Sellers managed to negotiate lower caps in recent years.

Sellers will want to cap their financial liability towards the purchaser in a share deal or asset deal. In real estate transactions the cap typically applies to liability under the warranties and in some cases also to liability under the indemnities. When negotiating the cap, the parties usually agree it as a certain percent of the net asset value of the property.

Commercial warranty liability caps

It is clear that sellers have been more and more successful in negotiating lower caps in recent years as competition between purchasers for quality assets is intense. While in 2018 we only saw 42% of the caps under 20% of the purchase price, in 2020 this figure stood at 70%. Only in 4% of the deals was no cap agreed at all.
In addition to the liability cap, the seller will usually try to insert into the SPA a small claims exclusion and a basket. The parties agreed on both a small claims exclusion and a basket in the overwhelming majority of our transactions in 2020.

Quantum limitation on warranty claims

If a small claims exclusion is agreed, a warranty claim made by the purchaser against the seller will only be considered if the amount of such claim exceeds the small claims amount. The rationale for this is that claims for small, immaterial sums should not be brought as they take a disproportionate amount of time and resources to manage and investigate. Purchasers try to avoid small claim exclusions as even small claims can add up over the warranty period. If a small claims exclusion is conceded, a purchaser should ensure this does not allow a series of small claims to be excluded where they arise from the same cause. This can be achieved by appropriate wording ensuring that small claims arising out of the same set of circumstances, or which are otherwise related are aggregated and treated as a single claim.

De minimis amount

In 18% of our transactions the small claims amount did not reach EUR10,000, the most common amount being EUR5,000.
In addition to the small claims exclusion, parties may also agree in a basket clause whereby the purchaser may only assert warranty claims if the aggregate of the individual warranty claims exceeding the small claims amount also exceeds the agreed basket amount. A secondary but important issue is whether that threshold should act as a “trigger” or an “excess.” A “trigger” means that once the threshold is reached, the value of all the claims will be recoverable by the purchaser. In contrast, an “excess” means that once the threshold is reached, either by a single claim or by a series of claims together having an aggregate value above the threshold, only the value of such claim(s) in excess of the threshold will be recoverable by the purchaser, ie the purchaser will bear the loss up to the threshold. As a rule of thumb, the basket threshold amount is usually five times bigger than the small claims exclusion amount.

Basket amount

In 2020, in almost half of the transactions the basket amount was less then EUR50,000 and in only 24% of the transactions was it higher than EUR100,000.

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