When a seller sells a property portfolio - Does the seller need to give any warranties to the buyer?

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24 May 2013

The typical scenario

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:

(a) financial records relating to outgoings and tenancies (including incentives and arrears);

(b) all tenancy documents (including incentive deeds and disclosure statements);

(c) all service and maintenance contracts which are to be novated;

(d) land identification surveys;

(e) structural, electrical and mechanical reports;

(f) contamination reports;

(g) 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 warranties.

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 Corporations Act.

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.

Risk management

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 disclosed;
  • a costing or strategy for dealing with each of those issues is available; and
  • 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; and
  • 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.

Specifically it:

  • enables the contract negotiation phase to be streamlined,
  • minimises the risk of future warranty claims; and
  • minimises the need for large retentions against warranties.

In short the costs of carrying out vendor due diligence are outweighed by the benefits.


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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