Buying a Dental Practice - Warranties, Indemnities and Disclosure
The first step in any dental practice purchase (after agreeing Heads of Terms) is carrying out the due diligence (See our article here for further information on due diligence). The due diligence exercise is carried out to provide the buyer with as much information as possible, so that they gain a fundamental understanding of the dental practice that they are buying.
The principle of caveat emptor (“buyer beware”) applies, meaning that the buyer’s solicitors have to raise all pertinent enquiries with the seller in relation to the dental practice. The seller’s responses may bring to light circumstances that will need to be addressed in the sale and purchase agreement (“SPA”). This would include the tailoring of appropriate warranties and indemnities.
Warranties and indemnities are a means of giving contractual weight to the information supplied by the seller in the due diligence process and allocating risk fairly between the seller and the buyer.
What are warranties?
Warranties are contractual statements of fact made by the seller to the buyer in the SPA. The buyer will rely on the warranties as being true. If it is later discovered that a warranty is inaccurate or untrue, this could give rise to a claim for damages for breach of warranty.
An award of damages for breach of warranty aims to put the Buyer in the position it would have been had the warranty been true; subject to the usual contractual rules on mitigation and remoteness. Such losses can be difficult to quantify and accordingly most buyers seek the option to claim damages based on an indemnity of the reduction of the balance sheet value of the target dental practice business
The seller discloses formally to the buyer if they know that any of the warranties are untrue or inaccurate in a document known as the disclosure letter (see below). The seller is not liable for a breach of warranty if it relates to a matter that it has disclosed. So the warranties are a useful means of identifying and assessing any risk, whilst also protecting the buyer against any issues which may not have been identified in the disclosure process and may arise or come to light in future.
What are indemnities?
An indemnity is a contractual promise by the Seller to reimburse the Buyer in respect of a loss suffered. The purpose of an indemnity is to place the buyer in the same position they would have been but for the event indemnified against arising. Indemnities are used in circumstances where a breach of a warranty would not give rise to claim in damages for example where the warranty in question has been disclosed against or they do not want the seller’s liability for resulting losses being limited by the limitations which usually apply to warranties.
Indemnities are appropriate in circumstances where a specific matter is known to the buyer and which clearly fall outside of the buyer’s responsibility, such as liabilities relating to staff, commercial contracts, clients or patients arising during the seller’s period of ownership and prior to completion of the sale of the dental practice.
An indemnity provides the buyer with compensation for all losses suffered (including professional costs associated with claiming under the indemnity).
In response to the warranties, the seller will carry out a disclosure exercise which usually results in the drafting of a Disclosure Letter.
The Disclosure Letter is agreed as a definitive record of all the information disclosed to the buyer; about the dental practice and will include an index listing the documents disclosed to the buyer during the legal due diligence process.
If the seller is asked to give a warranty in the SPA that is not true, it should provide a specific disclosure in the Disclosure Letter setting out details of all facts or circumstances that are inconsistent with that warranty. This excludes the matter disclosed from the scope of the relevant warranty, thereby eliminating the seller’s risk of a claim for breach of that warranty, to the extent that the buyer has the information it needs to assess the risk it will assume; unless the buyer subsequently negotiates to reduce the price or an indemnity in respect of the matter disclosed.
Other Limits on the Seller’s liability
The seller’s liability under the warranties is commonly limited in the SPA in the following ways:
1. Placing an aggregate maximum financial limit or cap on the total amount that claims under the warranties can reach (this is normally equivalent to the purchase price of the dental practice);
2. Placing a minimum financial limit for each claim for a breach of warranty and a minimum aggregate cumulative financial limit in respect of claims under the warranties before the seller becomes liable to pay any sums;
3. Excluding claims where recovery is possible from a third party (for example an insurer); and
4. Placing time limits on how long the buyer has to give notice of a claim under the warranties; providing a time where the sellers liability under the warranties comes to an end.
At Meade King we work hard to understand our clients and their business, so that their interests are protected. If you are thinking of buying or selling a dental practice, give us a call on 0117 926 4121 to discuss or make a Free Online Enquiry.