Definition
A disclosure letter is a document the seller gives the buyer before the purchase agreement is signed, listing exceptions to the warranties in that agreement. If a matter is fairly disclosed, you generally cannot later bring a warranty claim about it, because you knew about it when you signed. The term is most used in the UK. In US deals, disclosure schedules attached to the agreement do a similar job.
Warranties are the seller's statements of fact about a business in the purchase agreement; indemnities are promises to reimburse specific losses. Together they decide who bears risks that diligence could not rule out.
Worked example
Oakhollow Joinery Ltd is a fictional UK company. The share purchase agreement includes a warranty that the company is not involved in any dispute.
The disclosure letter states that a former customer has threatened a £50,000 claim over a faulty staircase. Because that claim has been disclosed, the buyer could not rely on the warranty if the customer sued. Instead, the buyer negotiates a specific indemnity from the seller covering that claim, with £50,000 held back from the price until it is resolved.
Why buyers care
A warranty is only as strong as what has been disclosed against it. Read the disclosure letter early and carefully with your lawyer, not in the final hours before signing.
Push back on general disclosures that try to treat everything in the data room, or every public register, as disclosed. Ask for each disclosure to be specific enough that you can understand the problem and its likely cost. When something new appears late, treat it as new information: it may justify a price change, a specific indemnity or more time to investigate.
A data room is a secure online folder where a seller shares documents for due diligence, with access controlled and usually logged.