Warranty and indemnity (W&I) insurance is becoming an increasingly common feature of corporate real estate (CPRE) transactions involving the acquisition or disposal of corporate entities that own UK real estate assets.
A CPRE transaction is different to what the UK property market recognises as a ‘straight property deal’ involving the transfer (from seller to buyer) of legal title to the relevant property.
On completion of a straight property deal, the buyer acquires the property subject to contractual covenants and title matters affecting the property. However, on completion of a CPRE transaction, the buyer becomes responsible (and therefore potentially liable) for all past dealings of the entities acquired.
The buyer can deal with such potential liability by seeking contractual protection under the sale and purchase agreement (SPA) in the form of warranties and indemnities from the seller. However, such W&Is are only as good as the covenant standing behind them.
The seller may have insufficient financial resources to cover liabilities under the SPA or have sufficient financial resources but simply refuse to stand behind the W&Is proposed in the SPA. Or they may insist on remitting the full proceeds of sale to investors on completion and not retain consideration in an escrow account to cover a potential SPA liability.
W&I insurance can therefore provide a solution that bridges the gap between what the seller is willing to offer and what the buyer expects to receive by way of contractual protection under the SPA. It covers the risk of warranty breach or an indemnity claim under the SPA and enables the buyer to claim directly against an insurer for the financial loss arising from such breach, or claim in place of a claim against the seller (seller liability is usually limited to £1 under the SPA).
There are, however, some strategic and commercial points to consider when procuring W&I insurance as part of a CPRE transaction. Purchasers should involve brokers early during deal discussions as they generally have a good idea as to what is insurable and can procure indicative quotes from insurers.
It is also sensible to negotiate up front who will fund the premium for the W&I insurance before discussing the detail of the protections or limitations in the SPA. Finally, procuring W&I insurance requires input from both the seller and the buyer - it should not be seen as a seller-side or buyer-side issue to deal with.
Paul Chases is a senior associate and head of corporate real estate at Herbert Smith Freehills LLP
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