A condition precedent is a condition in a contract that must occur before another party is required to perform. In purchase and sale agreements, there are often several conditions precedent that must be satisfied before a party is required to close. Particularly, in the sale of a business, these are often much more important for the buyer rather than the seller, as the seller’s primary concern is generally receiving payment whereas the buyer is concerned about operating a successful business. Failure to properly include the correct conditions precedent can cause a party significant problems, and even lead to breach of the contract, loss of the deposit, and money damages.
Common Conditions Precedent
Perhaps the most well-known condition precedent is that the closing is subject to the buyer receiving financing. This provision is standard in all form residential real estate contracts and helps to illustrate the concept of conditions precedent, generally. The buyer’s requirement to close the transaction and pay the seller is subject to the buyer actually receiving the funds to pay the seller. Without that condition precedent in place, if the buyer did not get financing, he would not be able to just walk away, but rather would be in breach.
Other common conditions precedent include the requirement that the buyer receive approval from the applicable regulatory body before closing. In healthcare, hospitality, building and trades, cannabis, and other regulated industries, licenses and permits are critical to operate the business being acquired. Often, the regulatory body wants to investigate and approve the new buyer before allowing it to operate the business. Failure to get that approval before closing could lead to suspension or even loss of the business’ license, in which case much of the value of the business that the buyer just paid for evaporates instantly.
Understanding the business and the buyer’s own needs are critical in determining what conditions precedent should be negotiated into a purchase agreement. Such conditions precedent will ultimately protect the buyer from being obligated to honor the agreement, if those conditions have not been satisfied.