Conditional contracts and development transactions – key considerations

This note follows the publication of our basic guide to conditional contracts.

The success of a conditional contract hinges on how well it is tailored to address the needs of the parties and practical considerations of the property.

The parties must give detailed and early consideration as to the structure of their proposed transaction. Common structures used include unconditional contracts, option agreements, promotion agreements and conditional contracts.

Each structure has its own benefits and burdens which should be discussed with legal and other professional advisers at the start of negotiations.

Key terms to consider

The following is a summary of key terms to consider when contemplating the use of a conditional contract:

The conditions

Proper consideration and drafting of the conditions is critical to the success of a conditional contract.

It is essential that all conditions are properly and clearly and objectively drafted providing as little ambiguity and subjectivity as possible. The following should be considered and clearly drafted:

a.    The precise and objective terms of each condition

b.    Who has the benefit of each condition

c.    The obligations of the parties relating to actions required to satisfy the conditions

d.    What and when will a condition be treated as being satisfied

Common conditions include the grant of “satisfactory” planning permission or construction of a particular piece of infrastructure for example. Care should be taken to ensure that the precise trigger for each condition is clearly identified. The age-old question of what is meant by a “satisfactory” planning permission is a good example of difficulties posed when drafting conditional provisions.

A condition may be easy to describe but might be much harder to draft in sufficiently objective and certain terms.

The drafting of conditions can often be bespoke to the site/transaction so careful thought must go in the drafting. Existing precedents may not always be suitable.

It is most common for conditions to benefit and protect a purchaser, as it is the purchaser who is likely to suffer greater harm if it is required to purchase where the risks intended to be overcome by the conditions are not met. That said, there can often be circumstances where the Seller may also wish to impose conditions, such as ensuring that a new planning permission does not harm adjoining land retained by the Seller, for example.

Given the complexity and importance of the conditions, the parties should think carefully about what is required and whether or not the risk can be addressed in another manner, such as a price reduction, for example.

Waiver

It is worth noting that without the ability to waive the conditions, a purchaser cannot compel a seller to sell where the conditions have not been satisfied even where the conditions are designed to protect the purchaser.

It is therefore important to consider whether either or both parties should be entitled to waive some or all the conditions. A purchaser may want the right to acquire the property regardless of whether the conditions are satisfied. The contract should make it clear who is entitled to waive the conditions and how and when a waiver will be deemed to take effect.

Timings

The contract should clearly identify the timeframes within which the conditions are to be satisfied or waived, specifying timings for any key benchmarks, such as the deadline for the purchaser to submit a planning application. It should also set a final deadline by which the conditions must have been satisfied (or waived) before either party can walk away.

The contract should provide for any circumstances under which the conditional period can be extended, for example to allow:

• additional planning applications or a planning appeal to be submitted and concluded;
• sufficient time for any judicial challenge periods to expire following the grant of a planning permission;
• completion of planning agreements following a resolution to grant planning permission.

If extension provisions are permitted, the parties should agree upon an ultimate deadline (the longstop date) after which either party can terminate the agreement (unless the conditions are satisfied or waived beforehand).

The contract will also detail the timing of completion following the unconditional date.

Deposit/Contract Fee

The parties should consider whether a deposit is to be paid on exchange of the conditional contract and/or at a later date. Where the contract provides for a long unconditional period, a purchaser is unlikely to commit a significant capital sum as a deposit upfront but might be willing to do so once the unconditional date has occurred, which is more akin to paying a deposit under an unconditional contract.

The parties should consider how a deposit is held, whether as stakeholder or agent, and whether or not all or part of it is refundable.

In some (but not all) circumstances, the purchaser may be willing to pay a contract fee (akin to an option fee) on exchange to incentivise the seller and perhaps in place of a deposit. The contract fee is usually released to the seller but a purchaser will usually expect that sum to be deductible from the price. The parties must also agree if the payment is refundable if the conditions are not satisfied or waived.

Termination provisions

The contract must clearly outline what happens if the conditions are not satisfied by the end of the conditional period. Ultimately this will depend on the terms agreed between the parties but typically the contract will allow the purchaser to withdraw without penalty. However, provisions will need to address whether any deposit paid is refundable or forfeited. 

Purchasers often wish to limit the Seller’s ability to terminate given the time, cost and expenses committed to the project. A fair balance is needed.

Parties' obligations and seller co-operation 

Often the contract will impose obligations on the parties to take certain steps to facilitate the satisfaction of the conditions.

The most common, is an obligation on the purchaser to submit and pursue a planning permission. Thought should be given to any duties imposed on the purchaser to keep the seller updated and/or whether the purchaser may, or is obliged to, submit a planning appeal if an unsatisfactory planning permission is granted.

Where price is influenced by the planning permission granted, the Seller may want a degree of control over what planning applications are submitted by the purchaser and/or require the ability to approve any planning application (or elements of an application) before submission to the planning authority. Sellers should be careful not to seek too much control ensuring the purchaser has sufficient flexibility to efficiently respond to feedback received from the planning authority.

The purchaser may require access to the property during the conditional period to comply with their obligations under the agreement. If so, the contract should include provisions which allow the purchaser to enter the property for the required purposes, such as for undertaking surveys and investigations.

The seller may be asked to refrain from undertaking activities which could prejudice the purchaser’s ability to satisfy the conditions or materially increase the cost of doing so. For example, the seller is often prohibited from submitting any planning application for the property or adjoining land and will be prevented from objecting to planning application made by the purchaser.

Price 

The parties should decide whether a fixed price is appropriate or whether a more flexible pricing mechanism is needed, such as a price based on a proportion of the market value following the grant of planning permission. It might be appropriate for a base fixed price to be agreed subject to increase or decrease depending on certain variables such as:

• the number and tenure of units permitted by planning permission
• the costs and other obligations imposed by planning conditions or agreements and/or CIL
• the cost of any unexpected practical implications revealed by the results of investigations undertaken during the conditional period, such as  the cost of decontamination unforeseen groundworks. 

If such an approach is taken, it is imperative that the price provisions are thorough and clearly drafted, using a formula where appropriate. It is often best to include a worked example not only to show the true intention of the formula and assist the future mathematician with the workings of the calculation but also to ensure the formula actually works.

VAT

The parties should identify whether VAT is due on the price at an early stage. The imposition of VAT may have a material impact on both the purchaser’s cashflow and SDLT liability and both of which should considered when agreeing the land value and funding arrangements.

Consideration should also be given to including provisions prohibiting the seller from making a VAT election during the term of the contract.

Dispute Resolution

Given the complexity of conditional contracts, disputes may arise for a number of reasons, such as, whether one or more of conditions have been satisfied and/or determination of the price where a variable price mechanism is used. It is therefore prudent to include comprehensive dispute resolution provisions in the contract. The parties should consider whether expert determination, mediation, or arbitration would be preferable to litigation, particularly for technical disputes such as those relating to valuation or planning matters. The parties may wish to instruct an independent expert to determine the dispute and consideration should be given to the requisite professional qualifications and experience of the expert and included within the contract.

Is a conditional contract appropriate?

Conditional contracts are most suitable in situations where uncertainties need to be resolved before a commitment to purchase is crystallised. However, this can also be achieved by using an option agreement which can often be agreed more swiftly whilst also providing similar protections.

A purchaser may be willing to agree a conditional contract to demonstrate its commitment to the project although, given the usual cost and complexities involved, conditional contracts are often more appropriate for complex or higher value transactions.

The Seller should also keep in mind that purchasers investing significant time, cost and expense into preparing and pursuing a planning application are unlikely to walk away unless the risks are insurmountable. In such cases, a more straight forward option agreement might be more appropriate. 

The prospect of dispute between the parties tends to be greater with conditional contracts than other forms of agreement. A thorough analysis of the transaction and robust legal drafting are essential to ensure the contract aligns with the parties’ objectives.

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