In making an offer to buy property, a purchaser may wish to make the agreement conditional on obtaining mortgage financing, having the house inspected or some other thing. Care must be taken in drafting the "subject to's" in the Contract of Purchase and Sale because the contract may be unenforceable if this is not done correctly.

An agreement is said to be conditional if its operation depends on the occurrence of some event. This in turn may depend upon the action of one of the parties to the agreement or some outside party. The purpose of a true condition precedent is to hold both the purchaser and the seller to the contract while the condition is explored and satisfied. Only upon satisfaction of the condition (or waiver by the party entitled to do so) are the purchaser and seller obliged to proceed. It is important that the parties intend to be legally bound during this period and that the conditions to be satisfied are clearly expressed. Even then a clear condition precedent may not be the result.

In the case of Black Gavin v. Cheung an agreement to purchase a hotel was . . . "subject to liquor administration branch approval, subject to my approval of the financial statements, and subject to me increasing present second mortgage by $140,000.00". The B.C. Supreme Court determined that this resulted in the document not being a binding agreement. That could only happen if the purchaser approved the property, chattels, and financial statements and obtained government approval for the transfer of the liquor licence. The Court said, "A document signed by both parties, in which one says to the other, "You may buy on these terms if you like the property and the other says he will if he does, is not, I think, an agreement subject to a condition precedent, or an agreement at all. It remains an offer by the proposed vendor to the proposed purchaser, and nothing more, until the proposed purchaser says that he does indeed approve of the property." The court indicated that the transaction really had the appearance of an option but failed as an option because there was neither a seal nor consideration. Thus the seller could withdraw acceptance of the offer at any time before the purchaser indicated approval because no contract had ever been made.

Wording of this nature does not always result in an unenforceable option. In the case of Griffin v. Martens a proposed purchase was expressed to be "subject to purchaser being able to arrange satisfactory financing on or before Friday, May 31, 1995 at 6:00 p.m. This subject is for the benefit of the purchaser . . .". The B.C. Court of Appeal determined that in this instance "satisfactory financing" meant "satisfactory to a reasonable person with all the subjective but reasonable standards of the particular purchaser". Therefore the contract was not void and the purchaser was obliged to use his best efforts to obtain financing that was satisfactory to him and he was not to withhold his satisfaction unreasonably.

It seems that the best course of action in drafting conditions precedent in an offer is to define the event which is to come about as clearly and thoroughly as possible. Maybe it is not desirable to do this. It might give the seller too much information about the buyer's intentions. In that event wording such as that used in the Griffin case could be used together with a precaution against it being interpreted as an option without seal or consideration. This precaution is the inclusion of a statement that consideration has been paid for the option. The agreement could state, "The seller acknowledges receipt of the sum of $10.00 as payment for the above option". Alternatively, the agreement could say, "This offer is executed under seal to give effect to all options".

The ability to enforce of a contract always turns on the intention of the parties. If it is clear from the contract that the parties intended to be legally bound then there is no problem. It is when it is not so clear that difficulties arise. The best way to ensure that both parties remain obliged while the condition is being pursued is to define the condition precisely or to give consideration for it as a precaution against it being interpreted as an unenforceable option.

Please call or e-mail me with questions or comments you might have.