Everything you ever wanted to know but were afraid to ask about SUBJECT CONDITIONS in Real Estate Agreements
First off, “what is a subject condition?”
It is a condition in a contract of purchase and sale which must be removed or waived by the benefitting party before a certain date, failing which the contract will terminate.
The benefitting party is usually the buyer, but it could also be the seller or both the buyer and seller.
Subject conditions are essential because they allow a party to carry out their due diligence (inspections, documentary reviews, searches and other confirmations) PRIOR to the contract becoming binding.
Typical subject conditions for a buyer could include:
– Building inspection;
– Review of title, strata plan, by-laws, strata minutes, Form B, insurance, financial statements, parking arrangements, depreciation or other engineering reports;
– Confirmation that: a. GST or PTT are not applicable, b. no underground oil tanks are located on the property, c. the water is potable, d. the septic system is approved and properly functioning, d. the zoning is appropriate for intended use, e. insurance is available on the property, f. the property was not subject to a stigmatizing event (such as a murder, suicide, paranormal event or other).
Too often subject conditions are carelessly thrown into contracts of purchase and sale without regard to their wording or significance. The importance of subject conditions should not be overlooked as a poorly drafted subject clause may give a party room to walk away from a deal or prevent a contract from even forming.
Typically when entering into a contract of purchase and sale each party has the same goal in mind, namely to complete the transaction. Once the price is agreed on the contract is a done deal, right? WRONG! While the negotiation of the purchase price is always important it is not all that matters.
In the standard form Contract of Purchase and Sale, those conditions that your real estate agent lists under “Terms and Conditions” play a very significant role. In fact, a party’s obligations under the contract do not commence until those subject conditions are removed.
A typical subject condition might be: “Subject to the Buyer obtaining and approving a building inspection.” To remove a subject condition, the benefitting party must waive or declare fulfilled the condition AND give written notice of the removal of the subject clause before the deadline stipulated in the contract.
Duty of Good Faith
In removing a subject condition, a party has a duty to act in good faith and make all reasonable efforts to remove their subject conditions and complete the contract (Dynamic Transport Ltd v O.K. Detailing Ltd., 1978 CanLII 215 (SCC),  2 SCR 1072). To act reasonably and good faith is to not act in a capricious or arbitrary manner (Mason v Freedman, 1958 CanLII 7 (SCC),  SCR 483 at 487).
Subject conditions can on occasion play a critical role in aiding a party to get out of his or her contract. Unless the subject condition is waived or fulfilled by written notice the contract is terminated.
However, as noted above, a party cannot refuse to remove a subject condition for an illegitimate reason.
For example, a Seller cannot refuse to remove her subject to legal review clause merely because she has found another Buyer who is willing to pay more money for the property (Zhang v. Amaral-Gurgel 2017 BCSC 1561).
For a hesitant or risk adverse party, the impulse may be to draft the subject clauses as subjectively in an attempt to give that party the ability to walk away from the contract. However, if the wording of the subject conditions are too subjective it may prevent a contract from even forming. To form a contract there must be some degree of certainty as to the essential terms of the contract. The more subjective a subject clause is, the more uncertain the criteria of the terms are. Therefore, instead of a binding contract, the parties may only have an offer to purchase and a binding contract will not be formed until the subject conditions are removed. This may give either party the ability to walk away before the subject conditions are removed.
Most parties when entering into a contract are not looking for a way out. To promote efficiency and certainty, subject conditions should be drafted objectively. Objective conditions are usually dependant on the happening of an external event, for instance “subject to the Buyer obtaining mortgage financing with an institutional lender.” The criteria of this condition is clear and precise as to when and how it will be fulfilled.
Is a “satisfactory” subject condition enforceable?
Often, a real estate agent will insert the word “satisfactory” to give the party some wiggle room as to the acceptableness of the condition. Take for example, “subject to arranging satisfactory financing.” The term satisfactory implies a subjective standard, leaving concern of the certainty of the clause. However, the Court of Appeal in Griffen v Martens (1988), 1998 CanLii 2852 (BCCA) stated that the purchaser has to use “his best efforts” to obtain financing as the meaning of “satisfactory” means “satisfactory to a reasonable person with all the subjective but reasonable standards of a particular purchaser.” Thus the term satisfactory invokes an objective standard of a reasonable person so the clause is not the subject to the whims and fancies of a particular individual. Therefore, there is a sufficient degree of certainty to the condition.
The moral of the story
In today’s hot real estate market, most everyone want the deal done quickly –BUT in a professional and enforceable manner.
Properly drafted subject conditions can aid in this goal (although, admittedly in many cases, particularly in Vancouver, buyers are forced to make offers with no conditions at all due to the many bidders all vying for the same property).*
A real estate transaction is one of the biggest transactions most people ever make, so it is not in anyone’s best interest that the deal collapses because of a poorly worded subject condition clause!
When in doubt, feel free to call us for advice 24/7.** So far we’ve successfully closed over 30,000 purchase and sale agreements!
*In such cases, it is often possible to put in some of the buyer’s due diligence items by way of warranties or representations by the seller. Also, if the buyer wants to spend the extra money without knowing whether he will be the successful bidder, most of the subject conditions can be carried out BEFORE the offer is made, in which case the offer need not contain any conditions. However, after losing out on a few such offers, the buyer may become hesitant to continue this expensive and somewhat time consuming procedure.
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1460 – 800 W. Pender St., Vancouver, BC, V6C 2V6,
Kenneth Pazder (ext. 245) Melissa Valana (ext. 258)