Which Contracts Need Consent to Transfer in an Asset Purchase?

When you buy a business's assets rather than its shares, you choose what you are buying. That is a major advantage, but it also means contracts such as the lease, key customer agreements and supplier terms do not automatically come with the deal.

This article explains how to sort out which contracts matter, what Ontario law says about leases, and what to do when a third party says no. Many answers depend on the wording of each contract, so it is worth having a lawyer read them.

Why contracts are a separate step in an asset deal

In a share purchase, the corporation stays the same and its contracts stay with it. In an asset purchase, the seller's corporation keeps existing and the buyer takes only the assets and contracts listed in the agreement. For employees, this difference is recognized in the rules: share purchases are different because the employer entity stays the same.

For each contract, the question is whether it can be transferred, and on what conditions. The answer sits mainly in the contract itself, in a clause often called an anti-assignment or change-of-control clause. Some contracts say they cannot be assigned at all, some allow assignment only with consent, and some are silent.

Commercial leases: what Ontario law says

Leases are usually the most important contract in a business sale, and Ontario has a specific rule. Under the Commercial Tenancies Act, where a lease bars assignment or subletting without the landlord's consent, the lease is read as including a term that consent is not to be unreasonably withheld, unless the lease expressly provides otherwise.

If a landlord refuses or fails to consent to an assignment, the tenant or proposed assignee can apply to a judge of the Superior Court of Justice. The judge can decide whether consent was unreasonably withheld and, if so, permit the assignment, and that order is equivalent to the landlord's consent.

The words "unless the lease expressly provides otherwise" matter. A lease can be written to remove the reasonableness protection, so you need to read the actual clause. Court applications also take time, so a buyer will usually want the closing date and the landlord's consent lined up well in advance.

Customer, supplier and licence agreements

For contracts other than leases, there is no single rule that says which ones need consent. Whether a contract can be assigned depends on its own wording and the type of contract. The table below shows what to look for in common categories.

If a clause requires consent and the other party refuses, what options you have depends on the contract, so it is worth having a lawyer review it. That is why buyers typically list the key contracts in the agreement and make receipt of the consents a condition of closing. A lawyer can tell you whether a particular contract has a workable alternative, such as a new agreement signed directly with the buyer.

Employees and other items that travel with a sale

When a business is sold and an employee keeps working for the new owner, past service with the seller counts toward Employment Standards Act entitlements based on length of employment. This does not apply if the new owner hires the employee more than 13 weeks after the employee's last day with the seller or the day of the sale, whichever is earlier.

The purchaser is not required to hire the seller's staff, and an employee may refuse the purchaser's offer and treat the sale as a termination by the seller.

Some government obligations also follow the business. A buyer who does not obtain the seller's Retail Sales Tax clearance certificate may be held liable for the seller's unpaid RST at the time of sale. A purchaser of all or part of a business must pay all amounts the seller owed to WSIB immediately before the sale. Ontario's Bulk Sales Act was repealed on March 22, 2017, so it no longer requires affidavits, creditor notices or court orders.

What to do next

Start by building a list of every contract the business depends on. Then sort them into those you must have, those that would be nice to have, and those you do not want.

• Collect every lease, customer, supplier, licence and equipment agreement, including amendments.
• Highlight each assignment, consent and termination clause.
• Ask the seller to approach the landlord and key counterparties early, with the buyer's financial information ready.
• Make the key consents a condition of closing in the purchase agreement.
• Ask for RST clearance and a WSIB Purchase Certificate before closing; the Ministry asks for RST clearance requests in writing at least two weeks before the sale, and a WSIB certificate is valid for 30 days from issue.
• Talk to a lawyer if a landlord or major counterparty refuses or goes quiet.

Frequently asked questions