Security
Substantial resources and time may be spent negotiating the warranties section of an SPA. However, all these resources and time will be wasted if no funds are available to cover a warranty claim. Likewise, if there is a possibility that, at some point, the parties will owe each other money pursuant to their respective obligations under the SPA, they will have an interest in ensuring that funds will be available to meet these payment obligations. The question of whether a payment obligation needs to be secured will depend on the circumstances of each individual acquisition. This is underlined by the fact that in 2020 in 68% of our transactions no security was provided at all.
The most commonly used securities on the Hungarian market for commercial real estate deals are corporate guarantee, surety and W&I insurance, while retention is hardly ever used.
A corporate guarantee under Hungarian law works the same way as a bank guarantee, the only difference being that it is issued by a parent company and not a third-party bank. This means that the guarantee is a standalone undertaking of the guarantor that is independent from the underlying obligations which it is guaranteeing. If the conditions for drawdown prescribed in the guarantee are met, the guarantor must perform payment without being entitled to investigate the status of the underlying obligations.
In contrast, a surety is a contractual promise to fulfil the obligations of a third party if such third party fails to do so. It is a secondary obligation, meaning that the party issuing the surety is only liable to the same extent as the third party whose obligations it is securing.
Security for warranty claims
W&I insurance is a form of insurance taken out to provide cover in respect of liabilities under warranties and indemnities given by the seller in the SPA. In recent years, buy-side policies – where the insurance is taken out by the purchaser, with no direct involvement from the seller – became the norm. The purchaser must satisfy the conditions under the W&I policy, with the proceeds of any claim being paid directly to the purchaser.
In our transactions, W&I insurance and surety were the two most commonly used securities in 2020.
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