Suspensive conditions are commonplace in sale agreements involving immovable property and we have seen in practice that they can lead to some confusion regarding how they operate and how they differ from normal performance obligations, so in this article we aim to clarify some FAQs.
What is a suspensive condition?
A suspensive condition suspends the operation of a contract pending the fulfilment of the condition or put more plainly, the contract will only come into full force and effect once the condition has been met. If the condition is not met then the contract simply lapses, and it is as if the contract was never concluded. The lapsing of the contract occurs automatically by operation of law once the time-period provided for in the condition has passed and the condition has not been fulfilled. There is therefore no need for any written notice to be sent to for the lapsing to take effect.
What is an example of a suspensive condition?
The most common suspensive condition that we see in practice is that of mortgage bond approval, where the condition reads something along the following lines: “This agreement is subject to the Purchaser obtaining a bank grant for a loan secured by a mortgage bond over the property in the amount of R1,000,000.00 or, such lesser amount as the purchaser may accept, on or before the 1st of June 2024.”
Practically, what this means is that:
- The agreement is suspended until the purchaser receives mortgage bond approval from a bank.
- If a bond is not approved by the due date (1 June 2024) and in the correct amount, or such lesser amount that the purchaser accepts, then the agreement will lapse.
- Once the purchaser receives mortgage bond approval in the amount of R1,000,000, or such lesser amount which s/he accepts, then the condition will be fulfilled, and the agreement will become unconditional and binding on the parties.
Further examples of suspensive conditions in the sale of immovable property include the sale agreement being subject to the sale of the purchaser’s property which must be sold within a certain period of time, or the purchaser conducting a due diligence investigation on the property within a certain time period before electing to continue with the sale.
Can you extend the time period in a suspensive condition?
If it becomes clear that the purchaser is not going to be able to comply with the suspensive condition prior to the expiry time and date set, and to avoid the sale agreement from lapsing, the parties can conclude a written addendum to extend the time period. This must however be done before the expiry of the suspensive condition. If it is not done before the expiry, the agreement will lapse, and the parties will have to conclude a new sale agreement if they would still like to continue with the sale.
To avoid the need of having to conclude a signed addendum extending the suspensive period, a clever drafting inclusion to insert after the date contained in the suspensive condition is, “…or such extended period as the Seller in their sole discretion may allow.” This then enables the purchaser to request an extension from the seller and the seller can grant it simply by providing their written consent.
Can you claim damages if the suspensive condition is not fulfilled?
As the agreement lapses when the suspensive condition is not fulfilled, no contractual rights come into being and accordingly there is no contractual claim available to either party. Any performance by a party, such as payment of a deposit, must then be returned so that they are restored to the position they were in prior to concluding the contract, unless stated otherwise in the contract.
What is the difference between a breach of contract and a contract lapsing?
A contract can only lapse if the sale agreement is subject to a suspensive condition and the suspensive condition has not been fulfilled. Suspensive conditions in sale agreements are easily identifiable as they will state in clear terms that the contract “is subject to” or “conditional upon” a certain act and that is how you distinguish them from ordinary performance clauses.
An ordinary performance clause on the other hand will simply state that a party is obligated to do something however the agreement is not made subject to the party’s performance. An easy example of an ordinary performance clause in a sale agreement is the purchaser’s obligation to pay the purchase price by a certain date. If the purchaser does not make payment by the specified date, then it is said that the purchaser is in default or breach of the terms of the sale agreement. The purchaser must then be notified that they are in breach in terms of the breach clause contained in the agreement, which will provide for a certain number of days for the purchaser to remedy the breach failing which the seller may cancel the agreement. If the agreement is then cancelled by the seller, the seller will be entitled to claim for damages suffered.
Conclusion
As conveyancers and property law experts, we specialise in drafting and interpreting agreements dealing with immovable property so should you require any assistance in navigating the property landscape, feel free to reach out.
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