Table of Contents
In Short:
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Conditions precedent are terms that must be fulfilled before completing a business sale.
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Common conditions include obtaining shareholder approval or landlord consent for lease assignments.
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If conditions are not met, the sale can be cancelled, offering protection to both parties.
Tips for Businesses:
Conditions precedent provide security for both buyers and sellers during a business transaction. Ensure all necessary conditions are clearly outlined in the agreement and understood by both parties. Common requirements might include regulatory approvals or third-party consents, so review these carefully to avoid delays or complications.
If you are in the process of buying or selling a business, you may have come across the phrase ‘conditions precedent’. In a business sale agreement, the conditions precedent are one or more terms that you or the other party must fulfil before the transaction can be completed. For example, the requirement to obtain the landlord’s consent for the assignment of the lease relevant to the business being sold is usually a condition precedent. If you do not fulfil a condition precedent in the sale agreement, you may prevent the sale from proceeding. This article explains the purpose of conditions precedent and provides some common examples to avoid prolonging the transaction.
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Conditions Precedent
In the context of a business sale or acquisition, the conditions precedent are one or more terms in the purchase agreement that you must meet for another portion of the contract to come into effect. A common example is where you cannot finalise a purchase under an agreement until the landlord has consented to an assignment of the lease which is required for the continued operation of the business being sold.
In an ideal world, you would take ownership once a final agreement is reached. This means that when you agree to the contract, you will also transfer the purchase money to own the business (or complete it). However, buying and selling businesses is a much more complex process. Before completion can occur, the business you want to buy must obtain its shareholders’ consent and comply with other procedures outlined in its articles.
Nevertheless, the buyer and seller benefit from the other party’s obligation by exchanging contracts.
Common Conditions
The conditions you must fulfil to complete the purchase depend on the nature of the business you intend to acquire.
Some common examples include:
- HM Revenue and Customs issuing clearances or granting tax relief;
- transferring any necessary regulatory licenses; or
- a vendor or landlord agreeing to assign the obligations of their contract under a new contract.
Conditions Precedent vs Conditions Subsequent
You should distinguish between conditions precedent and conditions subsequent. While conditions subsequent are less common, they are not unheard of.
On the other hand, conditions precedent are forward-looking. They outline what you or the seller must complete for the other portion of the contract to take effect. In the case of a business sale, certain conditions must be met for the sale to be completed.
Key Takeaways
Conditions precedent exist to provide commercial certainty to the buyer and seller in a business transaction. These conditions include one or more terms you or the seller must meet for the business sale to proceed. This can include obtaining shareholder approval of the transaction. If certain conditions are not met, the agreement terminates.
If you require additional guidance, our experienced business sale lawyers can provide support as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What are conditions precedent?
Conditions precedent, in the context of a business sale, are one or more terms in the business purchase agreement that a buyer or seller must meet for completion of the business sale to occur.
What is the purpose of conditions precedent?
A condition precedent provides a buyer and seller with a degree of commercial certainty.
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