Covenants and Conditions in Contracts
Both real estate professionals and laypersons oftentimes are confused by the differences between covenants and conditions. In its simplest terms, a “covenant” is an agreement to do or to not do something. Covenants are unconditional promises found in contracts, and the failure of a party who makes such an agreement to abide by its terms will entitle the other contracting party to damages for breach of contract. Such damages are usually calculated on the basis of how much it will cost the non-breaching party to be in the same position as such party would have been had the breach not occurred. That a party has made a covenant can often be seen by the use of words such as “promise,” “undertake,” or “agree.”
A “condition,” on the other hand, is a contingency, the happening of which may either excuse or trigger the obligation of a party to do something. Conditions can be either precedent or subsequent. A condition precedent is something that must occur before an obligation exists. A common example of such a condition is a loan contingency found in a purchase and sale agreement, whereby if the buyer is unable to obtain a loan, the buyer is not obligated to complete the purchase of the property. A condition subsequent is something that may occur after a promise is made, which will excuse the obligation of a party. An example of such a condition is that the obligation of a buyer to complete a purchase may be excused if a property is damaged by a natural disaster or fire before the close of escrow. That a condition, as opposed to a covenant, exists can often be seen by the use of words such as “if,” “when,” “unless,” “subject to,” or “conditional upon.”
Unlike the failure of a covenant, which will create liability on the part of the non-performing contracting party, the failure of a condition merely creates the possibility of the contract being terminated without there being any liability resulting from such failure. Using the above examples, if a buyer cannot obtain a loan in satisfaction of the loan contingency, the buyer can terminate the contract without liability. Likewise, if the property is damaged before the close of escrow, typically either party can terminate the contract without liability. Whereas the failure of a condition does not give rise to damages, it typically will excuse any future performance.
There are several clearly stated covenants contained within a normal purchase contract, including the promise of the buyer to pay, the promise of the seller to convey clear title, and the promise of the seller to deliver the property to the buyer in a non-defective condition. Sometimes, however, poor draftsmanship may lead to confusion as to whether something is a covenant or a condition. For example, if a purchase contract states that the buyer will close when a zoning change has been completed, is the buyer obligated to wait for an undetermined period of time for the zoning to change and then complete the sale, or can the buyer terminate the contract on the basis of a failed condition if the zoning change has not been completed within a reasonable period of time? In order to avoid problems, the language used in the contract should make it clear whether a particular term is a covenant or a condition.
About the Author: David Allen, a partner in the Phoenix law firm of Jaburg Wilk, has been representing clients in both transactional and litigation real estate and business related matters for over thirty years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker. Got a real estate law question for David? Contact him directly.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.
Originally published on Arizona School of Real Estate & Business