Contracts and Leases in an Asset Sale in New Brunswick

When you buy or sell the assets of a business, the equipment and inventory are the easy part. The harder questions are usually about the commercial lease, the supplier contracts and the customer agreements that make the business work.

This article explains, in general terms, how those documents are handled in an asset sale in New Brunswick, why a landlord or other party may need to agree, and what your options are if they say no. Every contract is different, so the details depend on what each document says.

This article covers the law of New Brunswick.

Why contracts need separate attention in an asset sale

In an asset sale, the buyer picks the assets it wants to buy. A contract is not like a truck that simply changes hands. It is an agreement between the seller and another party, so the buyer usually needs that agreement to be transferred, or needs a new one signed with the other party.

A share sale works differently. The buyer purchases the shares, and the company stays the same legal entity, so it takes the company with its past liabilities inside it. That is one reason some buyers and sellers choose between the two structures with contracts in mind. The trade-off is that the buyer inherits what the company already owes.

If the seller is an incorporated business, an asset sale of all or substantially all of its property outside the ordinary course of business needs shareholder approval by special resolution. Some transactions are exempt from that requirement, including leases of three years or less and transfers within a corporate group.

Leases: the contract that usually matters most

For many small businesses, the premises lease is the most valuable contract. Whether the landlord must agree to a transfer depends on the lease itself. Look for clauses about assignment, subletting, change of control and the landlord's right to approve a new tenant.

• Read the assignment and subletting clauses in the lease and any amendments.
• Check whether the landlord can refuse consent, and whether it must act reasonably.
• Check what happens to the seller's obligations once the lease is transferred, including whether the seller stays responsible.
• Ask whether the landlord will want a new deposit, a guarantee or financial information from the buyer.

If the business also owns land or buildings, a different set of rules applies. A transfer of land in an asset sale triggers real property transfer tax of 1% of the greater of the consideration or the assessed value on deeds tendered on or after April 1, 2016. No tax is payable on registration of a lease for a term of less than twenty-five years. A lawyer is also needed to register the transfer of land, because title registration involves a certificate certified by a Law Society member authorized to practise law.

Supplier and customer contracts, and what if consent is refused

Supplier, equipment-rental, service and customer agreements often say whether they can be assigned and whether the other party must approve. Some are simple. Others tie the price or service to the original business owner. The wording controls, so each one should be read before closing.

If a landlord or other party refuses consent, you still have options. Which one fits depends on the contract and on how important it is to the deal.

• Negotiate. The other party may agree if the buyer offers a deposit, a guarantee or updated terms.
• Sign a new contract directly between the buyer and the other party.
• Make the consent a condition of closing, so the deal does not complete without it.
• Adjust the price or walk away if the contract is central to the business.
• Consider whether a share sale would keep the contract with the same company, remembering that the buyer then takes the company's past liabilities too.

Whether any of these routes is open depends on the contract. Have a lawyer read the key documents before you commit to a closing date.

Other things that follow the business

Contracts are not the only item to settle. Several other points can affect an asset deal.

• Employees. When a business is sold or transferred in any manner, an employee's period of employment is deemed to be with the purchaser and continuity of employment is deemed unbroken. This applies to asset sales, so the buyer inherits employees' service for notice and similar entitlements.
• Lender claims. A lender's registered claim over business equipment, inventory or receivables can stay attached to assets a buyer acquires. Anyone may search the PPSA Registry and obtain a printed search result, so a buyer can search the seller's name before closing.
• Ordinary-course protection. A buyer of goods sold in the seller's ordinary course of business may take free of a seller's security interest, but buying a whole business's equipment is not an ordinary-course sale, so this generally does not help an asset buyer.
• GST/HST. The buyer and seller may jointly elect so no GST/HST is payable on the sale of a business, if the buyer acquires all or substantially all the property reasonably necessary to carry it on. The election cannot be made where the seller is a registrant and the buyer is not.

What to do next

• List every lease, supplier contract, customer agreement and licence the business relies on.
• Read each one for assignment, consent and change-of-control wording.
• Ask each key counterparty early whether it will consent, and get the answer in writing.
• Search the seller's name in the PPSA Registry for registered claims.
• Decide which contracts are must-haves, and write them into the purchase agreement as closing conditions.
• Ask a lawyer to confirm the structure and the steps, and confirm the lawyer is a practising member of the Law Society of New Brunswick.

An accountant can help with tax questions such as the GST/HST election. A lawyer can read the actual documents and tell you what consent is needed.

Frequently asked questions