Subject to or Suspensive Conditions: Everything you need to know about the clause
Usually when a so-called “subject to” clause is inserted into an Offer to Purchase, for the purchase of immovable property, it means that there is a condition that must be first fulfilled before the agreement is deemed to have been concluded and the property can be registered in the purchaser’s name. These clauses are also known as “suspensive conditions” as they suspend the operation of the agreement until such conditions are met.
Ardene Nel, Attorney and Conveyancer at Hammond Pole highlights the most common examples of “subject to” conditions in real estate:
1. The offer is Subject to Mortgage/Bond finance
When a buyer purchases a property but does not have the cash to finance the purchase, the buyer can apply to a financial institution to obtain a mortgage loan. As a result, it is common practice for the sale of property agreements to state that the offer is made subject to the purchaser being granted a bond by a financial institution within a certain period of time. This condition will be in writing in the offer to purchase, and a specific date will be set out by when the Buyer must obtain finance.
However, when a buyer does not obtain finance as set out in the Offer to Purchase, there are three common scenarios that play out in this regard:
The buyer gets declined by all financial institutions:
This would mean that the so-called suspensive condition was not met, and that the transaction has effectively fallen through and can no longer proceed.
The buyer obtained finance, but for a lesser amount as set out in the Offer to Purchase:
Effectively if the bond is not granted for the amount set out in the agreement, the sale cannot proceed. However, in practice, it is common for the seller to agree to amend the payment terms and allow the buyer to pay the balance in cash. This would mean that a new offer will have to be signed or an addendum be done to amend the relevant condition in the Offer to Purchase dealing with the payment terms. The Addendum will set out the reduced loan amount obtained as well as how the balance of the purchase price shall be paid.
The buyer did not obtain finance by the date set out in the Offer to Purchase:
The due date to obtain a bond can always be extended upon consent from the seller to do so. This will be done by way of an addendum which will need to be signed before the period to obtain finance, as set out in the agreement, expires. Should the seller not grant an extension, and the condition is not met, the period for the finance will lapse and the agreement will effectively be cancelled.
2. The offer is subject to the sale of the buyer’s property
It is often the case that a buyer of a property wants/needs to sell his/her property before they can buy another one. As a result, it is often agreed that an offer by a buyer is subject to the sale of his/her home. Such a condition means that the buyer can purchase a new home, whilst selling their current home and avoid paying for two homes. This condition will normally stipulate a specific date (which has been agreed upon by all parties), by when the buyer’s home will have to be sold.
Ardene continues, by answering a few important questions in this regard.
What happens when a buyer does not sell his house as set out in the Offer to Purchase?
This due date can be extended upon consent from the seller to do so. This will be done by way of an addendum (prior to the due date as per the Offer to Purchase) signed by both buyer and seller. Should the seller not grant an extension, the condition has not been met, and as such the said Offer to Purchase has lapsed.
Must the seller wait for the buyer to sell his/her home?
Obviously when a purchaser makes an offer, subject to selling their existing home, this could delay the sale for the seller. To protect the seller, most sale agreements will allow the seller to continue to try and sell his/her property while waiting for the purchaser’s home to be sold. In the event the seller receives another offer for the same property they are normally required to give the purchaser written notice of this further offer and give the purchaser a certain amount of time to try and come up with the funds in another manner failing which the subsequent offer can be accepted.
The above two clauses are the most common clauses used in an Offer to Purchase. However it is important to remember that each transaction will be subject to different circumstances and different conditions depending on the agreements signed between the parties. Always ask your estate agent to explain the contents of the offer to you. Alternatively, for any assistance relating to your property transactions, contact Hammond Pole Attorneys (011) 874 1800 or firstname.lastname@example.org