The five things every first-time home buyer needs to know
Warranties act as contractual statements confirming the condition of the business at the point of sale.
Normally provided by sellers to give legal reassurance to buyers, they provide clarity on what is being sold and, if a warranty later proves to be incorrect and a loss arises, help buyers to bring a claim.
Warranties commonly cover areas, such as:
- Ownership of shares and the right to sell
- Authority to enter into the transaction
- Accuracy of accounts and financial information
- Compliance with legal and regulatory requirements
- Disclosure of contracts and liabilities
Most agreements are built around two types of warranties:
- Fundamental warranties – These relate to core issues, such as ownership and authority. These are typically subject to fewer limitations.
- General warranties – These cover the wider operation of the business, including trading, assets, employees and financial position.
Why warranties are so important
Warranties provide buyers with a route to recover losses if something material has not been disclosed and for sellers, they can help to smooth over a sale by giving reassurance that the business is as described during negotiations and due diligence.
example, if it is stated that there is no ongoing litigation but a significant claim later comes to light, a buyer may be able to pursue a breach of warranty claim.
From a seller’s perspective, warranties also help define the extent of ongoing liability once the sale is completed to give them a clean break from the business.
Most agreements will include limitations, such as:
- Financial caps, often linked to the purchase price
- Minimum thresholds for individual claims
- Aggregate thresholds before claims can be pursued
- Time limits for bringing claims
- Requirements to seek recovery from insurance or third parties first
Warranties are often heavily negotiated and the wording matters. If they are too broad or unclear, they can create unnecessary exposure or lead to disputes later on.
Clear drafting helps ensure that:
- Risk is allocated fairly between the parties
- Liability limits are enforceable
- The agreement reflects what was uncovered during due diligence
- There is a clear framework for resolving disputes
Getting the right support
Careful drafting and negotiation can protect your position and limit your risk during a transaction.
If you are considering a share purchase or need advice on an existing agreement, please speak to our team.
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