Understanding sale agreements: full title guarantee

When selling any assets, which could be shares in a company, real property or some other tangible asset, the contract for sale will usually set out on what basis the sale will proceed.

Although it may be appropriate in some circumstances for the seller to give the less onerous limited title guarantee (for example, where the sellers are acting as personal representatives), in most cases, the seller will be expected to give full title guarantee.

Full title guarantee

A sale agreement which contains a full title guarantee implies certain covenants, or promises, on the part of the seller. These covenants are implied by law and include that:

• the seller has the right to dispose of the assets;
• the whole of the property in the registered title is being disposed of (if the property is registered);
• the seller, at its own cost, will do all that it reasonably can to ensure the buyer has good title to the assets; and
• the disposal is made free from all charges and encumbrances and all other rights exercisable by third parties, other than those which the seller does not and could not reasonably be expected to know about.

In comparison, limited title guarantee implies the first three covenants but not the fourth. Instead, it is implied that since the assets in question were last sold for value, the seller has not charged the assets or created an encumbrance over them and is not aware of any charges or encumbrances created by any third parties.

How does this affect you?

For a buyer, full title guarantee is important as it provides assurance that the buyer will receive proper title to the assets and that nobody else has any rights which could interfere with this. Due to their importance, buyers may wish to include express provisions setting out the covenants in the sale agreement, rather than relying on the implied covenants.

In both cases, the seller will usually be required to provide warranties relating to its title to the assets, providing additional protection to the buyer. If these protections are not given to the buyer and the buyer seeks to sell the assets in the future, it may have difficulty as it will not be able to provide this assurance to future buyers.

For a seller, providing full title guarantee will require it to uphold these promises. If the seller does not have personal knowledge of the assets, for example if it is a trustee holding the assets for another’s benefit or, as mentioned, a personal representative, it is not sensible to offer full title guarantee as the seller may not be certain that the property is free from charges, encumbrances and third-party rights. There would be a risk of breach of contract, which could lead to the buyer seeking damages, or possibly even rescission of the contract.

Overall, whilst it will largely depend on the bargaining position of the buyer and seller, the giving of anything other than full title guarantee is likely to be strongly resisted by the buyer. If the seller has any concerns about its ability to comply with the covenants, it may be preferable to modify the covenants, or include modified express covenants instead.