What Does Seller Indemnity Mean?
A seller indemnity is a clause included in a purchase and sale agreement (PSA), which relates to the reps and warranties provided by the seller. It is often a clause buried toward the end of the PSA, but, nonetheless, is an important component of the agreement for the buyer. It basically releases the seller from any liability that may arise due to the seller's failure to provide true and accurate reps and warranties.
How does this impact the buyer? For example, a seller may represent that there are no environmental issues with a property that is being purchased or leased as part of the transaction. If after the deal closes, an environmental issue is identified that requires cleanup, the buyer would be indemnified from these costs and the seller would be legally obligated to clear the issue up.
Divestopedia Explains Seller Indemnity
Seller indemnities, like buyer indemnities, are difficult to exercise. Everyone loses when a rep and warranty is found to be untrue, since exercising indemnities usually entails a legal process that is costly to both parties.
Buyers will usually look for sellers to indemnify them from losses arising from the following:
- A breach from the seller or its shareholders of any of the representations, warranties, covenants, or agreements made in the PSA and all other supporting documents including employment agreements, non-competition agreements, etc.;
- Any third party claim that arises related to conditions that existed prior to the closing date;
- Any environmental claim that arises related to conditions that existed prior to the closing date; and
- Any accounts payable and other liabilities (disclosed or undisclosed) that relate to the period prior to the closing date.