Lease Non-Renewal Risk During a Business Sale in Ontario

If the business you're buying or selling operates out of leased space, the lease is often as important to the deal as the balance sheet. A lease non-renewal risk — a term that's expiring soon, an option that may not be exercised, or a landlord who simply won't commit — can quietly undermine months of negotiation between buyer and seller.

This risk tends to surface late, often after a letter of intent is signed and both sides are focused on price and closing conditions rather than real estate. By then, discovering that the lease has no renewal right, or that the landlord is non-committal, can force a re-think of timing, price, or even whether the deal makes sense at all.

This article looks at why lease timing matters so much to a business sale, how the risk typically surfaces, and the practical ways buyers and sellers manage it.

Why the Lease Timeline Can Make or Break a Deal

For many small and mid-sized businesses — retail, food service, personal services, light industrial — the location is part of what the buyer is paying for: foot traffic, an established customer base, equipment already installed, or rent below current market. If that location isn't secure for a meaningful period after closing, the buyer may be paying for goodwill that can't actually be kept.

A looming lease expiry changes the calculus for both sides:

• Buyers want assurance they'll have the premises long enough to recoup the purchase price and build the business further.
• Sellers want the deal to close before uncertainty over the lease scares off a buyer or drags down the price.
• Lenders, if the buyer is financing the purchase, often expect a minimum remaining lease term (plus renewal options) before approving financing secured in part against the business.

Renewal Rights Are Contractual, Not Guaranteed

A common misunderstanding is that a commercial tenant has some general right to renew a lease. It doesn't work that way in Ontario. Unless the lease itself grants a renewal option — and sets out how and when the tenant must exercise it — the landlord is generally free to let the term expire, negotiate a new lease on different terms, or lease the space to someone else entirely.

That makes the lease document itself the starting point for assessing risk:

• Does it include a renewal option, and if so, on what terms (fixed rent, market rent, further options)?
• Is there a notice deadline for exercising the option, and has that deadline already passed or is it approaching during the sale process?
• Has the current owner already tried to renew, and what has the landlord said, if anything?

Where the lease is silent on renewal, or the option has lapsed, the buyer is effectively relying on the landlord's goodwill (or the seller's relationship with the landlord) rather than any legal entitlement.

Where This Risk Shows Up During a Sale

1. Due diligence. The buyer's lawyer reviews the lease and flags the remaining term, any renewal option, and the deadline to exercise it.
2. Negotiation. If the term is short or renewal is uncertain, the buyer may ask for a price adjustment, a longer transition period, or a condition tied to the lease before the deal proceeds.
3. Landlord conversations. Buyers and sellers often approach the landlord jointly — sometimes to negotiate a fresh lease directly with the incoming buyer.
4. Closing. If the lease situation isn't resolved, the parties decide whether to close anyway, delay closing, or walk away.

Where the deal is structured as an asset purchase and the existing lease is being assigned to the buyer rather than replaced, the landlord's consent to that assignment is a separate question from renewal — under the Commercial Tenancies Act, a lease clause restricting assignment without consent is generally read as requiring that consent not be unreasonably withheld, unless the lease says otherwise. That protection applies to assigning an existing lease; it doesn't create a right to a new term the lease doesn't already provide for.

Ways Buyers and Sellers Protect the Deal

• [ ] Review the lease's renewal terms and any exercise deadline before the letter of intent is signed, not after.
• [ ] Build a closing condition into the purchase agreement requiring lease renewal, a new lease, or landlord confirmation before the buyer is obligated to close.
• [ ] Consider a shorter closing timeline, or an extension mechanism, if the renewal decision is still pending.
• [ ] Ask the seller to approach the landlord early, since an existing relationship can sometimes get a faster answer than a stranger would.
• [ ] Have the buyer's lawyer negotiate directly with the landlord's counsel where a brand-new lease — rather than an assignment — is the plan.
• [ ] Revisit the purchase price if the remaining secure term turns out to be shorter than assumed when the deal was first priced.

If the Landlord Won't Commit Before Closing

Sometimes a landlord simply won't give a firm answer on renewal until closer to the expiry date, regardless of how the sale is progressing. In that situation, the parties typically choose between:

• Closing on schedule, with the buyer knowingly accepting the renewal risk — often reflected in the price.
• Delaying closing until the landlord responds.
• Making the entire transaction conditional on a satisfactory lease outcome, with a defined date by which either party can walk away if it isn't resolved.

None of these is automatically the "right" answer — it depends on how important the location is to the business, how much leverage either side has with the landlord, and how much risk the buyer is willing to absorb.

Frequently asked questions