By Natalie Gosper, a Solicitor in our Commercial Law team.
The standard conditions contained in the Contract for Sale of Business 2015 edition contain a number of warranties or promises made by the vendor about certain aspects of the business.
As they are contained in the ‘fine print’, they can’t be that important, right?
Wrong. The vendor’s warranties and promises must be carefully reviewed to ensure the vendor knows exactly what they are stating about the business and how they will conduct the business between exchange and completion. If a vendor makes incorrect representations or warranties, the purchaser may be able to make a claim for damages, rescind or terminate the contract.
The vendor promises that ‘the equipment is proper working order’. If some equipment is not in proper working order, this must be disclosed in the contract. This sounds simple enough, but is easy to overlook especially for businesses using old or dated equipment.
‘There is no subsisting breach by the vendor of a lease’. This sounds straight forward, however the vendor should check rent payments, bond requirements and insurance obligations are up to date and any redecoration or other specific obligations under the lease have been met. During the period between exchange and completion the vendor must continue to comply strictly with the lease terms, including exercising an option to renew if applicable.
‘There are no workers compensation claims by any employees of the business for the past three years’. This is a promise that is commonly overlooked but extremely important to get right. If there have been workers compensation claims in the past three years, these must be disclosed to the purchaser.
The standard contract for sale of business contains many other warranties. Between exchange and completion, the vendor must ensure the business continues to be operated as a going concern. This means a vendor must maintain the goodwill of the business, maintain normal stock levels and avoid varying employee entitlements.
The standard conditions restrict a purchaser rights for matters which are disclosed in the contract. The takeaway in this regard is to be clear about the warranties you are giving, disclose potential issues in the Contract and carefully observe your obligations under any lease or other agreements.
If you require assistance with selling your business or commercial law advice, contact team at Matthews Folbigg Lawyers as soon as possible.
