Offers to purchase or sell real estate are often conditional on or subject-to something happening. For instance, the offer to purchase could be subject-to the buyer obtaining financing or being satisfied with the results of a home inspection. If the conditions to the purchase and sale are not met, typically the sale will not complete. However, the interpretation and validity of such clauses can often become an issue and lead to litigation when one party is unhappy with that result. Which party will be successful often depends on what class of subject-to clause is at issue.
There are three classes of subject-to clauses:
- Entirely subjective;
- Clear, precise, and objective; and
- Partly subjective and partly objective.
Entirely subjective clauses depend entirely on the subjective state of mind of the party who benefits from the clause. An example would be “subject to how the buyer feels a week from now.” Such clauses do not create a binding agreement, but rather constitute an offer. Without an agreement, there is no obligation to act in good faith to remove the clause and either party can walk away from the deal so long as the condition remains.
A clear, precise, and objective clause result in a completed contract. An example would be “subject to the buyer selling their current home on or before January 1, 2022.” The parties cannot withdraw from the deal and their obligations are held in suspense until the condition is fulfilled. Both parties have a duty to act in good faith to bring the contract to fruition.
Partly subjective and partly objective imply a term that the parties will take all reasonable steps to cause the condition to be fulfilled. An example would be “subject to the buyer obtaining financing on satisfactory terms.” In this instance, satisfactory means satisfactory to a reasonable person in the buyer’s position.
What class a particular subject-to clause falls within will depend on the wording of the clause viewed in the context of the contract and with regarding to all surrounding circumstances. While this task can be difficult, courts will try to find a way to interpret a subject-to clause in a way that supports the existence of a contract. This is because it is assumed that the parties would not have signed the contract of purchase and sale if they didn’t mean to be bound by its terms.