Seller warranties in a practice sale agreement are tantamount to express guarantees or promises to a buyer that specific facts or conditions are true or will happen. What are you willing to warrant as the seller of your practice and what are buyers wanting you to warrant? Buyers seek warranty protection in a wide range of matters, including intellectual property rights, financial matters, title to and adequacy and state of the assets, quality and performance of plant and equipment, employment issues and whether the buyer is subject to any litigation. However, warranties should not be used as a substitute for the buyer’s own due diligence.
Warranties are key provisions of a practice sale agreement. A practice owner must read carefully and confirm they are comfortable with what they are warranting. When acting for buyers, we see examples of warranties being proffered in a first agreement draft, only to be later withdrawn by the seller – usually with no explanation. This can raise queries by a buyer as to the seller’s agenda. So, sellers, read and understand your warranties and ensure from the first draft agreement that you are comfortable and understand what you are warranting. Warranties relating to the financials may need to be properly verified by your accountant. A breach of a warranty will provide a buyer with a right to claim damages in compensation for the breach provided the buyer can prove loss or damage in that the effect of the breach was to reduce the value of the asset acquired.
You will recall our past blog on the importance of town planning permits. Sellers should be willing to warrant that they hold all statutory certifications, licences, registrations, approvals, permits, consents and authorisations necessary for the carrying on of the practice at the practice premises and that the seller’s use of the premises complies with any planning permit or applicable law. If the practice to be purchased/sold is a three (3) practitioner clinic with all correct permit documentation, it is commercially reasonable for a seller to warrant usage of the practice for the three (3) practitioners practising at any one time. If a practice has five (5) practitioners practising at any one time, but only a three (3) practitioner permit, and the seller is warranting that the usage of the practice complies with the town planning permit, then the seller is already opening up to issues with a buyer. As an aside, do not stress if you have an established practice (15+ years) without a town planning permit or the practice premises are within a commercial zoning which permits the use; there are alternative avenues for premises usage and “as of right” compliance.
Sellers should not take a buyer’s request for further and better warranties as a personal affront. Most warranty requests by buyers are commercially reasonable and are industry standard – and are usually asking the seller to stand behind the practice, particularly when the consideration is high. If the seller is a company, expect the seller’s director to personally and additionally provide the warranties. This too is industry standard.
It is important that seller warranties are drafted so that they are clear and certain and most sellers will seek to limit their liability as to time and quantum. Our Whitehead Legal practice sale agreement provides a fair and reasonable set of seller warranties which a buyer’s lawyer will find commercial and acceptable.
Watch our Blogs for commentary on Start-Ups