The buyer wants to hold back a portion of our purchase price in an escrow account to cover potential indemnity claims, but they also want the right to set off any claims directly against our seller note. How do we prevent this double exposure and ensure the escrow is the exclusive remedy?

Question

Tyler Smith · Accepted Answer

Allowing a buyer to have both an indemnity escrow account and a right of set-off against your seller note is a recipe for double exposure. It gives the buyer multiple paths to withhold your money, often without having to prove their claims in court first.

To prevent this, you must establish clear boundaries in the purchase agreement. First, insist that the indemnity escrow is the exclusive remedy for any post-closing representation and warranty claims, up to a specific cap. This ensures that once the escrow period expires, typically twelve to eighteen months, your remaining proceeds are safe from further claims.

Second, if the buyer insists on a right of set-off on the seller note, limit this right strictly. It should only apply to final, non-appealable judgements from a court of competent jurisdiction or written settlements signed by both parties. Do not allow the buyer to unilaterally withhold interest or principal payments on your seller note based on a mere allegation of a breach.

If they bring a claim, they must continue paying the note or deposit the disputed amount into a neutral third-party escrow account while the dispute is being resolved. This protects your cash flow and keeps the pressure on the buyer to settle claims quickly.