Public Holidays) from time of receipt of such notification to waive in writing the benefit of all suspensive conditions in this Agreement, thereby binding the Purchaser unconditionally to the Agreement. Should the Purchaser fail to do so, the Agreement will lapse and be of no further force and effect. “
The above wording is phrased to protect the Seller in that the Seller, in his sole discretion, can choose what is more acceptable to him. It also doesn’t oblige the Seller to provide the Purchaser (and/or the agent who was the effective cause in the first transaction) with a copy of the more acceptable Offer.
Agents generally hate 72 hour clauses as this is a one way, especially in a highly competitive area, to lose commission for which the agent has worked hard to secure. It is imperative that the agent continues to market the Seller’s property until the Purchaser’s suspensive conditions have been fulfilled.
Team: Southern Staying