Will I Owe the Old Tenant's Rent Arrears After Taking Over a BC Lease?

If you are buying a business that operates from leased space, you are usually also taking over the lease. A common worry is that the seller left unpaid rent, common area maintenance (CAM) charges, or other defaults, and that the landlord will look to you for them.

There is no simple yes or no. The answer turns on how the deal is structured and what the lease, the landlord's consent and your purchase agreement say. This article explains the questions to ask and the steps that usually reduce the risk.

This article covers the law of British Columbia.

Why the answer depends on your documents

In a typical asset purchase, the lease is transferred from the seller to you, often by an assignment signed with the landlord's consent. What you take on depends on the wording of the lease and of that assignment. Some assignments say you take the lease only from the assignment date. Others say you assume all of the tenant's obligations, including anything already owing. The difference can be large, so read the assignment wording closely before you sign.

Even where you are not responsible for old arrears, how a landlord treats them when you ask for approval depends on the lease terms and case law, so it is worth confirming with a lawyer. So the practical risk is often a delayed or conditional approval as much as a direct claim against you.

What British Columbia statute law says about assignment

The Commercial Tenancy Act, RSBC 1996, c. 57, does not set out a general rule on when a landlord may refuse consent to an assignment or sublease. The only provision found on a covenant against assigning or subletting is s. 29(3), which deals with a trustee in bankruptcy: a covenant not to assign or sublet without the landlord's leave or consent does not apply to a trustee's transfer if the Supreme Court approves it, and the incoming party must give security of up to 3 months' rent.

For an ordinary sale, then, the lease terms and court decisions on those terms govern, not a statutory checklist. Residential tenancy rules are under a different Act and do not apply to commercial premises. A lawyer can read your lease and tell you how its assignment clause is likely to work.

Charges that commonly sit behind a lease

Rent arrears are only part of the picture. Before closing, ask the landlord and the seller about each of the following.

• Unpaid base rent and late-payment charges.
• CAM charges, property tax and insurance recoveries, including year-end adjustments that have not yet been billed.
• Utilities or other amounts charged back by the landlord.
• Non-monetary defaults, such as unapproved alterations, signage, or use outside what the lease permits.
• Any deposit or security the seller paid, and whether it transfers to you or must be replaced.

Year-end adjustments matter because they can be billed after closing for a period when the seller operated the premises. Your purchase agreement should say who pays the share that relates to the time before closing.

Other inherited debts to check in the same deal

Lease arrears are not the only liability that can follow a business sale, so it helps to deal with them together.

• PST: a purchaser buying a business, or goods, software or an interest in a business in a bulk transaction, should obtain a PST clearance certificate. If you do not, you are liable for an amount equal to any outstanding amount owed by the collector. With the collector's consent, you can apply online or use form FIN 447, and the certificate confirms PST, penalties and interest are paid up to the issue date.
• Employees: if all or part of a business is disposed of, an employee's employment is deemed continuous and uninterrupted. If employment continues after the sale, the purchaser pays outstanding wages, including wages due before the sale, and assumes accrued vacation pay. In a bankruptcy, a trustee's sale can end the employees' rights under the Act, and the purchaser is not liable for wages owed before the bankruptcy.
• Related-party deals: where property is transferred to a spouse or common-law partner, a person under 18 or a person not dealing at arm's length, the transferee and transferor can be jointly and severally liable for the transferor's tax, up to the excess of fair market value over the consideration paid. Special rules apply to transfers after a relationship breakdown under a court order or written separation agreement.

If you buy the company's shares instead, the employment guidance on disposing of a business does not specifically address share sales, although the employer corporation itself does not change. How a share purchase affects your employees and the lease depends on your situation and the lease terms, including any clause about a change in control, so it is worth confirming with a lawyer and reviewing the lease and records carefully.

How to protect yourself and what to do next

• Ask the seller for the lease, all amendments and recent landlord statements, and read the assignment clause.
• Request a written estoppel-style statement from the landlord confirming the rent paid to date, any arrears, CAM balances and known defaults.
• Make landlord consent, in a form you have reviewed, a condition of closing.
• In the purchase agreement, state that the seller is responsible for all amounts relating to the period before closing, and consider holding back part of the price to cover them.
• Ask for a release of the seller's old debts from you in the assignment, or an express statement that you assume only obligations arising after closing.
• Have the lawyer confirm whether any guarantee is required from you and what it covers.
• Order the PST clearance certificate and confirm employee wage and vacation balances before closing.

Because the outcome rests on your specific lease and deal documents, have a lawyer review them before you sign. Raise the arrears question early, since it affects both the price and the landlord's willingness to approve you.

Frequently asked questions