The Sandbagging Clause That Nearly Sank a $68M Deal

The situation

Pratheep had spent close to two decades assembling a portfolio of nine commercial properties across south-central Ontario, mostly self-storage facilities and small industrial units leased to a mix of local businesses and a few national tenants. He operated the portfolio through a single holding company, and by his late fifties he was ready to sell the company outright rather than the properties one at a time.

Hyun-woo had built his wealth a different way, as the operator of a multi-unit franchise business spanning several quick-service restaurant locations across the Greater Toronto Area. Looking to diversify into commercial real estate, he partnered with Kajan, a longtime business associate and commercial landlord in his own right, to form an acquisition holding company. Together they agreed to buy Pratheep's company for roughly $68 million, funded through a mix of bank financing and their own capital.

Our team was retained by Hyun-woo and Kajan's holding company to act on the acquisition, from due diligence through closing and, eventually, through a dispute that arose almost a year later.

What the review found

In an acquisition of this size, the purchase agreement does most of the risk-allocation work. The seller makes a series of representations and warranties, factual statements about the business, such as that the properties carry no undisclosed environmental liabilities, that all leases are in good standing, and that there is no pending litigation. If a representation turns out to be false, the buyer can claim against the seller for the resulting loss, usually up to a capped amount and often backed by a holdback of purchase funds in escrow, money set aside with a third party until any post-closing claims are resolved.

During due diligence, our environmental consultants flagged a preliminary soil report for one of the larger industrial units. A previous tenant had operated equipment that used industrial solvents, and the report noted elevated readings in a small area near the loading dock, but stopped short of confirming the extent of contamination or estimating remediation cost. Further testing was recommended. With the transaction on a tight timeline and competing pressure from another prospective buyer, Hyun-woo and Kajan made the commercial decision to proceed to closing, relying on Pratheep's representation that there were no outstanding environmental orders or known contamination requiring remediation, and on an indemnity holdback of roughly $3.5 million placed in escrow for twelve months to cover exactly this kind of risk.

Full remediation testing was completed about five months after closing. The contamination was more extensive than the preliminary report suggested, and the estimated cost of remediation came in at roughly $3.4 million, consuming nearly all of the escrow. Our client submitted a formal indemnity claim against the holdback.

Pratheep's lawyers refused to release the funds. Their position rested on the purchase agreement's sandbagging clause, a provision that addresses what happens when a buyer closes a deal despite knowing, before closing, that one of the seller's representations might be inaccurate. An anti-sandbagging clause bars the buyer from later claiming against a representation it knew to be false at closing, on the theory that the buyer priced that risk into the deal or chose to proceed with eyes open. A pro-sandbagging clause does the opposite, preserving the buyer's right to claim regardless of what it knew. This agreement contained anti-sandbagging language, and Pratheep's position was straightforward: the buyer's own environmental consultants had flagged the contamination before closing, the buyer proceeded anyway, and the clause therefore barred any claim.

What we did

1. Reviewed the sandbagging clause for exactly what it excluded. The clause barred claims where the buyer had "actual knowledge of a breach" prior to closing. That phrase mattered. Our client's consultants had flagged a preliminary, unconfirmed reading suggesting a possibility of contamination, not a confirmed breach of the environmental representation. We argued there is a meaningful difference between knowing a fact might exist and knowing a representation is false, and that the clause, read narrowly as anti-sandbagging language typically must be, only barred the latter.
2. Assembled a clear due diligence record. We pulled the full email chain between our environmental consultants and the deal team from the weeks before closing. The record showed the preliminary report expressly recommending further testing before any conclusion could be drawn, and showed our client asking for, and not receiving, a firm cost estimate before the closing deadline arrived. That timeline supported the argument that our client closed on an open question, not on confirmed knowledge of a specific breach.
3. Sent a detailed demand letter itemizing the claim. Rather than open with litigation, we set out the remediation invoices, the engineering reports, and our legal position on the sandbagging clause in a formal demand to release the escrow funds, giving Pratheep's side a clear basis to evaluate the exposure without the cost of a court process.
4. Prepared for Superior Court while continuing to negotiate. We advised our client that litigating the sandbagging clause's ambiguity to a final result could take well over a year and would cost meaningfully more than the amount in dispute, given the escrow was already capped at roughly $3.5 million. We recommended pursuing a negotiated resolution in parallel with preparing a claim, so our client retained leverage without committing to the full cost and delay of trial.
5. Negotiated a compromise tied to the ambiguity itself. Because the clause's wording left real room for either side to prevail, we framed the negotiation around that shared uncertainty rather than around who was right. Both sides had genuine litigation risk: our client risked losing the sandbagging argument entirely, and Pratheep risked a court finding the clause too narrow to protect him, exposing the full $3.4 million plus costs.

The outcome

After roughly three months of negotiation, the parties agreed to release approximately $1.75 million of the escrowed funds to our client, close to half of the amount sought, with the remaining escrow balance returned to Pratheep once the twelve-month holdback period expired. Our client absorbed the rest of the remediation cost from the acquisition's own contingency reserve.

It was not the full recovery Hyun-woo and Kajan had hoped for, and it was more than Pratheep wanted to pay. Both sides described it afterward as the outcome they could live with, given what a contested court fight over the clause's wording would have cost and how long it would have taken to resolve. The remediation itself was completed within the year, and the property has continued operating as part of the portfolio without further environmental issues surfacing.

The dispute also became a lesson our client carried into later acquisitions. On a subsequent purchase the following year, they insisted on pro-sandbagging language and a clearer definition of what counts as buyer knowledge, changes we helped negotiate into that agreement from the outset rather than litigating after the fact.

What you can learn from this