The de minimis, the basket and the cap decide how much of what diligence finds can be recovered after completion, and each can be priced.
Under a tipping basket, once qualifying claims reach the threshold the buyer recovers from the first pound; under a deductible basket it recovers only the excess. On an illustrative 24,000,000 property company purchase with a 1 per cent basket of 240,000 and 375,000 of qualifying warranty claims, a tipping basket returns 375,000 and a deductible basket 135,000. The gap is the full basket, 240,000, from the moment the threshold is crossed until the cap starts to bind.
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The limitation schedule is usually negotiated late, by lawyers, after the price is agreed. It should not be. Terminology and drafting vary between markets and agreements, and the wording of the agreement governs; the arithmetic below applies to the common forms, not to any particular jurisdiction. The de minimis, the basket and the cap decide how much of what diligence finds can ever be recovered after completion, and each can be priced in the same unit as the purchase price.
| Term | Value |
|---|---|
| Purchase price | 24,000,000 |
| De minimis, per claim | 25,000 |
| Basket, 1% of price | 240,000 |
| Cap, 10% of price | 2,400,000 |
| Claim | Amount | Counts towards basket? |
|---|---|---|
| Service charge reconciliation not disclosed | 180,000 | Yes |
| Rent arrears warranted as nil | 95,000 | Yes |
| Unpaid business rates on a vacant unit | 60,000 | Yes |
| Lease variation not disclosed | 40,000 | Yes |
| Utility overcharge recharge | 18,000 | No, below de minimis |
| Total loss | 393,000 |
Step 1. Qualifying claims = sum of claims ≥ de minimis
Step 2. Tipping: recovery = qualifying claims, if they reach the basket; otherwise 0
Step 2. Deductible: recovery = qualifying claims − basket, if positive; otherwise 0
Step 3. Recovery = MIN(step 2, cap)
In Excel, with qualifying claims in B2: tipping =MIN(IF(B2>=240000,B2,0),2400000); deductible =MIN(MAX(B2-240000,0),2400000). Qualifying claims are =SUMIF(claims,">=25000").
The 18,000 utility claim falls below the de minimis and disappears: it neither recovers nor counts towards the basket. Qualifying claims are 375,000. None of the four would clear the 240,000 basket alone, so the basket works only by aggregation.
Tipping: 375,000 exceeds 240,000, so the buyer recovers all 375,000. Deductible: the buyer recovers 375,000 less 240,000, so 135,000. The cap of 2,400,000 is nowhere near.
| Basket | Recovered | % of loss | Borne by buyer |
|---|---|---|---|
| Tipping | 375,000 | 95.4% | 18,000 |
| Deductible | 135,000 | 34.4% | 258,000 |
| Difference | 240,000 |
On these claims the choice of basket is worth 240,000, 1.0 per cent of the price, exactly the size of the basket. That is not a coincidence of the example. Once qualifying claims pass the threshold and until the tipping recovery reaches the cap, the two structures differ by the full basket. Below the threshold both pay nothing. Between the cap and the cap plus the basket, 2,640,000, the gap narrows, and above that both pay the cap.
| Qualifying claims | Tipping | Deductible | Gap |
|---|---|---|---|
| 150,000 | 0 | 0 | 0 |
| 239,000 | 0 | 0 | 0 |
| 240,000 | 240,000 | 0 | 240,000 |
| 375,000 | 375,000 | 135,000 | 240,000 |
| 600,000 | 600,000 | 360,000 | 240,000 |
| 2,000,000 | 2,000,000 | 1,760,000 | 240,000 |
| 3,000,000 | 2,400,000 | 2,400,000 | 0 |
At signing nobody knows the claims, so price it on scenarios. Suppose qualifying claims are nil with 50 per cent probability, 150,000 with 30 per cent, 375,000 with 15 per cent and 900,000 with 5 per cent. The expected qualifying loss is 146,250. A tipping basket recovers 101,250 of it on average, 69.2 per cent; a deductible basket 53,250, 36.4 per cent. The tipping structure is worth 48,000 to the buyer, 20.0 basis points of the price, which is a number that can be traded against a price concession.
The basket level matters as much as its type. At 0.5 per cent, 120,000, the deductible basket returns 255,000 on the same 375,000 of claims. At 2 per cent, 480,000, neither structure returns anything, because the claims never reach it.
Check whether related claims can be aggregated for the de minimis. Three linked service charge errors of 18,000, 14,000 and 12,000 are each below 25,000; aggregated, 44,000 qualifies and also counts towards the basket.
The common mistake is to treat the basket as a filter on small claims. That is the de minimis's job. The basket is a deductible on the total, and a deductible basket at 1 per cent means the buyer has agreed in advance to absorb the first 240,000 of warranty losses, on top of everything below the de minimis. A threshold set as a percentage of a large price can exceed every finding diligence is likely to produce, as the scenario above shows. Diligence findings that are already known should be priced off the price or retained, not left to warranties, as covered in what a diligence exercise actually recovers.
The second mistake is to look at the cap last. A cap of 10 per cent of the price, 2,400,000, is irrelevant to routine findings and decisive for the one that matters: a tax or title problem large enough to reach 3,000,000 recovers 2,400,000 under either basket. A buyer negotiating hard on the basket and accepting a low cap has protected itself against the small losses it could absorb and left the large ones uninsured. Ask which findings could plausibly exceed the cap, and deal with those by price, retention or a specific indemnity outside the limitation schedule.
Tipping recovers everything once qualifying claims reach the basket; deductible recovers only the excess; the gap is the whole basket until the cap binds. Here that is 375,000 against 135,000, and 48,000 of expected value at signing. Price the limitation schedule when you price the deal. The free workbook for this case applies the basket and the reporting threshold to each finding in the book's own transaction.
Both stop the buyer claiming until total qualifying claims reach the threshold. Then a tipping basket pays from the first pound and a deductible basket pays only the excess. With a 240,000 basket and 375,000 of claims, tipping recovers 375,000 and deductible 135,000, so the buyer bears 240,000 more under the deductible.
Usually not: a claim below the de minimis is excluded both from recovery and from the basket total. Here an 18,000 claim against a 25,000 de minimis is lost entirely, leaving 375,000 of the 393,000 total to qualify. Aggregating related claims, if the agreement allows it, can lift small items over the threshold.
It is negotiated, often expressed as a percentage of price, and the right test is against likely claims rather than custom. On a 24,000,000 deal, a 1 per cent basket is 240,000 and none of four illustrative claims clears it alone. At 2 per cent, 480,000, the same 375,000 of claims would recover nothing under either structure.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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