Warranty And Indemnity Insurance: A Game Changer In Hotel Sales And Acquisitions

Warranties and Indemnities: their role in a sale and purchase transaction

Warranties and indemnities play a key role in a sale and purchase transaction for both vendors and buyers. Broadly, a warranty is a statement of fact in relation to a target asset / business and a party's capacity to enter into an agreement. Normally, if a vendor discloses against a warranty as part of the disclosure exercise, the buyer will not be able to claim damages for a breach of that warranty to the extent the disclosure qualifies the warranty statement. To address the risk of loss arising for these "known risks", apart from renegotiating the purchase price if the issues are sufficiently major, the buyer may look for a specific indemnity in the sale and purchase agreement (SPA).

Commonly the principle of caveat emptor (let the buyer beware) or "sold as is" principle applies, meaning that without warranties the buyer assumes the risk that a target asset may fail to meet expectations or have defects. Absent any price adjustment, warranties provide to the Buyer an avenue for recourse from the vendor for such failures or defects relating to the target asset and vendor's title thereto. On the other hand, the vendor seeks protection either by not giving certain warranties, limiting a buyer's recourse (through time and quantum) or by way of disclosing against the warranties as part of due diligence process.

It is clear from the above that a robust due diligence process in a sale and purchase transaction is important. On the one hand, a buyer has to undertake a comprehensive legal, financial and tax due diligence on the target hotel and land and operating business (and, in the case of a "share deal" as opposed to an "asset deal", any target holding entity or entities) in order to determine the risks. The buyer then seeks to either renegotiate the price, mitigate such risks prior to completion of transaction (for example, as part of conditions precedent or completion deliverables), or protect its position on significant issues by way of specific indemnities. A vendor, on the other hand, is incentivised to give as full a disclosure as possible about the asset and the target business (and entities, if relevant) on the basis the buyer will usually not be entitled to make a claim on any matter which had been duly disclosed in due diligence materials.

Due to the importance of the disclosure exercise, buyers often seek a separate warranty that all information disclosed by the...