Reviewing Commercial Leases During Due Diligence on an Ontario Business

If the business you want to buy operates from a leased storefront or office, the right to stay in those premises may be the most important thing you are buying. A great customer list means little if you cannot keep the location.

This article explains what to look for in the lease during due diligence. The lease wording controls, so a lawyer should read the actual document before you sign anything.

Get the whole lease and the paper trail

Ask the seller for the signed lease and every document that changes it: amendments, renewals, side letters, notices from the landlord and any earlier assignment. A summary from the seller is not enough.

• The full lease, with all schedules and any guarantee.
• Amendments and renewal notices.
• Recent rent statements and proof that rent and other charges are paid up.
• Correspondence about defaults, disputes or repairs.
• The landlord's contact details, so your lawyer can confirm the lease status.

Assignment and landlord consent

If you buy the business assets, the seller usually needs to transfer the lease to you, which is called an assignment. Many leases require the landlord's consent first. Read the clause that deals with assignment, subletting and a change of control, since some leases treat a share sale as a transfer too.

Whether the landlord can refuse consent, charge a fee, or ask for a new guarantee or deposit depends on the lease wording and the circumstances. Your lawyer can advise on that. Do not assume consent will be given.

• Does the lease need the landlord's consent to assign, and on what conditions?
• Does the landlord review your finances or ask for a personal guarantee?
• Will the seller remain responsible for the lease after the assignment?
• Does the landlord have to confirm in writing that the lease is in good standing?

Make landlord consent a condition of closing in the purchase agreement, so you are not bound to buy a business you cannot operate from its location.

Term, renewal and rent

Check how much time is left on the lease. A short remaining term can leave you with a business and no secure location. Find out whether there is a renewal option, how it is exercised, and how the renewal rent is set.

• The start and end dates, and the notice deadline for any renewal option.
• Current base rent, scheduled increases and how renewal rent is set.
• Additional rent for property taxes, maintenance and insurance, and how it is calculated.
• Whether the renewal right passes to you on an assignment.

If a taxable lease or licence is part of the deal, GST/HST can still apply to it even where the buyer and seller make a Form GST44 election on the sale of the business. Ask your accountant how this affects you.

Use, alterations and condition of the premises

Confirm the lease allows your intended use, including signage and any exclusive-use or competing-tenant restrictions. Ask who owns the fixtures and leasehold improvements, and what must be restored at the end of the term.

Visit the premises. Compare what you see with the lease, look for repairs, and check that required permits and insurance are in place. Equipment on the premises can be subject to a lender's security, so run the searches described in our lien search article before closing.

What to do next

• Obtain the complete lease and all amendments before you sign any agreement to buy.
• Have your lawyer review the assignment, renewal, default and guarantee clauses.
• Ask the landlord, through your lawyer, for written consent and confirmation the lease is in good standing.
• Write landlord consent and a satisfactory lease into the purchase agreement as conditions of closing.
• Compare the remaining term and rent with your business plan.
• Ask your accountant about GST/HST on any lease or licence involved.

Frequently asked questions