Is a Letter of Intent Binding When Buying a Business in Saskatchewan?

A letter of intent, sometimes called an LOI or term sheet, is often the first written step in a business sale. It sets out the main terms the buyer and seller have in mind before the lawyers prepare the full purchase agreement. People often sign it quickly and later wonder what they have committed to.

This article explains how to think about the different parts of a letter of intent. There is no single answer for every letter. What a clause means depends on its exact wording and the circumstances, so have a lawyer read the document before you sign it or act on it.

This article covers the law of Saskatchewan.

What a letter of intent is for

A letter of intent records the deal as the parties understand it so far: the price, what is being bought, the proposed structure, a timeline and the steps still to come, such as due diligence. It helps both sides find out early whether they agree on the big points.

What each part of the letter means depends on its exact wording and the circumstances. The label on the document does not settle which parts matter most, so it is worth confirming with a lawyer.

Clauses that deserve a close look

Some clauses deserve a close look, and whether any of them is binding depends on the words used. How a particular clause applies depends on your situation, so it is worth confirming with a lawyer.

Treat this table as a guide to what to look for, not as a statement of how a court would read any particular clause.

Parts that may be left for the final agreement

The price, the list of assets, the closing date and most other commercial terms are often described as subject to due diligence, financing and a final written agreement. How a letter like that applies depends on its exact wording and the facts, so it is worth confirming with a lawyer.

• Look for phrases such as "subject to", "non-binding" or "subject to a definitive agreement".
• Check whether the wording is firm or conditional, and ask what the letter says about whether it is binding.
• Check whether a deposit is mentioned and whether it is refundable.
• Notice whether the letter says it ends on a date or when the full agreement is signed.

Where a letter mixes firm and soft language, the result can be unclear. That is a good reason to have the wording tightened before signing, not after a dispute.

Rules that still apply after the letter

Even a well-drafted letter does not deal with the legal rules that govern the deal itself. For example, if you buy assets, buyer and seller may jointly elect under section 167(1) of the Excise Tax Act so that no GST/HST is payable on the sale, if the seller is supplying a business or part of a business and the buyer acquires all or substantially all of the property reasonably necessary to carry on that business. The election is unavailable if the seller is a GST/HST registrant and the buyer is not. It does not apply to a sale of only one or more individual assets. Even where it is made, GST/HST still applies to certain items, such as taxable services the seller will render, taxable leases or licences, and real property sold to a non-registrant. A buyer of goods can search the Saskatchewan Personal Property Registry for registered security interests.

Saskatchewan PST is payable on both new and used business assets. For assets bought to start operations in Saskatchewan, the buyer files the Business Assets Declaration form within 30 days of the purchase date. For purchases made after the business has started operating, the PST is reported on the Net Tax on Consumption line of the regular PST return instead.

Where a business is sold and an employee keeps working there, the employee's service is maintained for notice purposes, whether the deal is an asset sale or a share sale.

If the business is a franchise, franchisors must give a prospective franchisee a disclosure document at least 14 days before any franchise agreement is signed or any payment is made. That matters if the letter asks you to pay a deposit or sign something early.

Because structure affects tax, a letter should say whether you are buying assets or shares, and your accountant should check the numbers first.

What to do next

• Read every clause and mark which ones say they are binding and which say they are not.
• Ask for a plain statement of what is binding and what is subject to a final agreement.
• Confirm the length of any exclusivity period before you agree to it.
• Check who pays costs if the deal does not close.
• Do not hand over a deposit until you understand whether it is refundable.
• Have a lawyer review the letter before you sign, because it is much easier to fix wording early.

Frequently asked questions