In a typical significant institutional property sale as part of
the process the seller:
establishes a comprehensive electronic data room which contains
amongst other things:
financial records relating to outgoings and tenancies
(including incentives and arrears);
all tenancy documents (including incentive deeds and disclosure
all service and maintenance contracts which are to be
land identification surveys;
structural, electrical and mechanical reports;
geotechnical reports (if applicable);
a proforma sale contract predicated on the assumption that the
property is sold "as is" and subject to all disclosures
in the electronic data room. The proforma sale contract will
contain few if any warranties.
WHAT HAPPENS NEXT?
When a clear price leader emerges in the sale process, despite
whatever has been disclosed in the data room, it is common for the
preferred buyer to negotiate for the seller to give extensive
These warranties not only relate to the completeness of
materials disclosed in the data room but extend to specific
warranties regarding matters from title through to planning issues
and environmental issues. In order to get the deal done, sellers
tend to accommodate the buyer to some extent when the buyer
requests warranties. However a seller needs to focus on the process
by which it does this. For example a seller that is a responsible
entity under a managed investment scheme will wish to demonstrate
that is has met its obligations under Section 601 FC of the
In addition if there is a possibility that following completion
of the sale the seller entity will be wound up or stripped of its
assets, the buyer will seek that a material part of the price be
quarantined as a retention amount to be held to secure any warranty
claims successfully made during the warranty period.
From a risk management perspective, the seller is well advised
to have a planned strategy in place regarding identification of
risk issues which might emerge during the sale process so that:
as part of the sale process the issues can be appropriately
a costing or strategy for dealing with each of those issues is
the seller can develop its likely response to a request by a
buyer for a warranty and focus on appropriate dollar value
liability caps which would apply.
WHAT CAN A SELLER DO?
Ideally when bringing a property to market, a seller should
carry out a targeted due diligence on the property.
The focus should be on identifying and dealing with each of the
issues that a well-advised buyer would raise.
To this end our clients have found it helpful for Corrs to take
a direct role in reviewing seller due diligence materials,
preparing questionnaires for managers and, if appropriate,
interviewing managers with a view to:
identifying gaps in the information;
planning how the data room should be laid out so that the buyer
due diligence process is simplified. This will reduce the number of
buyer queries in any "Q&A process";
analysing issues which need to be addressed in the sale
contract rather than waiting for a buyer to raise these issues;
assisting the seller to develop its negotiation strategy
regarding the giving of warranties.
This strategy, if efficiently handled, is a very cost effective
part of the sales process.
enables the contract negotiation phase to be streamlined,
minimises the risk of future warranty claims; and
minimises the need for large retentions against
In short the costs of carrying out vendor due diligence are
outweighed by the benefits.
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.
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