Conditional vs. Unconditional Contracts

If you’re considering buying or selling property, it is important to understand the difference between conditional and unconditional contracts.

Broadly, a conditional contract is a contract that is subject to one or more conditions in the contract of sale. If a condition in the contract is not met, then either one or both of the buyer or seller will be able to terminate the contract.

An unconditional contract is one in which both parties are bound to proceed to settlement, in that neither party has a right to terminate the contract for non-fulfillment of a special condition or non-fulfilment of most standard conditions. It’s important to note that even though a contract may be unconditional, circumstances can still arise that could prevent the contract from settling.

The Contract Of Sale

The conditions attached to the property transaction are laid out in the contract of sale.

It is important to have these conditions drafted or reviewed by a professional conveyancing solicitor prior to signing the contract to make sure you understand what you are signing, and to ensure that there are no hidden issues that might surprise you as the settlement date approaches.

A contract can contain any number of, and many types of conditional clauses. Some of the more common reasons a contract might be conditional are:

There Is An Unpaid Deposit

Standard contracts of sale normally give the seller the right to cancel if the buyer does not pay a deposit by a certain day. There may be one deposit due on or around the contract date (an initial deposit) and another due later on in the contract process (a balance deposit).

You Are Still In The Cooling Off Period

A cooling off period of five business days applies to most contracts, unless it has been specifically excluded or another exception applies.

While in the cooling off period, the buyer may cancel the contract and be refunded their deposit within fourteen days. The seller may choose to deduct a penalty of 0.25% of the purchase price.

There Is A Finance Clause

If a contract is conditional on finance, it means the buyer may terminate the contract without penalty if they are not able to secure satisfactory finance approval for the purchase by the finance date set out in the contract of sale.

Once the buyers notify the sellers of their finance approval, the contract is no longer conditional on finance.

There Is A Building And Pest Inspection Clause

A building and pest inspection clause allows the buyer to have the property inspected and cancel the contract without penalty if they are not satisfied with the pest and building inspection report. Buyers must act reasonably, use a licensed building and pest inspector, and produce a copy of the report to the sellers if requested.

Once the building and pest inspection clause has been satisfied, the contract is no longer unconditional in this regard.

The Contract Is Subject To The Settlement Or Sale Of Another Property

If a contract is subject to the sale or settlement (or both) of another property, it can be cancelled if the sale or settlement doesn’t happen.

This is a common type of conditional contract where the buyer is using proceeds from their sale to pay for their purchase.

There Is A Sunset Clause

A sunset clause allows the seller to keep the property on the market for a certain period of time even after they have entered into a contract to sell the property to someone else.

If the seller receives a better offer during this period, they can ask the existing buyers to make their offer unconditional (i.e., waive the benefit of any existing finance or building and pest condition), or the seller will cancel the contract and enter into a new contract with the new buyers.

The first buyer can then choose to make the contract unconditional or lose the contract to the new buyer.

It Is A Back-Up Contract

A contract of sale may also be subject to a prior contract terminating. This is sometimes referred to as a ‘back-up contract,’ and it means that the second contract will be activated by the termination of the first contract

There Is A Due Diligence Clause

Some contracts are subject to a due diligence clause, which allows the buyer to make enquiries about the property and cancel if they are not satisfied with what they find.

Should I Make An Unconditional Offer?

Though some property buyers who’ve found their dream home might feel pressured into making an unconditional offer to the seller, it is rarely a good idea and can leave buyers exposed to legal action where they are unable to complete their unconditional contract of sale.

When they are professionally drafted, conditions in contracts of sale can protect the interests of buyers and sellers by allowing them the right to back out of the contract where it isn’t in their interests to proceed. Without the right conditions in your contract, you could potentially lose your dream home, or be subject to legal action.

Conclusion

When buying or selling property, it’s critically important that you have the right conditions in your contract of sale to protect your interests.

If you are unsure about whether your contract is unconditional, or you are considering going under contract and would like to have it reviewed by an expert, our conveyancing solicitors provide free pre-contract reviews.

The above is not legal advice and is general information only. If you require legal advice in relation to your sale or purchase, please contact our office.