Conditions precedent to closing: Overview, definition, and example
What are conditions precedent to closing?
Conditions precedent to closing refer to specific requirements or actions that must be fulfilled by one or both parties before a transaction, such as a merger, acquisition, or sale, can be finalized. These conditions ensure that all necessary steps are completed, legal obligations are met, and risks are mitigated before the closing date.
For example, in a business acquisition, conditions precedent may include obtaining regulatory approvals, securing financing, or delivering certain documents like audited financial statements.
Why are conditions precedent to closing important?
Conditions precedent to closing are important because they ensure that all parties are adequately prepared and that the transaction can proceed smoothly without unexpected issues. For SMBs, these provisions provide clarity and a structured process for finalizing complex agreements, reducing risks, and protecting their interests.
By defining these conditions clearly, both parties can avoid misunderstandings, ensure compliance with legal or regulatory requirements, and establish accountability for completing specific tasks before closing.
Understanding conditions precedent to closing through an example
Imagine a small business owner sells their company to a larger corporation. The purchase agreement includes conditions precedent to closing, such as:
- The buyer must secure financing for the purchase.
- The seller must provide a certificate of good standing and audited financial statements.
- Both parties must obtain all necessary regulatory approvals.
If any of these conditions are not met, the transaction cannot proceed to closing.
In another scenario, a real estate purchase agreement may include conditions precedent, such as the buyer securing mortgage approval and the seller resolving any title defects. These conditions ensure that both parties are ready for the transaction to be finalized.
An example of a conditions precedent to closing clause
Here’s how a conditions precedent to closing clause might appear in a contract:
“The obligations of the Parties to proceed to Closing under this Agreement are subject to the satisfaction (or waiver, where applicable) of the following conditions precedent: (i) the Buyer shall have secured financing in an amount sufficient to consummate the transaction; (ii) the Seller shall have delivered all required documentation, including audited financial statements and a certificate of good standing; and (iii) all necessary regulatory approvals shall have been obtained. If any of these conditions are not satisfied or waived by the Closing Date, the Parties shall not be obligated to proceed with the transaction.”
Conclusion
Conditions precedent to closing are essential for ensuring that all necessary steps and obligations are completed before finalizing a transaction. For SMBs, these provisions provide a structured and transparent process, reducing risks and ensuring the deal proceeds smoothly. A well-drafted conditions precedent to closing clause protects both parties’ interests and establishes accountability, fostering confidence in the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.