Reps & Warranties: Title to Purchased Assets
Essential Question:
Do you have good and clear title to the assets you’re selling?
In Brief:
Attestation that the Seller is fully able to sell all assets being sold.
Definition and thresholding for Permitted Encumbrances.
Category: Continued Diligence & Fact-Finding; Risk Allocation
What is it?
The Seller represents that it is the legal owner or lessee of all the Purchased Assets. It also represents that the Purchased Assets are free and clear of any Encumbrances other than Permitted Encumbrances. Part of this representation then details what constitutes Permitted Encumbrances.
When does it matter?
In an asset sale, the Buyer is purchasing specific assets for specific reasons, so it’s important that the Seller is able to transfer every single asset according to the transaction terms. Its failure to do so could meaningfully alter the value of the deal for the Buyer.
What to look out for?
The major sticking points here are specificity and scope. When reviewing this representation, identify what is being included as an asset and what counts as a Permitted Encumbrance and how those are qualified (e.g., via a general materiality standard or a material adverse effect standard).
