What Is a Letter of Intent When Buying a Business in Newfoundland and Labrador?

You have been handed a letter of intent, or you have been asked to sign one, for the purchase or sale of a business in Newfoundland and Labrador. It looks short and friendly, and it may say it is only a first step. It can still shape the whole deal.

This article explains what these letters usually contain, how to think about the parts that are meant to bind you (such as confidentiality and exclusivity), and the points of NL and federal law that are worth raising before you sign. It is general information, not advice on your particular letter.

This article covers the law of Newfoundland and Labrador.

What a letter of intent is

A letter of intent is a written outline of the main terms a buyer and seller expect to include in a deal. It is usually signed before the long, detailed purchase agreement is drafted. People also call it a term sheet, a memorandum of understanding or an offer to purchase, and the label matters less than what the document actually says.

Most letters cover the parties, the business being sold, the proposed price and how it is paid, whether the buyer is taking assets or shares, a timeline for due diligence and closing, and conditions such as financing or landlord approval.

Which parts are binding

There is no single answer. A letter of intent can be written so that almost nothing in it binds anyone, or so that several clauses do. The wording and the circumstances matter, so the safest approach is to read every clause as if it might be enforced and to ask your lawyer which ones are intended to bind.

Letters commonly split into two groups of terms:

• Terms often intended to bind: confidentiality (the buyer will not share what it learns), exclusivity (the seller will not negotiate with others for a set period), who pays the costs of the deal, and sometimes a break fee.
• Terms often intended not to bind: the price, the structure, the closing date and the other deal terms, which are normally finalized in the purchase agreement.

Look for clear wording such as "subject to a definitive agreement" or "this clause is binding." Vague wording is where disputes start. If you are the seller, check how long exclusivity lasts and whether it renews on its own. If you are the buyer, check whether exclusivity gives you enough time to complete your review.

Points of NL law the letter should anticipate

A good letter does not need to settle every legal detail, but it should not ignore issues that affect value and risk. These commonly come up in an NL business sale.

• Employees: when a business is transferred, an employee's employment with the new owner is treated as continuous with their employment with the first employer, so past service counts toward entitlements such as notice. A buyer who later ends a transferred employee's job counts the seller's years.
• Unionized staff: a collective agreement, certification or pending application covering affected employees continues in force and binds the buyer. This applies unless the Labour Relations Board directs otherwise.
• Lease: taking over an existing business's lease normally needs the landlord's written consent. Whether that rule applies depends on the lease wording, so the buyer must read the actual lease.
• Liens and security interests: unpaid tax is a first lien in favour of the Crown on the taxpayer's assets until it is paid or a clearance certificate is issued. A buyer of business assets should also search the registry for security interests the seller gave over equipment, inventory or receivables.
• Workplace insurance: where a business with an unpaid assessment is sold, the commission may determine that a person is the successor of the employer and collect the unpaid assessment from that person.
• GST/HST: a buyer and seller can jointly elect so that no GST/HST is payable on the sale of a business if the buyer acquires all or substantially all of the property reasonably necessary to carry on the business. The election is not available where the seller is a registrant and the buyer is not. Even with an election, tax is still payable on a taxable supply of a service the seller will render, on a taxable lease or licence of property, and, if the buyer is not a registrant, on a taxable sale of real property.

Risks of signing too quickly

The biggest risks come from assuming the letter is harmless. A few to watch for:

• Being locked out of other offers by an exclusivity clause while the buyer's financing or review drags on.
• Confidentiality terms that cover more than you intended, or that do not protect the information you care about, such as customer lists and staff details.
• Paying for a buyer's costs or a break fee if the deal falls apart.
• Structure assumptions. A vendor selling qualifying small business corporation shares may be able to shelter gains with the lifetime capital gains exemption, while an asset sale by a corporation does not get that exemption directly. Check the current figure and eligibility with an accountant.
• Foreign buyers: for non-WTO investors and cultural businesses the Investment Canada Act review threshold is far lower than the general thresholds.

If the letter says the buyer will take over a company, the company's good standing matters. A corporation that files its annual return late becomes NOT IN GOOD STANDING, and the registrar may strike off a corporation that fails to file for three years.

What to do next

• Read the whole letter and mark which clauses say they bind and which say they do not.
• Ask for a clear end date on exclusivity and for confidentiality that fits the information being shared.
• Decide whether the deal is a share sale or an asset sale, and say so in the letter.
• List the contracts, the lease, the employees and the licences involved, and check what each one requires for a change of owner.
• Ask for searches and records to be part of the due diligence period, including liens, security interests and tax or workplace insurance balances.
• Talk to an accountant about the tax effect of the structure, including GST/HST.
• Have a lawyer review the letter before you sign it, not after.

Frequently asked questions