What it means
Contracts frequently need to be signed before every requirement can be met, and conditions precedent are how that gap is bridged. The parties agree terms now but state that completion, payment or some other obligation only becomes due once specified events occur.
Signing therefore locks in the deal while leaving a defined route out if the conditions fail. The distinction from a condition subsequent is worth holding onto.
A condition precedent must be satisfied before the obligation starts; a condition subsequent ends an obligation that was already running. One switches a duty on, the other switches it off.
In corporate transactions these conditions are usually listed in their own schedule and are heavily negotiated. Typical items include competition or regulatory clearance, third-party consents, key customer contracts being novated, financing being drawn down, and no material adverse change occurring in the target's business between signing and completion.
The party that controls a condition is generally required to use reasonable or best endeavours to satisfy it. Loan agreements use the same device extensively.
A lender will commit to a facility subject to receiving board resolutions, security documents, valuations, insurance certificates and legal opinions, and no money moves until that checklist is complete. Borrowers who assume the money is available on signing often discover that the conditions list takes weeks to clear.
The commercial risk is the gap between signing and satisfaction. During that period the buyer is committed but not in control, the seller must keep running the business under agreed restrictions, and both sides need a long-stop date after which either can walk away.
Well-drafted agreements say precisely who must satisfy each condition, by when, and what happens if it is waived rather than met. For finance teams the practical question is what to recognise while the conditions are outstanding.
An acquisition that has been signed but remains conditional is generally not accounted for as a completed purchase, though it may need disclosure as a commitment, and a conditional loan facility is not available cash until drawdown conditions are cleared. Treating a conditional agreement as though it were done is a common cause of embarrassing forecast revisions.
In practice
Real-world examples.
Example
A buyer agrees to acquire a regional insurance broker for $22,000,000 subject to regulatory change-of-control approval. The share purchase agreement is signed in March, approval arrives in July, and only then does the obligation to pay the consideration crystallise.
Example
A property developer exchanges contracts on a site conditional on planning permission being granted within twelve months. When permission is refused at nine months, the condition fails, the contract falls away and the deposit is returned under the agreed mechanism.
Example
A bank commits to a $5,000,000 facility for a haulage company conditional on receiving audited accounts, a debenture over the fleet and confirmation of insurance cover. Drawdown is delayed by six weeks because the insurance endorsement is issued in the wrong company name.
Case study
Seen in the real world.
This illustrative and fictional example concerns Wexbury Foods, which agreed to buy a chilled desserts business for $14,000,000. The agreement contained four conditions precedent, including the novation of a supply contract with the target's largest retail customer, which represented 38% of its revenue.
Wexbury's team treated the conditions as paperwork and focused on integration planning. Six weeks after signing, the retailer indicated that it would consent to the novation only on revised commercial terms that cut the contract's margin by a third, which changed the economics of the whole acquisition.
Because the novation was a genuine condition precedent rather than a warranty, Wexbury was not obliged to complete on the original terms. It renegotiated the price down to $11,200,000 and completed two months later. The internal review concluded that conditions precedent should be owned by a named person with a weekly status report, exactly like any other project milestone.
Watch out
Common mistakes.
- Treating conditions precedent as administrative formalities rather than real deal risks that need an owner, a deadline and weekly tracking.
- Confusing a condition precedent with a warranty, when a failed condition means the obligation never arises while a breached warranty means a claim for damages.
- Leaving out a long-stop date, so a deal can hang unresolved indefinitely while both parties remain committed and constrained.
Questions
People also ask.
Can a condition precedent be waived?
Usually yes, if the agreement allows it and the party the condition protects agrees to proceed without it being satisfied.
What happens if a condition is never satisfied?
The obligation it governs never becomes due, and the agreement normally lapses at the long-stop date with each side bearing its own costs.
Who is responsible for satisfying conditions?
The agreement should say explicitly, and it usually assigns each condition to whichever party controls the outcome, with an obligation to use reasonable endeavours.
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