If a developer wants to buy your land you will want them to sign on the dotted line as soon as possible. But what if planning permission is required before the development can go ahead or you need the agreement of your neighbour to release you from a restrictive covenant? A well-drafted conditional contract can commit both sides to the deal, while allowing time to sort out the practicalities and retaining the right to walk away if things do not fall into place as intended. Louis Mathers, Director at Parnalls Solicitors in Launceston, explains how conditional contracts work and the potential pitfalls.
‘Conditional contracts can be really useful because they mean both parties can be bound to the deal early on’, says Louis. ‘The buyer will have the comfort of knowing that they will not have to pay the purchase price unless all the permissions necessary for the development have been obtained, and the seller will know that as long as everything is put in place they will get their money.’
‘However, problems can arise if the parties have not been clear enough about what has to happen before completion of the deal takes place and who is responsible for ensuring any conditions are met. It is therefore crucial to involve your solicitor at an early stage to ensure clear contract terms are agreed.’
Nature and scope of conditions
The first step is to determine what the conditions are and how you will know that they have been satisfied. Typical conditions that a developer may insist on include:
• the grant of planning permission for development or alterations they intend to carry out;
• the obtaining of landlord’s consent to sell leasehold land;
• the grant of access rights; or
• the lifting of restrictions on use.
The contract should state who is responsible for satisfying each condition and how hard they must try to ensure the conditions are met. Contracts typically refer to using ‘reasonable’ or ‘best endeavours’ and it is important to understand what these phrases mean.
• An obligation to use best endeavours will require the party responsible for meeting the condition to take all steps in their power to ensure the condition is satisfied, even if that means acting against their own interests.
• The use of reasonable endeavours is less onerous and allows a balance to be struck between contractual requirements and personal and financial concerns. There is no obligation to pursue every possible course of action; instead efforts can be focused on what a party reasonably believes to be the best course of action to achieve the desired result.
Take care with contracts which oblige you to act in good faith because it is not clear how such an obligation will be interpreted by the courts.
Timescales for meeting conditions
The amount of time allowed for conditions to be satisfied must be spelt out clearly.
Timescales must be realistic but recognise that there will come a point at which attempts to meet conditions should be abandoned and you should be free to cut your losses and walk away.
The contract should specify an end date (often called the long-stop date) and be clear about how the contract can be terminated. Typically, you will have the right to end the contract by giving written notice if the long-stop date is reached and the conditions have not been satisfied. However, the developer may want to reserve the right to push on and complete the sale anyway and if so their right to do this will need to be carefully drafted to avoid the potential for dispute.
Problems around planning permission
If planning permission is required, the contract must cover additional points because permission may be refused or granted subject to conditions. It should be clear:
• what permission will be applied for, ideally by attaching an agreed form of planning application;
• what, if any, variations, restrictions or conditions will be accepted;
• whether the refusal of planning permission must be appealed; and
• who will pay associated costs.
Used carefully, conditional contracts are a valuable tool but they can easily go wrong. Talk to your solicitor at an early stage to discuss what you want to achieve and to make sure that this is properly reflected in the contract you sign.
For advice on conditional contracts, or any other commercial property matter, please contact Louis Mathers on 01566 772375 or email email@example.com to see how we can help.