What the 'Subject to' clause really means

Sellers often have to accept 'subject to' offers on a property. What does this mean for both buyer and seller?

In any sales agreement, there are some clauses that can cause a certain amount of confusion.

In terms of property sales, a common clause that is included in many agreements is that the sale of the property is subject to the sale of another property. This is a suspensive condition meaning that if the sale of a property is subject to the sale of another one, it simply means that if that event does not take place the transaction lapses and therefore no cancellation of such a transaction is necessary.

Linda Erasmus, CEO of Fine & Country South Africa, explains that when selling a home on the condition that the sale is subject to the sale of the purchaser's property, it merely means that the purchaser needs to sell his property in order to raise funds to pay the seller. Should the purchaser not sell his property, it means that the seller has, in essence, not sold his property.

Things go wrong as they sometime will, which is why Erasmus believes that the "subject to the sale of another property" clause in any agreement should include a condition to protect the seller.

"The intention of any seller when they put their home on the market is to sell the house and get the money as soon as possible. When accepting a "subject to" offer which includes only a simple term such as "this offer is subject to the sale of the purchaser's property, stand 124 Muldersdrift, within 60 days " will mean that the seller is bound to this one purchaser for 60 days and that he/she cannot sell to another buyer within the 60 day period," says Erasmus. "Should the purchaser not sell his stand within the allotted period, the seller's home is back on the market."

Erasmus says that in order to protect the buyer and the seller, the terms and conditions should state that the "subject to the sale of another property" clause is limited to a certain period of time, which needs to be realistic. The seller should also be able to keep on marketing his property within this period. "Should the seller receive another offer within the period he/she should give the existing buyer an option to eliminate the subject to condition," says Erasmus. "The seller should also have the right to accept an offer with better terms and conditions. This way both parties' intention is clear and both parties are protected and will not waste each other's time."

The advantages of the "subject to" clause for the seller would only really apply if he/she is still allowed to market the property and if he/she is able to maintain control over which offers can be accepted. "The estate agent should look after the seller's interest and should make sure that a good addendum for selling a home "subject to" is available at all times," says Erasmus.

"Subject to" clauses can be much more advantageous for the buyer in that if the purchaser is not in a position to pay for the home without receiving funds from the sale of his current home, the clause will protect him. But, Erasmus notes that the purchaser should not at any time eliminate this clause unless he has other means to pay for a property.

A disadvantage for the purchaser is that another buyer who has sufficient funds available immediately may come along and buy the property. But if procedure is followed properly and if all parties abide by the clauses of selling a home "subject to the sale of another" it should be easy, but Erasmus says that there are a few golden rules which are important to remember in the process:

Rule no 1:
The purchaser, who needs to sell his property say within 60 days, needs to put his property on the market at a realistic market value in order to sell within the given period. The estate agent selling such a property should give the purchaser ample information to establish a realistic market value.

Rule no 2:
The buyer should not blame anyone if he/she is not able to compete with a cash offer. "The buyer should then accept that they have not sold their home and the intention of the seller is to get the money from the sale of his home as soon as possible," says Erasmus.

Another point of importance for sellers is to note that it is common practice - especially in cities where people move from one suburb to another to be closer to schools etc – that most buyers are not in a position to purchase other than with a "subject to" condition.

A final word of warning from Erasmus: "Throughout many years in real estate, we have noticed that a "subject to" offer normally comes in higher than a cash offer. The reason for this seems to be that the purchaser always thinks that he/she can get more for the property than what it is worth – only to find out later that the unrealistic price cannot be achieved."

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