UK: Conditional Contracts In The Spotlight

Last Updated: 12 April 2011
Article by Elaine Dobson

After Prince Charles expressed his dislike of the proposed designs for the Chelsea Barracks site, the public was treated to a court case with everything – royals from two nations, a peer with a penchant for modern architecture, rags-to-riches property developers and a battle over millions of pounds.

Strip all of that away, and the court challenge came down to something relatively common in property deals – the conditional contract agreed when the state-backed Qatari Diar and the Candy Brothers shook hands on the deal.

Legal property expert Elaine Dobson, of Bircham Dyson Bell, said: "The case may have had much in the way of hype and glitter due to the parties involved, but the root of it is really just a large scale version of a very ordinary, if sometimes complicated, legal agreement."

In this instance, the Candys argued that they had been effectively cheated out of £81m when the Qataris withdrew their planning application; one of the conditions in the contract covered payment to the Candys if and when planning permission was achieved. With the planning application withdrawn, clearly planning consent couldn't be given. In this case, the judge found that the Candys were not entitled to that payout although they can claim damages.

"The argument boiled down to whether the Qatar Diar had acted in good faith, and the judge found they hadn't not acted in good faith – they were caught between a rock and a hard place," explained Elaine.

The very public dispute around the Chelsea Barracks did serve to highlight the complexities that can arise from conditional contracts – something which should be borne in mind, says Elaine, as these types of contracts are not only put in place for substantial property developments; they are also commonly used for smaller commercial and domestic property deals. And agents are often the parties advocating them.

One reason for their popularity with agents is that they seemingly bind buyer and seller together – but, warns Elaine, that is very much an illusion.

"Of course, there is a psychological advantage to having a conditional contract in place but that doesn't mean the sale is guaranteed to go ahead. Conditional contracts can be very complex – for example, planning permission might be required before the sale goes through, but is that outline permission or detailed, if it fails who is responsible for appealing, at what point can the condition be waived and by whom? Other common conditions include landlord's consent for the sale of a lease, search results or environmental testing, listed buildings or retrospective planning consent for works already carried out and, for new build, conditions such as having the work certified by the architect.

"There are two types of conditional contract – the first is subject to conditions precedent, which means the contract won't come into force until the conditions have been met, or subsequence where the contract is effective immediately but can be broken if the conditions set out within it are not satisfied.

"The two different contracts also have implications for Capital Gains Tax which, of course, increased in the recent budget. The transfer of beneficial interest depends on when the contract is formally in place - with precedence, the benefits won't transfer until after the contract conditions have been met, whereas with subsequence, the transfer takes place immediately."

Elaine has seen an increase in requests for these types of contracts, particularly over the last few months, and also for options, which can provide financial benefits over a conditional contract.

She explained: "An option is simply an agreement to enter into a contract at a later date. It provides some exclusivity, normally for a set period of time but, clearly, it is less binding.

"However, financial considerations do also come into play. Conditional contracts normally require 10% of the total deal up front, whereas options can be taken out for any sum of money, even £1. They're also useful if conditions are difficult to identity – after all, you can't have a conditional contract without setting out the conditions."

Elaine said: "I believe it's really important for agents to have a basic understanding of the sorts of legal agreements which can be made. As it's often tempting to encourage putting a contract in place, though, I feel it's even more important that they are realistic with what is achievable, what conditions are capable of being met in the first place to avoid an agreement falling through and a sale being lost.

"To feel a sale is secured and then to have it fail must be far worse than not having reached the point of conditional contract in the first place, to say nothing about the wasted time and effort involved."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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