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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, the conditions precedent are one or more terms that you or the seller must complete before another portion of the contract comes into effect. For example, a seller might have to obtain shareholder approval as a condition precedent to the sale of the company. If you do not complete a condition precedent in the sale agreement, you may prevent the sale from going ahead. This article will explain the purpose of conditions precedent and some common examples to avoid prolonging the business sale.
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 you or the seller have completed certain formalities.
In an ideal world, you would take ownership when you reach a final agreement. This means that when you agree to the contract, you would also transfer the purchase money to own the business (or completion). However, buying and selling businesses is much more complex. Before completion can occur, the business you want to buy will have to get its shareholders’ consent and follow other procedures in its company constitution.
Nevertheless, the buyer and seller benefit from the other party’s obligation by exchanging contracts. That is to say, the other party is obligated to complete the transaction according to the agreement’s terms. If they deviate from these terms, the aggrieved party can sue on the contract and force the other to comply.
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;
- obtaining the necessary consent from the Competitions Market Authority;
- transferring any necessary regulatory licenses;
- a vendor or landlord agreeing to assign the obligations of their contract under a new contract; and
- the shareholders of the company assenting to the resolution formalising the sale.
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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. Essentially, conditions subsequent create conditions that terminate a pre-existing contract.
On the other hand, conditions precedent are forward-looking. That is to say, they outline what you or the seller must complete for another portion of the contract to come into effect.
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 need further guidance, our experienced business sale lawyers can assist 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
Conditions precedent are one or more terms in the purchase agreement that a buyer or seller must meet for another portion of the contract to come into effect.
A condition precedent provides a buyer and seller with a degree of commercial certainty since it ensures either party takes certain steps essential for the sale’s completion.
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