Skeletons In The Cupboard: Warranty And Indemnity Insurance In Corporate Real Estate Transactions

Author:Ms Deborah Lloyd and Tom Taylor
Profession:Nabarro LLP
 
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Warranty and indemnity insurance is an increasingly common part of many corporate transactions. Corporate real estate transactions are no exception, although there are some differences to note.

Why use corporate structures in the first place?

Corporate real estate deals typically involve the sale and purchase of shares in a special purpose vehicle (SPV) that holds property, as opposed to a transfer of the target asset itself. There are tax advantages to this method of transfer (SDLT on a sale of shares in an English company is 0.5 per cent), but these are not the only driver.

In a standard corporate sale of a company operating a business, the change of ownership allows the buyer to get on with running the business after completion, and the seller to make a clean break, walking away from the deal without significant, ongoing, contingent liabilities. The same approach is often used in the real estate context.

Warranties and indemnities - the skeletons left in the cupboard

However, the nature of corporate transactions is that the buyer must beware (that's a legal doctrine) of skeletons in the cupboard (that's not). A buyer is highly unlikely to enter into an a share purchase agreement (SPA) unless it contains warranties (written statements of fact about the company) from the seller, which give the buyer the right to sue for damages if it discovers, after completion, that the statements were untrue.

In a real estate context, statements about the company's ownership of title to the property, legal encumbrances on the property, adverse possession and occupation, and a range of other issues, may be included as well as those common to any corporate transaction (such as details of the company's share capital, material contracts, capacity, accounts and, of course, potential tax liabilities). However, given that property deals are inherently simpler and less risky, and that the corporate route attempts to replicate via an SPV what happens in a direct property transaction (where land registry searches and such are typically performed by the buyer), warranties are often lighter than in a standard corporate sale.

Nevertheless, the fact that the seller will normally be exposed for some time after the sale to potential claims by a buyer under the SPA warranties means the seller will not normally be able to deposit all potential skeletons with the buyer and walk away following a deal. At the same time, buyers generally need comfort that the seller (which...

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