Terminating condition and condition precedent

When you sign an agreement or contract, you are usually bound by it immediately. However, there are conceivable situations in which parties still want to be able to get out of their obligations. In that case, you can choose to include a resolutive condition or a condition precedent in the agreement.

Dissolving condition: here's how it works

A resolutive condition is a provision in an agreement. If the contract is signed it does come into existence, but if the ‘condition’ occurs, then the contract can be dissolved. We often see resolutive conditions in the purchase agreement of a home or commercial property. This then includes as a resolutive condition the situation where the buyer cannot get the financing. This is the so-called financing reservation. Also common is the resolutive condition that the building inspection is disappointing. 

What is important with the resolutive condition is that it must be actively invoked by the buyer. If this does not happen, or not in the right way, the purchase agreement will simply remain in force. Often there are also deadlines within which the resolutive condition must be invoked. Read more about the invoking the financing reservation When buying a home.

Mirror image: the condition precedent

The condition precedent works the exact opposite way. With a condition precedent, although the contract is signed, it is not finalized until the condition occurs. The effect of the contract is thus suspended, as it were, until the condition becomes manifest. Property developers regularly use the condition precedent in purchase agreements. These are only finalized once all necessary permits have been obtained. If that does not happen or not in time, the developer is not contractually bound to those buyers either. The advantage of using a condition precedent is that no action is required to dissolve the agreement. There are also no mutual obligations to undo the agreement: if the condition precedent does not take effect, the agreement simply never existed.

Distinction between suspensive and resolutive condition sometimes difficult

Whether you are dealing with a condition precedent or a condition subsequent depends on the wording of the clause. If that wording is not entirely legally pure, the distinction is often difficult to make. And that can cause a serious problem. The court then has to step in to determine which variant you are dealing with. The consequences are major: because the court's ruling then also means that you are either bound by an agreement or that there never was an agreement. Therefore, when entering into an agreement with or without a suspensive and resolutive condition, get timely advice from a lawyer. This will prevent you from having to start the discussion when it is actually already too late.