The buyer is demanding a broad offset right in the seller note, allowing them to unilaterally suspend our interest and principal payments if they allege any breach of representations and warranties. How do we limit this offset right to prevent them from using fabricated operational claims as an excuse to default on their payments?

Question

Tyler Smith · Accepted Answer

A broad, unilateral offset right in a seller note is a major risk that allows a buyer to act as judge, jury, and executioner over your remaining payments. If the buyer can stop paying you whenever they claim an issue exists, they will find an operational excuse to default the moment their cash flow gets tight. You must negotiate strict limitations on this right to ensure your cash flow remains secure. First, insist that the buyer cannot unilaterally withhold payments based on a mere allegation. Specify in the purchase agreement that any disputed amount must be paid into an independent escrow account, rather than withheld by the buyer, while the dispute is being resolved. This keeps the pressure on the buyer to settle the issue quickly. Second, limit the offset right to final, non-appealable judgments from an arbitrator or court, or written agreements signed by both parties. If they claim a breach, they must prove it through the formal dispute resolution process before they can touch your payments. Finally, ensure that any offset is subject to a high deductible basket. The buyer should not be allowed to offset your note for minor operational issues; the claim must exceed a significant threshold before any withholding is permitted. Protect your note with strong legal guardrails so it remains a reliable source of post-close income.