Rent Arrears and Lease Assignment: What Buyers Need to Confirm Before Closing in Ontario

Buying a business that's mid-lease means buying into whatever state that lease is in — including any rent the current tenant hasn't paid. If arrears exist and go unaddressed, they don't simply disappear when the lease is assigned; they can attach to the space, complicate landlord consent, or land on your desk as the new tenant.

This article explains why rent arrears and lease assignment need careful attention during due diligence, and what steps confirm you're not inheriting someone else's unpaid rent along with the business.

Why Arrears Matter to an Incoming Tenant

A commercial lease is a running relationship between landlord and tenant. When a business is sold mid-lease and the lease is assigned to the buyer, the buyer generally steps into that same lease — the same rent obligations, the same term, and the same standing (good or bad) that existed the day before closing.

If the seller owes back rent, a landlord may:

• Refuse to consent to the assignment until arrears are paid in full.
• Insist that arrears be settled as a condition of releasing an estoppel certificate confirming the lease is in good standing.
• Retain contractual remedies against the space itself (such as the landlord's right of distress over goods on the premises) that could affect a buyer taking over inventory or equipment left in place.

None of this is automatic or guaranteed to happen in every case — leases vary — but it is exactly the kind of risk due diligence exists to catch before you're the one holding it.

Where Arrears Get Discovered

1. The Estoppel Certificate

An estoppel certificate is a landlord-signed statement of the lease's current status, and it should specifically confirm whether rent is paid to date or, if not, exactly how much is owed and for what period. This is generally the most reliable single source, because it comes from the landlord directly rather than the seller's own representation.

2. The Seller's Financial Records

Reviewing the seller's accounts payable and rent ledger during due diligence should show whether rent has been paid on schedule. A pattern of late payments — even if technically caught up by closing — can be a signal worth discussing with the landlord directly.

3. Direct Landlord Confirmation

Beyond the estoppel certificate, your lawyer may request direct written confirmation from the landlord of the current rent status as part of the consent package, particularly where the estoppel certificate is delayed or the deal timeline is tight.

Steps to Confirm Arrears Are Cleared Before Closing

1. Request the estoppel certificate early — as part of the same landlord consent process needed for the lease assignment itself.
2. Cross-check the estoppel against the seller's own rent ledger — discrepancies are a red flag worth raising before you proceed.
3. Build a purchase agreement condition requiring confirmation of no rent arrears (or a specified maximum) as of the closing date.
4. Consider a closing holdback — where a portion of the purchase price is held back specifically to cover any arrears that surface after the estoppel is issued but before closing.
5. Get written landlord acknowledgment that any arrears identified have been paid, rather than relying on the seller's assurance alone.

Whose Responsibility Is It — Buyer or Seller?

This is a negotiated point, and there's no fixed legal rule dictating the outcome — it depends on what the purchase agreement says. Common approaches include:

Which structure makes sense depends on how confident you are in the estoppel certificate's accuracy and how much lead time exists before closing.

Asset Sale vs Share Sale: Does the Structure Change This?

In an asset sale, if the lease itself is being assigned to you as part of the deal, the same arrears concerns above apply directly — you're taking on the tenant obligations only to the extent the lease is assigned to you, and unaddressed arrears are exactly the kind of liability an asset sale is meant to let you leave behind if you choose not to assume it.

In a share sale, the corporation — including its existing lease and any arrears tied to that lease — comes with the shares. There is no separate "assignment" step because the tenant entity doesn't change, but that also means any existing arrears are already inside the corporation you're acquiring. Representations, warranties, and price adjustments in the Share Purchase Agreement become the main tools for addressing this risk rather than a landlord consent process.

Frequently asked questions