Sellers don't like suspensive conditions in offers to purchase a property, and buyers need to know that a contract of sale with suspensive conditions is a gamble, even for them.
In a hot real estate market, where sellers can pick and choose between buyers, offers to purchase property that are subject to the sale of another property usually don't get much attention. When sellers have multiple buyers to choose from, they usually go for an offer to purchase that is as close to cash as possible.
Release clause reality
If a seller is willing to accept an offer with suspensive conditions, he will most probably want to include a release clause in the contract of sale. A release clause provides the seller with a way out of the sales contract, if a better offer comes along before the buyer can fulfil the suspensive conditions in the agreement of sale.
Here's how it works:
You make an offer to purchase a property, which includes a suspensive condition of some kind (subject to selling your current home, subject to obtaining mortgage finance, etc.). The seller says fine, he'll accept your offer, but he wants a release clause included in the contract of sale. And you accept the counter offer.
Now you get sparking to get all your ducks in a row and meet the suspensive conditions of the sales contract. In the mean time, the seller continues to market his property, so that he doesn't lose precious marketing time.
If your suspensive condition is for the sale of your current property, you will have put your home on the market as well. So now it's a race between you and the seller to see who can find a buyer first. (If the suspensive condition was only for mortgage financing, the race is between the lender's mortgage approval process and the seller's marketing machine.)
You are hoping (and secretly the seller too), that you will be able to sell your property in a flash, hopefully to a buyer who does not need suspensive conditions in his contract of sale. If your house sells quick enough, you win and you can complete the purchase of the new property. But if the seller "wins" and receives another offer before your suspensive conditions have been met, he's free to accept the new offer as a "back-up", subject to the cancellation of your contract to purchase the property.
If this happens, the release clause states that the seller must notify you about the new offer to purchase and that you have x amount of time (usually 72 hours) to fulfil your suspensive conditions. If you cannot fulfil the suspensive conditions in time, your contract of sale lapses and the house goes to the second buyer.
Fulfilling the suspensive conditions
Suspensive conditions are usually included in a contract of sale for the benefit of the buyer. So, the buyer could, under normal circumstances, wave his right to protection under those suspensive conditions and simply declare them fulfilled. This means that the contract is not suspended any more, and that the transaction can move on to the next step, which is transferring the ownership from the seller to the purchaser.
But remember that the buyer will still be required to come up with the purchase price, so depending on the wording of your contract of sale, simply declaring the suspensive conditions fulfilled may not be good enough to ward off the release clause onslaught.
In most cases, the release clause states that you will need to prove that you can go ahead with the purchase. This means that you will need guarantees for the full purchase price, even without the funds that would have been available if the suspensive condition was actually fulfilled and you sold the house or got the mortgage.
Suspensive conditions can be costly
A contract that is subject to suspensive conditions and a release clause can mean that the buyer could expend a lot of time and effort only to lose the property to another buyer. But it might not only be time and effort that is lost.
A buyer who tries to fulfil a suspensive condition might incur actual expenses in the process. He might also have to lock himself into binding agreements, such as an exclusive mandate to sell his property, without the option to be released.
Buyers should be aware of the risk and try to make alternative arrangements that might ensure that they don't lose out twice - losing their dream property AND the effort and cost of trying to perform.
Hedge your bets
Here's a free tip for buyers who need suspensive conditions in their contracts of sale: Don't wait until you receive a release clause notice. If the property is truly the dream home for you, decide to move forward with the purchase no matter what, right from the start.
If there's really no way you'll proceed with the purchase unless your suspensive conditions are fulfilled, then so be it. But, if you are prepared to make the transaction work regardless of the suspensive conditions, make arrangements for adequate finance and guarantees as soon as you make your offer to purchase.
Don't wait until you receive a 72-hour release clause notice. A period of 72 hours is very short. If you're not prepared, you may not be able to pull the financing together in time and end up losing your dream property.
Buy some time
If a buyer cannot proceed with the purchase unless the suspensive conditions are fulfilled, he should try to buy some time. This can be achieved in two ways:
The buyer could try to negotiate a "reprieve" or a delay in the release clause, so that the release clause won't go into effect for a period of time, say 21 days. The buyer would be more likely to succeed in fulfilling the suspensive conditions if he can buy some time before the release clause comes into effect.
The buyer would obviously like to delay the release clause as long as possible, but any delay is better than none. If a property is ready to market and there is a demand for that type of property, it should be able to sell within 21 days (if it is priced right).
The buyer could also try to negotiate a longer notice period in the release clause. There is no law that says a release clause must have a notice period of 72 hours. It can be for any time period the buyer and seller agree to.
A buyer might also try and exchange a delay in the activation of the release clause for a shorter notice period. The seller should have fewer problems in finding a back-up buyer if the new buyer will know if they have the property in 48 or even 24 hours.
A suspensive condition is a gamble
Both the buyer and the seller take a gamble if suspensive conditions need to be included in a contract of sale. But the seller can reduce his risk by introducing a release clause to the contract.
The buyer needs to be a little more creative in ensuring that he has a fighting chance to conclude the purchase. Time is the buyer's friend, and he should try and negotiate as much of it as possible, especially if the buyer has a suspensive condition that involves the sale of another property.
If a buyer is trying to make a trade-up, selling a lower-priced house to buy a more expensive one, the suspensive condition might just work out okay, because the lower-priced real estate market is usually more active than the higher-priced section of the market.
A buyer would still be much better off if he can get in a cash position BEFORE making an offer to purchase, and eliminate the need for suspensive conditions altogether.
