Disclosure letters exist in deals for the sale and purchase of assets or shares in a company, although they are normally more relevant in a share sale.
The idea is for the seller giving warranties within the Sale and Purchase Agreement to “flag up” in a Disclosure Letter any areas where “disclosures” need to be made.
Any discrepancies in the actual warranties will be notified to the buyer so that the buyer is then aware that a particular warranty is qualified by the disclosure. If done properly, the buyer will not be able to make a warranty claim for this particular point.
For example; if a seller warrants that there are no employment claims known to the seller and the seller just received a letter of proposed claim from an employee, then the seller would disclose this.
The disclosures will be contained in the Disclosure Letter which will refer to the specific warranty paragraphs against which the disclosures are being made (Specific Disclosures).
General Disclosures will also be made against the warranties. For example; if property is involved in the sale and purchase, a General Disclosure may refer to matters apparent from inspection of the property or apparent from specific property searches.
Seller replies to buyer due diligence enquiries (and supporting documentation) would also normally be referred to as part of the General Disclosures.
The Disclosure Letter will evolve as the deal progresses and must give enough detail so that the buyer can assess the risk of any disclosures and make decisions accordingly. For example; the buyer may request further information, or perhaps (in the extreme) pull out of the deal.
It is also possible that the items disclosed will lead to a request from the buyer for an indemnity or indemnities from the seller.
The Disclosure Letter will be delivered by the seller to the buyer on exchange and/or completion and an acknowledgement should be delivered by the buyer to the seller.
Failure by the seller to make adequate disclosure may pave the way for the buyer to make warranty claims against the seller.
Please see our Snapshot on The Due Diligence Procedure, Warranties & Indemnities for more information. Call rhw Solicitors in Guildford on 01483 302000 or email: firstname.lastname@example.org