Can a Landlord Block the Sale of Your Business in Ontario?

If your business operates from leased premises, the location may be a big part of what a buyer is paying for. A buyer who cannot take over the lease may walk away, or may want to cut the price.

This article explains in general terms how lease clauses and landlord consent affect a sale. The outcome depends on the exact wording of your lease and the facts, so the lease should be reviewed by a lawyer early.

Why the lease matters to the sale

In an asset sale, the buyer usually needs the right to occupy the premises, which means taking over your lease by assignment or signing a new one with the landlord. In a share sale the tenant company stays the same, but many leases treat a change in ownership of the tenant as if it were an assignment.

Either way, the starting point is the lease itself. Look for the clauses on assignment, subletting, change of control, landlord consent, and what happens to the original tenant's responsibility after an assignment.

Can the landlord refuse consent?

There is no single answer. Some leases say consent cannot be unreasonably withheld, some say nothing about the standard, and some give the landlord broad discretion. The exact wording of your lease and the facts of your situation matter a great deal here. How these pieces interact for your lease, and whether a refusal can be challenged, is a question for a lawyer who has read the lease.

In practice, landlords often ask about the buyer's finances, experience and intended use of the space. They may also ask for a guarantee, a deposit or a fee to cover their costs. Expect to supply information, and plan time for the landlord to respond.

What to check in your lease

• The assignment and subletting clause, including any consent requirement and any standard the landlord must meet.
• Whether a sale of shares or a change in control counts as an assignment.
• Whether you stay liable for the lease after assigning it.
• Any landlord right to end the lease or take back the space if you ask to assign.
• Renewal options and the remaining term, which affect what the buyer is getting.
• Any permitted-use limits that could affect the buyer's plans.

Other pieces of the deal that run alongside

Landlord consent is usually a condition of closing, but other items need attention at the same time.

• Employees: if the purchaser employs an employee of the seller in a sale of a business or part of it, employment is deemed not terminated or severed for purposes of the Employment Standards Act.
• GST/HST: the section 167(1) election is available only if the buyer acquires all or substantially all (generally 90% or more) of the property reasonably necessary to carry on the business or part of it. Where the seller is a registrant, the buyer must be a registrant too, and the parties make the election jointly on Form GST44.
• Non-competes: the Employment Standards Act ban does not apply where a business run as a sole proprietorship or partnership is sold, the seller becomes the buyer's employee immediately after, and the parties sign a non-compete as part of the sale. The Ministry reads that exception as applying only where the seller is an individual, not a corporation.

What to do next

Start with the lease before you agree on a price or a closing date, because a buyer's offer will often depend on it. Then:

• Find your signed lease and every amendment, and have a lawyer review the assignment and change-of-control wording.
• Decide whether the sale is an asset sale or a share sale, since that affects whether the lease must be assigned.
• Approach the landlord early, with the buyer's information ready.
• Make landlord consent a written condition in the purchase agreement, with a clear date.
• Get the consent in writing, and confirm whether you remain responsible under the lease.
• Coordinate the lease with the employee, tax and non-compete terms of the deal.

Frequently asked questions