Warranties and indemnities

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Warranties and indemnities
  • Warranties
  • Indemnities
  • Retention

There are several ways a purchaser can seek protection from pre-acquisition liabilities.

Due diligence is an important part of the process and aims to uncover potential future liabilities. Following due diligence, purchasers may typically try to renegotiate the sale price to account for the known liabilities which will be passed onto them.

For more information on due diligence see the Due diligence guidance note.

Warranties are a statement made by the seller in the sale and purchase agreement. If the statement subsequently proves to be untrue then the purchaser can seek compensation.

An indemnity is an agreement to recompense the purchaser for future liabilities arising from a specified issue.

Warranties

General warranties can be used as a tool by the purchaser to encourage the seller to disclose relevant information.

The seller typically responds to the first draft of the sale and purchase agreement with relevant facts and information and amended warranties.

The production of clear detailed information in the letter limits the purchaser’s ability to make a claim.

Transaction project plans should allow for plenty of time between the purchaser receiving the disclosure letter and completion. This is so that the purchaser has time to respond appropriately to potentially significant issues.

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