Typical seller warranties in business sales

This is a core area of transactional law and one where the detail matters enormously. The warranties given by a seller in a business sale (whether structured as a share sale or an asset sale) serve to allocate risk between the parties and provide the buyer with contractual protection and potential remedies if things turn out not to be as represented. Here is an overview of the typical categories.

Title and capacity:

The seller warrants that it has the legal right and authority to sell the business, shares, or assets, that it has full power to enter into the transaction, and that the shares or assets are free from encumbrances, charges, or third-party claims. In a share sale, the seller will warrant good title to the shares being sold.

Accounts and financial information:

The seller warrants that the accounts provided (usually the last audited or management accounts) give a true and fair view of the financial position of the business, that they have been prepared in accordance with applicable accounting standards, and that there has been no material adverse change since the accounts date.

Tax:

Tax warranties are often extensive and may sit in a separate tax covenant or tax deed. The seller typically warrants that all tax liabilities have been properly provided for, that all returns have been filed on time, that there are no outstanding disputes with HMRC, and that no transactions have been entered into which could give rise to unexpected tax liabilities. In a share sale, the tax covenant usually provides a pound-for-pound indemnity for pre-completion tax liabilities.

Assets:

The seller warrants that the business owns or has the right to use all the assets necessary for its operation, that those assets are in reasonable condition, and that there are no hire purchase or leasing arrangements not disclosed. In an asset sale this is particularly critical because the buyer is acquiring specific identified assets rather than a corporate wrapper.

Contracts and trading:

The seller warrants that all material contracts have been disclosed, that no material contracts contain unusual or onerous terms (such as change of control clauses), that no material contracts have been breached, and that the business has been carried on in the ordinary course. The buyer will typically want protection against the risk that key customer or supplier contracts will fall away on completion.

Employees:

The seller warrants that full details of all employees have been disclosed, including terms of employment, benefits, pensions, and any outstanding or threatened claims. In a share sale the employees remain with the company, so the buyer needs comfort that there are no hidden liabilities. In an asset sale, TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) will usually apply, and the seller will be expected to warrant compliance with TUPE obligations including the duty to inform and consult.

Litigation and disputes:

The seller warrants that there is no current, pending, or threatened litigation, arbitration, or regulatory investigation involving the business. This extends to actual and contingent liabilities.

Intellectual property:

The seller warrants that the business owns or is properly licensed to use all intellectual property material to its operations, that there are no infringement claims, and that IP registrations are valid and up to date.

Property:

If the business holds property interests, the seller will warrant that full details of all freehold and leasehold interests have been disclosed, that there are no breaches of lease terms, and that all necessary consents and licences are in place.

Compliance with law:

The seller warrants that the business has been conducted in compliance with all applicable laws and regulations, that it holds all necessary permits, licences, and authorisations, and that there are no known regulatory breaches or investigations.

Insurance:

The seller warrants that the business maintains adequate insurance, that all policies are in force, and that there are no outstanding claims or circumstances likely to give rise to a claim.

Environmental:

In some transactions, particularly those involving manufacturing or land, the seller will give warranties about environmental compliance, contamination, and liabilities under environmental legislation.

Data protection:

Increasingly common, the seller warrants compliance with the UK GDPR and the Data Protection Act 2018, including that the business has maintained proper data processing records, has a lawful basis for processing, has issued privacy notices, and has not suffered a reportable data breach.

Pensions:

If the business operates or participates in pension schemes, warranties will cover the status of the schemes, compliance with auto-enrolment duties, and the absence of unfunded liabilities, particularly for defined benefit schemes.

Practical points to keep in mind:

1. Disclosure is critical. The seller will almost always provide a disclosure letter against the warranties, identifying known exceptions. A properly disclosed matter will typically not give rise to a warranty claim, so the buyer should scrutinise the disclosure letter and its attachments with extreme care.

2. Limitations on liability are always negotiated. The seller will seek to cap its total liability under the warranties (often at a percentage of the purchase price), impose time limits for bringing claims, set minimum thresholds or baskets below which claims cannot be brought, and exclude consequential or indirect losses.

3. The scope and detail of the warranties depends heavily on the size and nature of the transaction, the bargaining power of the parties, and the level of due diligence carried out. In a smaller deal the warranties may be condensed. In a larger deal they can run to dozens of pages.

4. Warranty and indemnity insurance is now common in mid-market and larger transactions. This can be taken out by either seller or buyer and provides an insurance-backed remedy for warranty claims, which can help bridge the gap in negotiations.

5. There is a legal distinction between warranties and indemnities. A warranty is a contractual statement of fact giving rise to a damages claim measured by the diminution in value of what was acquired. An indemnity provides a pound-for-pound reimbursement for a specific identified loss. Tax liabilities and certain known risks are often covered by indemnities rather than or in addition to warranties.

If you are buying or selling a business, the negotiation of the warranty package is one of the most important parts of the transaction. The starting point is almost always a first draft from the buyer's solicitors with comprehensive warranties, which the seller then seeks to negotiate down or qualify through the disclosure process.