The vast majority of property sales are financed by a loan granted by a bank to the buyer. In this situation, the preliminary sale agreement prior to the notarial deed of sale must be signed subject to the suspensive condition of obtaining a loan. The purpose of this condition precedent is to allow the purchaser to discharge his obligations and not to purchase in the event that the bank refuses to lend the necessary funds.
However, buyers who already own their home may wish to sell it to finance their new purchase. The timing of the sale of the previous home and the purchase of the new one is always complex and needs to be thought through in advance.
There are three possible solutions:
- the simplest and safest solution for the buyer is to first sell the property and then buy. However, the two sales rarely take place simultaneously, and it is not uncommon for buyers to have to rent a property between the sale and the purchase.
- The second solution is to ask the bank for a bridging loan, giving the buyer a sort of advance to finance the new home straight away. This advance will be repaid to the bank once the buyer has sold the original home (with interest). This is still a dangerous solution, particularly if the buyer does not manage to sell his or her first home within the period authorised by the bank. The bridging loan can then become very expensive. This situation was very common during the 2007-2008 crisis. Since then, banks have been more reluctant to grant these bridging loans.
- the final solution is to sign a preliminary sales agreement for the purchase of the new home, subject to the condition precedent that the buyer's home is sold.
A condition precedent on the sale of a property owned by the purchaser means that the sale is subject to a condition that determines whether or not it is completed. With the compromis, the seller and buyer agree on the property, the price and the essential elements of the sale. However, only if the buyer has sold his own property will the sale be completed by the signing of a notarised deed. If this is not the case, the compromis will lapse and the sale will not take place.
The concept of a condition
A "condition" is legally defined as a future but uncertain event to which the performance of an obligation is subject. The notion of condition is to be distinguished from that of term, which corresponds to a future but certain event on which the due date or extinction of theobligation depends. Unlike a term, a condition is based on the uncertainty of the event.
The occurrence of the event that characterises the condition must not depend exclusively on the will of one of the parties to the contract. Such conditions are called potestatives and are considered void.
In our example, a clause in the compromis stating that the sale is subject to the suspensive condition of the sale of another property, without any other specification, would be considered potestative and therefore null and void. There is no real obligation on the buyer to sell his property. The sale will depend on his goodwill (after the withdrawal period, he will still be able to free himself from his obligation to buy by putting his property up for sale at an exorbitant price). The condition precedent to the sale of another property therefore needs to be defined.
A regulated condition
To be valid,the condition precedent to the sale of another property must be clearly defined. It must not be left to the buyer's discretion.
To this end, the sale price (or at least a price range) of the property belonging to the purchaser must be determined, and a maximum period must be set for the sale to be completed.
It is also necessary to check that the purchaser has taken the necessary steps to sell the property beforehand. The Cour de Cassation (French Supreme Court) has upheld this condition where the purchaser has used the services of a third party to sell the property, for example where the property has been put up for sale by an estate agent.
Similarly, this condition is valid where the buyer has already signed a preliminary agreement for the sale of his home. In this situation, the suspensive condition will allow the buyer to withdraw from the sale if his own purchasers do not ultimately have the loan to buy.
It is therefore perfectly possible to include a condition precedent for the sale of another property in a compromis de vente, as long as the clause is clearly defined.
In practice, however, such a clause is highly uncertain and very risky for the seller. The seller's property will be blocked for several months while the buyer finds a buyer for the property. If the deadline for fulfilling the condition has passed without success, the seller will find himself back where he started and will certainly have let other potential buyers through.
This is why, even if the Cour de Cassation validates this clause when the buyer has put his property up for sale through an estate agent, in practice this clause is only recommended when the buyer has already signed a preliminary sales agreement for his own property.