Right of Offset
The seller wants to be paid for the business, but the buyer does not want to pay twice for the business by also having to pay someone else for something which the seller owed. The buyer wants to pay only the purchase price which was negotiated and only if the buyer receives all of the business and the assets which were purchased. Problems can arise when the seller misrepresented, or did not know, the true condition of the business or the assets, when someone else claims ownership of the business or title to the assets, whenever the buyer has to pay something more than what was bargained.
Usually in the Purchase Agreement the seller will agree to indemnify the buyer against certain contingencies which may arise after closing and to pay or reimburse the buyer for any expenses the buyer may incur in having to resolve those matters. If the buyer is paying the purchase price by an installment note, the buyer may want to be able to make payments to the other persons and also be able to offset such payments by deducting such amounts from the balance owed under the promissory note and by not making some of the installment payments when they become due.
If applicable to the transaction, the Purchase Agreement should contain specific provisions about the right of offset, including what matters it is intended to cover, how long it is effective and what notice the buyer must give the seller or other action the buyer must take before being able to offset payments under the note. If the transaction contains such provisions, the potential for offset should be clearly stated in the terms of the promissory note in order to provide any of the seller’s transferees with appropriate notice about such terms.
While the right of offset can be very attractive to the buyer, who can apply installment payments towards third party claims, the seller may have reservations about whether the transaction should include offset provisions when the seller knows that after closing the seller may want to factor or otherwise sell the buyer’s note obligation to another person who certainly will not want to assume the uncertainty of whether the buyer will make future installment payments to the note holder or to someone else.