What is a Condition Precedent?
Condition precedents or “subject to” conditions are common in business sale agreements. A condition precedent is a contractual condition that requires certain things happening or be satisfied before something else can occur. In the context of a business sale, conditions precedent are all of the things that must happen prior to completion or settlement of that sale. Commonly, these conditions involve obtaining consent from a landlord to occupy the premises from which the business operates or there being an assignment of the franchise agreement.
Often, these conditions precedent provide the buyer with added assurances and protections, for example that if they were to exchange the business sale contract and the lease was not assigned (thereby denying them the benefit of the locational goodwill), they would not be legally bound to purchase the business.
From a seller’s perspective, conditions precedent can be positive and, for example, operate to ensure that you do not sell your business and find yourself will liable under a lease or franchise agreement.
However, a seller should look to limit conditions which are not specific, are for an unlimited time, or could mean the sale could fall over for a trivial reason. For example, where a sale is “subject to finance” and there is no timeframe for the purchaser to obtain this finance. This provision could mean the sale may not settle for months and, during this time, the seller may be turning away other offers.
Key Take Aways
It is essential to a smooth business sale that any conditions precedent are clear and concise and contain strict timeframes and obligations. It is important these things are understood by both parties and agreed upon prior to the signing of any business sale agreement and that parties take all reasonable and required steps to ensure the conditions are satisfied to facilitate the completion of the sale. Careful management of this process should remove ambiguity and prevent a buyer from withdrawing from a sale due to uncertainty or risk.
If you require assistance with selling your business, Adams & Partners Employment Law Team can help you. Contact us on (02) 4721 6200.
Written by Amelia Hatton.