Tuesday, January 17, 2006
'Subject To'
Resolving ambiguities in real estate contracts.
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Contracts of Purchase and Sale are typically written in Real Estate using ‘subject to’ clauses, that is conditions that must take place prior to the purchase being finalized. Conditions precedent are the opposite of conditions subsequent, which are conditions that must continue to exist for something else to continue. Since the contract is the instrument that signifies the common intention of the parties to be legally bound by their respective obligations, it is diriment that contracts be written in clear and unambiguous terms. If the parties have not expressed those obligations with sufficient clarity, there is no contract because there does not yet exist the necessary common intention to be bound by definite obligations. It is a requirement at law, therefore, that all of the terms and conditions of the contract be sufficiently clear, the reason being that the law does not enforce arrangements whose essential terms or conditions are uncertain.
The ideal ‘subject to’ clause is one whose criteria are so clear that it is completely obvious whether the criteria for satisfying that clause are met. To determine the certainty of a ‘subject to’ clause the courts often consider whether the criteria for satisfying such ‘subject to’ clause are subjective or objective. A subjective criterion is one that depends on the personal view of the individual who decides it. In contrast, an objective criterion is one that depends on an external event. Therefore, the more subjective the wording of a ‘subject to’ clause, the more likely a court will find the clause to be uncertain. To be absolutely technical, furthermore, in addition to be subjective and objective the courts have recognized that conditions precedent may also be partly subjective and partly objective, and that different results occur depending on the circumstances.
Each ‘condition precedent’ case must be considered on its own facts. Some conditions precedent are so imprecise, or depend so entirely on the subjective state of mind of the Purchaser, that the contract process must still be regarded at the offer stage. An example of a subjective ‘subject to’ clause would be: “This Contract is subject to the approval of the Buyer’s parents”. This means that if a condition precedent is wholly subjective (sometimes called a ‘whim and fancy’ clause), the courts may view the arrangement in law as nothing more than an offer by the Seller that the Buyer may accept by removing the ‘subject to’ clause. In other words, even though there was an initial offer followed by an acceptance, and even though the instrument is called Contract of Purchase and Sale, the arrangement at law is nothing more than an offer until such time as the ‘subject to’ clause is removed (by the Buyer).
On the other hand, when the condition precedent is clear, precise and objective, a contract is completed. Neither party can withdraw, but performance is held in suspense until the parties know whether the objective condition precedent is fulfilled. An example would be "Subject to the Buyer obtaining satisfactory financing” by a certain date. If a ‘subject to’ clause is objective, a contract comes into existence as soon as the offer is accepted. The obligation to carry out the contract to completion is suspended until such time as the condition precedent is removed.
But, as stated before, there is a third class of conditions precedent. Into this class fall the types of conditions that are partly subjective and partly objective. An example would be: “Subject to the Planning Department approval of the attached plan of subdivision”. This clause looks objective but, in fact, it differs from a truly objective condition precedent in that someone has to solicit the approval of the Planning Department. Perhaps some persuasion of the Planning Department will be required. Can the Purchaser prevent the condition from being fulfilled by either refusing to present or otherwise convince the Planning Department not to approve the plan of subdivision? Clearly, the Purchaser must take two steps to fulfill his obligation in this respect: the first step is to submit the plan of subdivision to the Planning Department, and the second is to use his best efforts to make sure the Planning Department approves it.
The law in relations to implying terms in a contract is no different in relation to conditions precedent than it is for other terms of the contract. Contracts must not be permitted to fail over an omission that the parties would immediately have corrected if they had noticed the omission at the time the contract was made. The courts have at their disposal the ‘efficacy test’ and the ‘officious bystander test’ to guide them through their evaluation of contracts. In the example above, the efficacy test would require that someone submit the plan of subdivision to the Planning Department, and the officious bystander test would be met by both parties answering the hypothetical question as to who will present the plan – obviously the Purchaser. In essence, where a condition precedent is partly subjective and partly objective the court must determine whether its features are objective enough to constitute a contract. If, on the other hand, the clause is predominantly subjective, then the arrangement will amount to nothing more than an offer, which the Buyer may accept by removing the ‘subject to’ clause.
Luigi Frascati
Real Estate Chronicle
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