Condition Subsequent: the Promise After the Money Goes

Commercial transactions have dates that do not wait. A property settles on a set day, a vendor must be paid, an old lender's payout figure expires. Some items on the approval cannot be finished by then for reasons nobody controls: a land registry queries a dealing, a landlord's lawyer is on leave, or the first audited accounts do not yet exist. Holding the whole loan back for those items could lose the transaction the loan was meant to fund.

So the lender separates what it must have before paying from what it can accept shortly afterwards, and credit usually signs off that division. The items left to later should be those whose absence the lender can live with for a few weeks.

A well-drawn condition subsequent has four parts: the item, the date, the evidence that closes it, and what follows if it is missed. The date may run from first drawing or be fixed in the calendar. Evidence is usually required in a form satisfactory to the lender. The consequence differs by document. Many make a missed item an event of default, after any grace period; some stop further drawings; some Australian facilities treat it as a review event. The phrase is looser here than in general contract law, where a condition subsequent is an event that brings an existing obligation to an end. In a facility letter it is a promise with a date on it.

Where the item is registration of security, statute may run its own clock, and a generous date in the letter does not move it. The UK Companies Act 2006 gives 21 days, starting the day after a charge is created, to deliver it to Companies House; a charge delivered late is void against a liquidator, an administrator and creditors unless the court allows more time. In Australia, under section 588FL of the Corporations Act, a PPSA security interest perfected only by registration can vest in the company on winding up or administration if it was registered later than both 20 business days after the security agreement took effect and six months before that event, unless a court fixes a later time. A mortgage of land is outside that section. In New Zealand there is no equivalent fixed period for a general security interest, but priority among registered interests generally follows the order of registration, so each day's delay leaves room for someone else. Perfection of security sets out what registration achieves.

A cider maker, constructed for this page like every figure in it, borrows US$3.5m to buy and fit out a neighbouring packing shed, valued at US$4.6m on completion of the purchase. Settlement is fixed, and five items are left until afterwards. The periods are the example's.

The registry queries the mortgage, which registers on day 26. The deed of priority slips, and on day 52, seven days late, the bank extends it in writing to day 75. The insurance item is forgotten by everyone: the broker says the certificate is coming, the analyst who opened the file moves to another team, and nothing is diarised. On day 83 a cool-room fire does US$620,000 of damage. The policy names only the cider maker, so the insurer pays the cider maker, and the money goes on wages and suppliers before the bank hears of the loss from the valuer on day 90.

The bank has had a right to call a default since the grace period on the insurance item expired. That right is of limited use now. It cannot bring back US$620,000, and a default notice to a cider maker with a burnt cool room makes recovery harder. The condition was cheap to satisfy on day 14 and very expensive to have left open on day 83.

The difference is who holds the leverage. With a condition precedent, the lender has not paid, and the unfinished item enforces itself. With a condition subsequent the money has gone, and the lender has only its contractual rights to press with. That is why valuation and core security items tend to be fought over at the precedent stage, and why a borrower's request to move one across is a credit decision and not an administrative one.

It also differs from a continuing undertaking. An undertaking to keep the assets insured runs for the life of the loan, whereas a condition subsequent is done once and closed. Failure to deliver the first certificate of insurance is a missed condition; failure to renew three years later is a breach of undertaking.

DEFINED IN ONE PARAGRAPH → · LOSS PAYEE → · READING YOUR FACILITY LETTER →

These clauses fail through administration more than through bad intent. The deal team has moved on, the borrower considers the loan done, and the date sits in a document no one reopens. A bank's control is therefore a register with an owner and a date against each item, and an annual review that finds an open condition has found a weakness in the file as well as in the borrower's paperwork.

A missed date also has to be dealt with deliberately. A lender that knows an item is late and simply carries on may later face an argument that it gave up the right to rely on the breach. A short letter that extends the date, or reserves the bank's rights, removes that argument. For a borrower, the sensible course is to ask before the date passes, because an extension requested in advance is an ordinary request and one requested afterwards is a waiver of a default.

EVENT OF DEFAULT → · PERFECTION OF SECURITY →