Conditions Precedent

Conditions precedent (sometimes abbreviated CPs, or referred to as "conditions to closing") are contractual requirements that must be satisfied — or formally waived — before the parties to a purchase agreement are obligated to complete the transaction. They function as gates: if a condition is not met by the agreed deadline and is not waived by the party it protects, that party has the right to walk away without completing the purchase and without being in breach of contract.

Common conditions precedent in a Canadian business sale include: receipt of required third-party consents (such as landlord consent to a lease assignment, or lender consent if existing debt has a change-of-control covenant); regulatory approvals, such as Competition Act clearance for transactions above the applicable notification threshold; satisfactory completion of due diligence; confirmation of buyer financing; no material adverse change in the business between signing of the purchase agreement and closing; and retention of key employees or customers whose departure would materially affect business value.

Most conditions primarily protect the buyer — they allow a buyer to exit if the business turns out to be materially different from what was represented. Sellers negotiate to keep conditions limited in scope and duration, and to include "efforts" obligations requiring the buyer to actively work toward satisfying financing and regulatory conditions rather than passively waiting. The letter of intent typically signals what conditions will be included in the definitive agreement, and the negotiation of CP language can be a significant part of the documentation process.

See also: Closing, Due Diligence, Letter of Intent, Purchase Agreement.