Subject conditions—we’ve all seen them and we’ve all used them. Easy peasy, nothing fancy, right? Not so fast. The cold hard reality is that subject conditions have the potential to become major roadblocks and can land you directly into the middle of a traffic jam with no escape route. Don’t know what I’m talking about? Read on.

Back to basics

Drafting legally enforceable contracts is an indelible part of any licensee’s practice, and subject conditions often play an important role in real estate contracts. Typically, subject conditions will allow a buyer to conduct their due diligence (e.g. subject to the buyer obtaining a home inspection, financing, etc.) before they become contractually obligated to purchase a property. While less common, subject conditions can also be for the benefit of a seller (e.g. subject to the seller selling their own home, obtaining third-party approval, etc.). Regardless of who benefits from a subject condition, licensees should be aware that the manner in which subject conditions are drafted can have serious implications on the enforceability of the Contract of Purchase and Sale. For instance, subject conditions that are too vague, imprecise, or entirely subjective can render an agreement entirely unenforceable. Yikes!

The important stuff

Needless to say, licensees can be exposed to potential liability if a transaction fails to complete due to vague, imprecise or entirely subjective subject conditions. In this regard, the case law has generally distilled subject conditions into three different “classes,” each with their own legal ramifications:

1. Clear, precise and objective subject conditions
   1. An example might be “subject to Kanye West being elected President in the U.S. Presidential Election of November 5, 2024.” This clause is entirely dependent on the occurrence of an event that is in the sole power of a third party to perform and neither party (buyer nor seller) can walk away from the contract. The obligations in the contract, however, are held in suspense until the happening of the objective event (which, in this case, is unlikely but not impossible). If the objective event does not occur, then the contract is at an end, and both parties can walk away from the deal.
2. Partly subjective and partly objective subject conditions
   1. An example might be “subject to the buyer obtaining satisfactory financing.” This clause is dependent on the objective action of a buyer obtaining financing but with the subjective element of it being “satisfactory” to them. In this case, the parties are bound by the agreement but have no obligation to perform until the subject condition is fulfilled or waived. If the subject condition is not fulfilled or waived, then the contract is at an end and the parties can walk away.
3. Entirely subjective subject conditions
   1. An example might be “subject to the approval of the buyer’s father” or “subject to the seller finding a suitable replacement riverfront property.” Entirely subjective subject conditions give either a buyer or seller an entirely subjective right to buy or sell the property. Subject conditions that allow the benefiting party to indulge a whim when deciding whether or not to complete the deal will likely prevent a binding contract from ever being formed until the subject condition is waived.

While it may be tempting for licensees to draft subject conditions that are as subjective as possible to give their clients the ability to walk away from the contract if they so desire, this practice is dangerous. The recent case of Davidson v. Merrick, 2021 BCSC 1847^[1] demonstrates why.

A cautionary tale

In Davidson v. Merrick, 2021 BCSC 1847 (Davidson), the plaintiffs (buyers) were interested in purchasing a cabin property (the Property) and made an offer to the defendants (sellers) with subject conditions for various inspections. The sellers made a counteroffer and also included a subject condition which read “[t]his offer is subject to the seller entering into an unconditional agreement to purchase a suitable waterfront or semi-waterfront home on or before August 14, 2020” (the Suitable Property Condition). The buyers accepted this counteroffer.

The buyers subsequently removed/waived their subject conditions, but as the August 14, 2020 deadline approached, the sellers proposed a one-month extension of the Suitable Property Condition to allow them more time to find a “suitable” property. The buyers did not accept this proposal; instead they proposed extending the closing date for a further six months on the condition that the Suitable Property Condition would be waived by the sellers. The sellers did not agree to this counterproposal and the contract lapsed.

The buyers commenced a court action against the sellers seeking to enforce the Contract of Purchase and Sale, arguing that the sellers failed to make best efforts to satisfy the Suitable Property Condition. In the end, the Court found that the Suitable Property Condition was entirely subjective and subject only to the whims of the sellers. In particular, it was held that it would be impossible for the Court to evaluate whether the sellers have fulfilled their obligations pursuant to the Suitable Property Condition because suitability, in this context, was entirely subjective. The Court held that no enforceable contract was created between the buyers and sellers and either party was entitled to revoke (and walk away from) what was, in essence, a mere offer. Wow.

The “satisfactory” subject condition

Given Davidson, you may be wondering whether there is any material distinction between the Suitable Property Condition and the often used “satisfactory” subject conditions. For example, is “subject to the buyer obtaining satisfactory financing” or “subject to a satisfactory property inspection” any more objective than the Suitable Property Condition?

While the line may be a fine one, there does appear to be a line. Mr. Justice Wilson in Davidson stated that, in the case of a “subject to satisfactory financing clause,” the court is able to evaluate a party’s efforts and whether a party was reasonable in refusing to accept an offer of financing having regard to prevailing rates and practices. A similar evaluative process can be undertaken to determine whether a party acted reasonably in not removing a property inspection clause^[2].

However, what constitutes a “suitable waterfront or semi-waterfront home” will differ from one family to another and is simply impossible to evaluate. As such, “satisfactory” subject conditions do not necessarily render a contract unenforceable, but this will ultimately depend on the precise wording of the subject condition viewed within the context of the contract, as well as other contextual factors. As a licensee, you should be aware that the BCFSA Knowledge Base contains a database of sample subject clauses that you can use, but you are expected to exercise your own professional judgement in applying the clauses to specific situations and in determining whether they are appropriate in the circumstances.

The takeaway?

In short, subject conditions are complex legal creatures, and the law regarding their treatment is not yet entirely settled. The cold hard truth is that trying to figure out whether there is a deal or no deal is not always easy or straightforward, even for those who are legally trained. As you’re operating within this somewhat tenuous legal framework, you’d be best served to ensure that subject conditions are as clear and objective as possible to avoid potential liability. Ideally, subject conditions should set out what must occur and what criteria must be satisfied.

Similarly, you should be aware of the potential problems that come with subject conditions that are too vague or subjective and should recommend that your clients obtain legal advice when facing subject conditions that appear to be too subjective or vague. Where appropriate, you should also take advantage of stock subject conditions found in the BCFSA Knowledge Base and also consider speaking with your managing broker if you’re unsure about the language in a subject condition. As always, when in doubt, check it out.

For more information regarding subject conditions, please also see Scott Twining’s article “Subject Clauses: Let’s Make a Deal” in the May 2014 Risk Report and Scott Cordell’s article “Subject clauses. Simple, right?” in the December 2017 Risk Report.

[1] https://www.canlii.org/en/bc/bcsc/doc/2021/2021bcsc1847/2021bcsc1847.html

[2] In this regard, courts have sometimes implied an additional term into the contract that the parties will use reasonable efforts to cause the subject condition to be fulfilled. As to the meaning of “satisfactory,” courts have, in some cases, held that “satisfactory” means satisfactory to a reasonable person with all the subjective but reasonable standards of the particular purchaser (See: Griffins v. Martens, 1988 CanLII 2852 (B.C.C.A.) and Flack v. Sutherland, 1995 CanLII (B.C.C.A.)).