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Found MoneyMany businesses and property owners miss out on thousands, even millions, of dollars that are rightfully theirs for the taking. Real estate sales, leases and other business transactions involve contractual indemnities that often lie dormant. Some indemnity provisions lapse without ever having been analyzed, much less exercised. A systematic effort to identify and capture the value of dormant indemnities can make the difference between a bad financial year and good one, or between a good year and a great one. An indemnity is a contractual commitment by one party to make another party whole for an agreed-upon set of anticipated costs or expenses. Indemnities can cover all sorts of potential liabilities or contingencies. Although they are routinely included in contracts so that parties can avoid fighting (or worse, litigating) after the parties go their separate ways, indemnities are among the most hotly contested provisions of a contract. A contract's real economic value is often dependent upon the perceived value assigned to the indemnity provisions. Yet once the transaction closes, or the lease terminates, all too often the written document is filed away, never to be reviewed again. If, after closing or lease termination, the purchaser or landlord has to spend money to cure a problem, the contract or lease should be reviewed to determine if applicable indemnities are available. Examples of such circumstances might include the post-closing discovery of environmental contamination of real property, or being required to retrofit a piece of equipment that is operating out of compliance with the law. If the purchaser or landlord fails to exercise a contractual indemnity that addresses the problem, he has lost some of the value of the deal. It is always best to have a plan in place, before the transaction closes, to capture the value of all contractual indemnities. To do so, the purchaser or landlord should be aware of how long the indemnities run, what the likely benefits will be and whether the benefits are transferable. If an issue arises post-closing or post-termination that may possibly be covered by the seller's or the tenant's indemnity, all relevant contracts should be identified, located and gathered. This may seem to be a daunting task, especially for businesses that have been the subject of recent or repeated acquisitions, mergers and/or divestitures, but in many cases, this can be inexpensively done by a qualified paralegal under the direction of an experienced lawyer. Some clients find this to be the most useful part of the indemnity capture exercise, even if they decide not to venture further. All relevant document should then be carefully analyzed, with the goal of assembling an outline of which rights have lapsed and which are still alive, and what entity may exercise such rights (e.g., whether an indemnity runs only to an immediate purchaser or also to a successor). The final step in the process is to actually collect on the indemnity. Not a step to be taken lightly, this involves making contact with the folks who owe the money, and then negotiating, settling and/or litigating to get them to fulfill their contractual obligations. Any money a company receives above the costs it takes to get it is, in essence, "Found Money." Although it is a lot more fun to focus on being the recipient of
"Found Money", it is imperative to focus on outstanding
indemnity obligations when purchasing or merging with an existing
business. All contracts and agreements (even those relating to sales
that have closed in the past) should be reviewed as part of the due
diligence process, to determine whether any indemnity obligations are
outstanding. For further information on this topic, please contact Beth Tiggelaar at beth.tiggelaar@strasburger.com.
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