Condition precedent: Overview, definition and example
What is a condition precedent?
A condition precedent is a requirement that must be met before one party has to fulfill their part of a contract. It’s like a gate that needs to be opened for the rest of the agreement to take effect. If the condition isn’t met, the responsibilities tied to it don’t kick in, and the contract might not move forward in certain areas.
You’ll often see conditions precedent in big transactions—think real estate deals, insurance claims, or business acquisitions—where certain things, like approvals or financing, need to happen first.
Why is a condition precedent important?
A condition precedent matters because it makes sure obligations only start when the key requirements are in place. It gives both parties a safeguard, ensuring no one is forced to act prematurely or take unnecessary risks. For example, a seller doesn’t hand over property until the buyer gets their loan approved. If the loan falls through, the seller doesn’t lose out.
This structure is especially useful in contracts where timing and risk management are crucial. By waiting for the condition to be met—like regulatory approval or delivery of required documents—both sides can protect themselves from unnecessary liability and ensure the deal is solid before moving forward.
Understanding a condition precedent through an example
Imagine you’re buying a warehouse for your business, but the contract says the deal depends on your bank approving the financing. That’s a condition precedent. If the bank says no, you’re not required to buy the warehouse, and the seller isn’t required to transfer ownership.
Or take an insurance policy: if you’re filing a claim, you might need to provide proof of loss before the insurer is required to pay. If you don’t submit the paperwork, the insurer has no obligation to process the claim.
An example of a condition precedent clause
Here’s a condition precedent clause you might find in a contract:
“The Seller’s obligation to transfer ownership and the Buyer’s obligation to make payment are contingent upon the Buyer obtaining financing approval from a recognized lender by [date]. If this condition is not satisfied, the Agreement shall be deemed null and void.”
Conclusion
A condition precedent is a simple way to make sure everyone knows when and how obligations under a contract take effect. It keeps things fair by tying duties to specific requirements, so no one’s left guessing or taking on unnecessary risks.
Whether you’re buying, selling, or signing, understanding conditions precedent gives you a clear path forward. It’s a smart way to protect yourself and ensure a deal only moves forward when everything’s in place.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.