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

Last Updated: 8 December 2014
Article by Deborah Lloyd and Tom Taylor

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 might itself be an SPV that will be liquidated not long after the deal, or a fund that will soon be wound up) can and will pay up in the event of a successful claim.

A possible compromise

Standard compromise solutions include injecting some certainty as to the potential size of any future claim by capping liability under the warranties at an agreed level, using a parent company guarantee, or holding some of the sale proceeds in escrow.

This is less than ideal for the seller and its parent company, who will usually want to distribute the sale proceeds in their entirety, and who under this arrangement retain potentially significant contingent liabilities. The key downside for the buyer is that recovery via warranty claims is risky, particularly where the long term creditworthiness of the seller is weak or uncertain.

Another option – warranty and indemnity insurance

Warranty and indemnity insurance (WI) is an increasingly common and neat solution in corporate real estate transactions. It works broadly like any insurance – the insured party pays a premium (usually through a broker) to an insurer who agrees to cover a defined amount of losses resulting from the occurrence of any of the events listed in the policy: in this case any claims under the warranties or tax indemnity. Parties should consider the WI option early in the process, and where appropriate involve brokers relatively early to give the insurer time to review the SPA, disclosure letter and due diligence reports and agree a price for the policy (which may affect the price of the deal, depending on the commercial position). WI nonetheless takes typically only a couple of weeks to arrange, so it should fit comfortably into most deal timetables.

Which party is insured?

Either party can take out a WI policy. If the seller does so, it will be liable to the buyer for warranty claims up to a cap amount specified in the SPA, and for the excess specified in the policy. The insurer then steps in to satisfy the buyer with the remaining amount. This has the disadvantage of leaving the seller on the hook for claims, albeit for a reduced amount, but also complicates things by leaving the seller in control of the process of claiming against the insurer.

If the buyer effects the policy directly with the insurer, the cap in the SPA is low (the current market standard in the real estate context has become a nominal amount, often £1), and the purchase price for the company may be reduced to account for the premium. Buy-side WI also allows the seller to step away (subject to satisfying any nominal cap in the SPA), and gives the buyer a strong contractual recourse to the insurer in the event that any of the warranties are breached.  In effect this should mean more definitive closure for the seller and greater reassurance for the buyer.

Premiums and coverage

The market rate for premiums in real estate WI policies is probably around one per cent to 1.5 per cent the limit on the coverage under the policy. The amount of coverage is a commercial point that will vary on a case-by-case basis, and could theoretically stretch to the whole of the purchase price. However, given the relatively lower risk and the more limited nature of the warranties in an average real estate deal, the market rate is currently around 10 to 20 per cent of the price.

The strategic use of WI

Insurers usually accept a low cap on the seller's liability and do not insist on the buyer claiming against the seller before the right to claim against the insurer is triggered. This means that a buyer in a competitive auction process can potentially offer the seller a better deal in terms of minimizing the seller's contingent liability under any warranty or tax indemnity claims. If pitched at an appropriate level, taking into account the competition, this could be very attractive to sellers, enhancing the buyer's offer relative to other bids where WI has not been considered.

Sell-side WI is also sometimes used where the seller wants to level the playing field (on this point) between different types of bidder who may have different attitudes to risk under the warranties. By taking out a WI policy, the seller can offer all bidders the same cap on its contingent liabilities.


WI is an option that has the potential to allow both parties to a corporate real estate transaction to sleep easier after the deal, knowing that if any skeletons do fall out of the cupboard, the insurer is on hand to step in and give them a proper burial.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions