- A condition precedent is an event or requirement that must occur (or be waived) before a party is obligated to close the transaction.
- Due diligence completion A condition that the buyer's review of financials, contracts, employee records, and other materials turns up nothing that materially changes the deal — often…
- Purchase agreements typically set an outside date (sometimes called a "drop dead date") — a deadline by which closing must occur.
Signing a purchase agreement doesn't mean a business sale is guaranteed to close. Between signing and closing, most Ontario purchase agreements make the transaction conditional on a list of things happening first — financing coming through, a landlord consenting to a lease assignment, regulatory approvals landing, or nothing turning up in due diligence that changes the deal. These are conditions precedent, and understanding how they work is essential to knowing how solid your deal actually is once you've signed.
This article explains what a condition precedent is, the categories that show up most often in an Ontario business sale, and what happens — legally and practically — if one isn't met by the deadline.
What a Condition Precedent Actually Is
A condition precedent is an event or requirement that must occur (or be waived) before a party is obligated to close the transaction. Until it's satisfied or waived, the party who benefits from the condition isn't required to complete the deal — even though a signed agreement exists.
This is different from a covenant, which is a promise to do (or not do) something — a covenant's breach gives rise to a damages claim, but a failed condition simply means the deal doesn't have to close at all (subject to whatever the agreement says about termination and consequences).
Conditions are usually structured in one of two ways:
- For the benefit of one party only — that party can choose to waive it and proceed anyway.
- For the mutual benefit of both parties — typically can't be waived unilaterally; both sides need to agree to proceed without it being met.
Common Conditions Precedent in an Ontario Business Sale
Due diligence completion
A condition that the buyer's review of financials, contracts, employee records, and other materials turns up nothing that materially changes the deal — often phrased as the buyer being "satisfied, in its sole discretion," with the results of due diligence.
Financing
A condition that the buyer secures acquisition financing on acceptable terms by a specified point. This shifts real risk to the seller, since a financing condition gives the buyer a built-in way out if a lender doesn't approve the loan. See our related article on financing conditions for more detail.
Landlord consent to lease assignment
Where the business operates from leased premises, closing is often made conditional on the landlord consenting to assign the lease to the buyer — a step covered in more detail in our article on landlord consent as a closing condition.
Third-party and regulatory consents
Certain contracts, licences, or permits may require consent from a supplier, franchisor, regulator, or government body before they can transfer to the buyer.
Shareholder or director approval
Under the Business Corporations Act (Ontario) and the federal Canada Business Corporations Act, a sale, lease, or exchange of all or substantially all of a corporation's property outside the ordinary course of business generally requires approval by special resolution of shareholders. Where this applies, obtaining that approval is typically made a condition of closing.
Accuracy of representations and warranties at closing
A condition that the representations and warranties given at signing remain true (or true in all material respects) as of the closing date itself — protecting the buyer against something changing for the worse between signing and closing.
No material adverse change
A condition that no significant negative change has occurred in the business's condition, operations, or prospects between signing and closing.
Key employee retention
Occasionally, closing is conditioned on specific key employees agreeing to stay on with the buyer, particularly where the business depends heavily on particular people.
The Outside Date: What Happens If a Condition Isn't Met
Purchase agreements typically set an outside date (sometimes called a "drop dead date") — a deadline by which closing must occur. If a condition benefiting one party hasn't been satisfied or waived by that date, the usual consequences are:
- The party benefiting from the condition can terminate the agreement without being in breach, since the condition — not a broken promise — is what's failed.
- The parties may agree to extend the outside date, if both sides still want the deal to proceed and simply need more time.
- The parties may negotiate a waiver of the unmet condition, allowing the deal to close anyway, often paired with a price adjustment or added protection for whichever side is giving something up.
- Deposit or exclusivity provisions may be triggered, depending on how the agreement allocates the consequences of a failed condition — this varies significantly by deal and needs to be checked against your specific agreement.
Whether a failed condition allows only termination, or also supports a damages claim, depends heavily on how the agreement is drafted — including whether either party had an obligation to use reasonable efforts to satisfy the condition and failed to do so.
Practical Checklist for Reviewing Closing Conditions
- [ ] List every condition in the agreement and identify who it benefits (buyer, seller, or both).
- [ ] Confirm the outside date and calendar it — with enough lead time to act if a condition looks at risk.
- [ ] Identify which conditions require active effort (like pursuing financing or landlord consent) versus passive ones (like representations remaining true).
- [ ] Check whether the agreement requires "reasonable efforts" or "best efforts" to satisfy each condition, and understand the difference matters legally.
- [ ] Clarify what happens to any deposit if a condition fails and the deal terminates.
Frequently asked questions
Can a party waive a condition that exists for the other side's benefit?
Generally, no — only the party the condition is meant to protect can waive it, and mutual conditions typically require both parties to agree. This is why it matters to identify, for each condition, exactly whose benefit it's drafted for.
What's the difference between a condition and a covenant?
A condition is something that must happen before a party is obligated to close; if it fails, the deal generally just doesn't proceed. A covenant is a promise to take or avoid an action; breaching it can support a damages claim even if the deal does close, or even if it doesn't.
Does a failed financing condition mean the buyer forfeits their deposit?
That depends entirely on how the specific purchase agreement allocates deposit consequences — some agreements return the deposit if a financing condition genuinely fails despite good-faith efforts, others don't. This needs to be checked against your actual agreement.
Can conditions be added after the agreement is signed?
Not unilaterally — conditions are part of the negotiated agreement. Adding or changing one after signing generally requires both parties' agreement, typically through a formal amendment.
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