Skip to main content
Home page
Site map
Search
Contact Us
0116 442 2076
It is normal for your liability under the warranties prepared when you are selling a business to be limited, and this is done in a number of ways:

Number and wording of the warranties

The best way to limit your liability is to give as few warranties as possible.

In addition you should also cut back on the wording of the warranties themselves whereas the buyer will want the warranties to be as wide as possible, e.g. you might be prepared to warrant that “all equipment is in working order” but you should not agree to add “and has been properly maintained” unless you know what this means and you can show it has been done.

Time limits on warranty claims

Unless stated in the contract the buyer normally has 6 years to start court action against you for breach of warranty (12 years if it is a deed). You should therefore try to reduce this to a few months or at least 2 or 3 years.  The important thing for the buyer is to make sure that you remain liable under the warranties for sufficient time to allow major problems to arise but you should not agree to any longer.  

For tax warranties, your liability is usually for 6 or 7 years because HM Revenue & Customs can reopen the tax affairs of a company up to six years later.

Time limits for notifying and making warranty claims

You need to be told promptly when the buyer becomes aware of a possible claim, otherwise, even if the liability period is reduced, the buyer can turn up at the end of that period with a “shopping list” of claims. It is therefore usual for the buyer to have an obligation to notify you of the possible claim within a short time after they find out about the breach, e.g. 1 or 2 months. You should also require that the buyer takes court action within a set period after the end of the liability period. Again this is to provide certainty and so that the buyer can’t keep coming back.

Financial limits on warranty claims

Unless stated in the contract there is no limit to your financial liability so it is therefore important to include financial limits in the contract. An obvious limit is the purchase price so that, whatever the loss to the buyer, this is the total amount for which you could be liable. However, often the price includes the value of machinery and property of which the buyer has the benefit after completion. It is therefore sometimes possible to separate out the limits, partly to machinery and party to goodwill or that the overall limit should be the purchase price minus that amount of it allocated to the machinery or property. In contrast, the buyer may argue that they may suffer other loss if, in reliance upon the warranties, they have made substantial investments in the business, e.g. new equipment or premises. 

At the other end of the scale as seller you will want a minimum amount for claims, e.g. £1,000 so as to prevent the buyer making low value claims that are too expensive to defend.

Disclosure

You will not be liable for a breach of warranty if you have told the buyer about the breach beforehand. Disclosures can be general (e.g. anything held in public records) or specific. Specific disclosures relate to specific warranties, e.g. if a warranty states that all vehicles are roadworthy you may disclose that there is no MOT certificate for a particular van.

Awareness

It is common for your warranties to be qualified by saying that they are true "so far as the seller is aware". The buyer will want to make sure the contract states that you are deemed to have made proper enquiries. Do not rely on your memory or recollection – physically check everything!  

If the seller is a company, then what’s in the seller’s knowledge depends on its officers. Be careful here because facts known to any employee could be deemed to be in the company’s knowledge so you should consider limiting this to those officers or employees whose awareness is relevant (e.g. directors). 

Other limits

Other limits on liability that can be included to protect you are:
  • Preventing double recovery – this is to prevent the buyer from making a claim if there are other ways of making good the loss e.g. insurers, or a debtor
  • Post-completion acts to be disregarded – this is to make sure that you are not liable for things the buyer does after completion
  • Limiting liability to the seller's ownership – if you have only owned the assets or shares for a short time you may not be fully aware of the previous history of the business. This is a potentially controversial clause because the buyer will argue that you, as seller, should have your own warranties from the previous owner
  • Disregard of changes in the law – in a heavily regulated industry you should argue that you should not be liable for loss where there has been a change in the law.
For further information please contact David Heys at Lawson-West Commercial on 0116 212 1000.