How the financing condition secures a property purchase: condition precedent and condition subsequent, their effect and what matters in the wording.
BRANDAUER Rechtsanwälte
Salzburg law firm for real estate, property and corporate law
Every matter is handled by a coordinated team of lawyers, legal staff and specialists. In property purchase matters we look at the contract, land register, escrow and tax consequences together.
Most property purchases stand and fall with the bank financing. Whoever signs a purchase offer before the loan commitment is there takes a considerable risk. If the bank refuses, the buyer remains bound by the contract and owes the purchase price. This is exactly where the financing condition comes in.
A financing condition is a condition that ties the effect of the purchase contract to the coming about of the financing. Austrian law knows two basic forms for this: the condition precedent and the condition subsequent. They work differently and should be chosen deliberately.
This post explains from a lawyer perspective how a financing condition works, how condition precedent and condition subsequent differ and what matters in the wording. This way you do not bind yourself to a purchase that you cannot finance in the end.
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Whoever raises the purchase price from own funds needs no condition. Whoever depends on a bank commitment should protect themselves.
If you raise the purchase price from own funds or already have a binding loan commitment, a financing condition is as a rule unnecessary. Nevertheless make sure that the bank payout fits in time with the maturity of the purchase price. Also clarify the settlement via an escrow so that payment and transfer of ownership go hand in hand.
Have the payment periods coordinated with the bank payout.
If a financing condition is missing and the bank refuses, you remain bound by the purchase contract. You owe the purchase price despite the missing financing and risk damages or the loss of forfeit money. Therefore include, already in the purchase offer, a clause that ties the purchase to the coming about of the financing. Formulate the condition and the period clearly.
Have a condition clause formulated before you bind yourself.
A condition precedent lets the effect of the contract begin only on the fulfilment of the condition. Until the bank commits, the contract is in suspense. If the commitment fails to arrive within the agreed period, the contract does not take effect and the parties are free. This is the safest route because without financing no binding arises at all. Set the period and the proof of the condition precisely.
Have the condition precedent and its period precisely drafted.
A condition subsequent lets the contract take effect immediately but ends it retroactively if the condition occurs, that is if the financing fails. This route binds you more strongly at first than the condition precedent, because the contract applies until it fails. Clarify precisely what happens to performances already rendered on the occurrence of the condition.
Have the unwinding on the occurrence of the condition subsequent regulated.
The financing condition is a contractual condition. The Austrian Civil Code allows the parties to make the effect of a contract dependent on a future uncertain event. The coming about of the bank financing is such an event. With the condition, buyer and seller agree that the purchase only applies or only remains in place if the financing actually comes.
The practical benefit is obvious. Without a condition the buyer bears the full risk of a bank refusal. He would then have to raise the purchase price from other means or break the contract and pay damages. With a clearly worded condition this risk shifts, because a failure of the financing either does not let the purchase take effect at all or ends it again.
For the condition to hold it must be precisely framed. It should be settled which financing is meant, by when the commitment must be there and how the fulfilment or failure of the condition is to be proven. A vague clause leads to problems of interpretation in case of dispute and can miss its purpose.
The law distinguishes two types of condition. With the condition precedent the effect of the contract begins only on the fulfilment of the condition. Until then the contract is in suspense. If the bank commitment comes, the purchase takes effect. If it fails to arrive within the period, the contract does not take effect and both sides are free.
With the condition subsequent it is the other way round. The contract takes effect immediately but ends if the condition occurs. If the failure of the financing is agreed as a condition subsequent, the purchase applies at first and only falls away once the bank definitively refuses. Until then the buyer is therefore already bound.
For the financing condition, the condition precedent is usually the safer route. As long as the financing is not in place, no full binding arises. Which form fits in the individual case depends on the interests of both sides. The seller often prefers the earliest possible binding, the buyer the latest possible. A balanced clause takes both concerns into account.
Both types of condition secure the financing but take effect at different points in time.
| Condition | Effect of the contract | Consequence on failure |
|---|---|---|
| Condition precedent Effect begins only on fulfilment | Suspense until then | Contract does not take effect at all |
| Condition subsequent Effect begins immediately | Contract applies until occurrence | Contract ends retroactively |
| No condition Fully effective purchase contract | Buyer is bound immediately | Full financing risk on the buyer |
For the financing condition the condition precedent is usually the safer choice, because without financing no full binding arises.
Caution without a condition: Do not sign a purchase offer or a purchase contract without secured financing and without a financing condition. If the bank refuses, you remain bound and owe the purchase price. Have the clause checked before signing. Booking an initial consultation (72 euro) quickly clarifies which condition fits your situation.
Include the condition already in the purchase offer, not only in the later contract. The offer already binds, as our post shows on why the purchase offer is binding. Whoever demands the condition only afterwards often no longer has any negotiating power.
Set a realistic period for the bank commitment and regulate how the fulfilment or failure of the condition is to be proven. Without a condition, a refusal would leave you only the exit via the general remedies. Which these are is dealt with in our post on withdrawal from a property purchase contract.
Finally coordinate the financing condition with the settlement via an escrow so that purchase price payment and transfer of ownership mesh cleanly. Also plan the incidental costs that you can estimate with the incidental costs calculator. This way your financing stands on solid ground.
A financing condition is a condition in the purchase offer or purchase contract that ties the effect of the purchase to the coming about of the bank financing. If the financing does not come, the purchase either does not take effect at all or ends again, depending on the type of condition agreed.
With the condition precedent the effect of the contract begins only on the fulfilment of the condition. With the condition subsequent the contract takes effect immediately and ends only when the condition occurs. For the financing condition, the condition precedent is usually the safer choice.
Without a condition you remain bound by the purchase contract even if the bank refuses. You owe the purchase price and risk damages or the loss of agreed forfeit money. An exit is then only possible via the general remedies.
What matters before you sign a property purchase contract.
Why even the offer binds and why the condition belongs there.
Which routes lead out of the contract if no condition was agreed.
Estimate the incidental costs that your financing has to carry.
When buying property, the contract and the land register decide. Call us directly or send an email, callback within one business day.
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