- A break fee (sometimes called a termination fee) is a clause where one party agrees to pay the other a specified amount if the deal fails to close for a defined reason.
- Break fees are more common in larger or more competitive transactions than in typical small "main street" business sales, for reasons that generally include: - The seller granted…
- A break fee clause generally specifies the exact circumstances that trigger payment — it is not usually a blanket fee for any failure to close.
Most letters of intent for smaller Ontario business sales don't include a break fee at all. But on larger or more competitive deals — especially where a buyer is asking the seller for real exclusivity, or where a seller wants to discourage a buyer from walking away after tying up the business for months — a break fee clause sometimes shows up. If you've come across the term and aren't sure what it actually does, here's the plain-language version.
What a Break Fee Is
A break fee (sometimes called a termination fee) is a clause where one party agrees to pay the other a specified amount if the deal fails to close for a defined reason. It's a form of pre-agreed compensation for a specific kind of failed transaction, rather than a general penalty for any deal that doesn't close.
Break fees are a negotiated deal term, not something imposed by law — Ontario has no statutory rule requiring, capping, or standardizing break fees in a business sale. Whether one is included, what amount is chosen, and how it's triggered are all decided by the parties and their advisors on a deal-by-deal basis.
When Break Fees Tend to Appear
Break fees are more common in larger or more competitive transactions than in typical small "main street" business sales, for reasons that generally include:
- The seller granted meaningful exclusivity. If a seller took the business off the market for a period, a break fee can compensate for the opportunity cost if the buyer later walks away for a reason within the buyer's control.
- Significant deal-specific costs were expected. Where due diligence, financing arrangements, or advisor work will be extensive, a break fee can allocate some of that risk in advance.
- One side wants to discourage a change of heart. A break fee raises the cost of walking away, which can be attractive to a seller worried about a buyer using an LOI to lock up the business while shopping for financing or a better deal.
On a smaller, straightforward business sale, the parties often decide the cost and complexity of negotiating a break fee outweighs the benefit, and rely instead on exclusivity and confidentiality clauses alone.
How Break Fees Are Typically Triggered
A break fee clause generally specifies the exact circumstances that trigger payment — it is not usually a blanket fee for any failure to close. Common trigger structures include:
- Buyer-triggered fees — payable if the buyer walks away without a permitted reason (such as a failed financing condition or a material adverse change disclosed in due diligence).
- Seller-triggered fees — payable if the seller breaches exclusivity, accepts a competing offer, or otherwise causes the deal to fail.
- Mutual carve-outs — most clauses exclude certain reasons for walking away from triggering the fee at all, such as a failure to satisfy a due diligence condition that was disclosed and negotiated in good faith.
Because the trigger language is doing all the real work, a vaguely drafted break fee clause can end up being argued over more than it's worth. Precise drafting matters more here than in almost any other LOI clause.
Break Fee vs. Other LOI Protections
| Mechanism | What It Does | Typically Triggered By |
|---|---|---|
| Exclusivity clause | Prevents the seller from shopping the deal elsewhere | Seller soliciting or negotiating with others |
| Confidentiality clause | Restricts use/disclosure of shared information | Misuse or disclosure of confidential information |
| Break fee | Requires a payment if the deal fails for a defined reason | Whatever specific trigger the parties negotiate |
| Deposit (where used) | Funds held that may become non-refundable in some circumstances | Depends entirely on the deposit agreement's own terms |
These mechanisms are not mutually exclusive — a single LOI can include exclusivity and a break fee together, each addressing a different risk.
Frequently asked questions
Is a break fee the same as a deposit?
No. A deposit is money actually paid and held (often in trust) that may become non-refundable under specified circumstances. A break fee is a contractual obligation to pay a defined amount if a triggering event occurs — whether or not any money changed hands earlier in the deal. Some LOIs use one, the other, both, or neither.
Are break fees legally enforceable in Ontario?
A properly drafted break fee is generally enforceable as a contractual payment obligation, provided it's tied to a clear trigger and isn't structured in a way a court would treat as a penalty rather than a genuine pre-estimate of loss. This is a drafting-sensitive area — have a lawyer review the specific clause rather than relying on a template.
What amount is typical for a break fee?
There is no standard or typical amount — this is a negotiated deal term that varies enormously with deal size, industry, and the specific risks the parties are trying to allocate. Don't rely on a rule of thumb; work out the right structure and amount with your lawyer and advisors for your specific transaction.
Do small business sales in Ontario usually include a break fee?
Not usually. Most straightforward, smaller Ontario business sales rely on exclusivity and confidentiality clauses without a separate break fee, reserving break fees for larger or more contested deals where the added complexity is worth it.
This is a business purchase or sale question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.