Can You Back Out of a Business Purchase Agreement in Ontario?

Cold feet after signing a business purchase agreement are common. The financing looks tighter, the numbers do not match, or something has come up about the lease or the staff. The question is whether you can leave and what it will cost.

The answer depends mostly on what you signed. This article explains the main routes out, the special rules for franchises, and the risks of simply stopping. It is general information, and a lawyer should read your actual agreement.

No general cooling-off period

In an ordinary business purchase, there is no general statutory right to cancel once you have a binding agreement. The right to leave usually comes from the agreement itself, through conditions and termination clauses, and from the general law of contracts.

That is why the time before signing matters. A letter of intent or offer that is not clearly conditional may still bind you. Read what is binding, what is not, and what happens to your deposit.

Conditions, deposits and termination clauses

A condition is something that must happen, or be satisfied, before you have to close. Typical examples are satisfactory due diligence, financing, landlord consent to the lease and clean lien searches.

• Check who the condition is for. A condition for the buyer's benefit usually gives you the choice to waive it or end the deal.
• Check the deadline. What happens if a date passes without notice depends on the wording of your agreement, so it is worth confirming with a lawyer.
• Check the deposit wording. The agreement should say when the deposit is returned and when the seller can keep it.
• Check how notice must be given, and to whom.

Landlord consent is a common example. If a lease has a covenant against assignment without consent, the lease is deemed to say consent is not to be unreasonably withheld, unless the lease has an express provision to the contrary. If the landlord refuses or neglects to consent, the tenant, assignee or subtenant can apply to a judge of the Superior Court of Justice, who decides whether consent was unreasonably withheld. Whether a refusal is unreasonable depends on the facts.

Franchises: statutory rescission

Franchise purchases are different. A franchisor must give you a disclosure document at least 14 days before you sign or pay, and a written statement of any material change before you sign or pay.

Notice of rescission must be in writing and delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method. Within 60 days of the effective date of rescission, the franchisor or its associate must refund money received (other than for inventory, supplies or equipment), buy back inventory, supplies and equipment at the purchase price, and compensate you for losses in acquiring, setting up and operating the franchise, less those amounts.

Any waiver or release of these rights by a franchisee is void. A claim for damages is also possible where a misrepresentation or non-compliance caused a loss, but a person is not liable if they prove you acquired the franchise knowing of the misrepresentation or material change.

Not every grant requires disclosure. Exceptions include a resale by an existing franchisee that is not effected through the franchisor, a renewal with no interruption and no material change, a sale by an executor, receiver or trustee, and certain investment thresholds. If an exception applies, the rescission right may not be available.

The risks of walking away without a right to

If you stop without a contractual or statutory right, the seller may claim that you breached the agreement. The possible consequences include losing your deposit, a claim for the seller's losses, or a demand to complete the deal. The outcome depends on the wording, the facts and the court.

Be careful about how you act. Telling a seller informally that you are out, or missing a condition deadline, can create problems you could have avoided. Do not assume that a problem you found gives you a right to leave. Check that it falls inside a condition or termination clause.

What to do next

• Find the signed agreement, any amendments and all correspondence.
• List every condition, its deadline and who it benefits.
• Note the date you signed, paid anything or received disclosure, if it is a franchise.
• Do not send or accept a termination notice until a lawyer has reviewed it.
• If you want to rescind a franchise, act quickly, because the deadlines run from specific dates.

Frequently asked questions