Selling a Business Where the Landlord Must Approve the Lease in Ontario

For many small businesses, the lease is the business. A restaurant, clinic or shop may be worth little to a buyer if it cannot stay at the same address. When the lease says the landlord must approve a new tenant, the sale cannot safely close until that approval is dealt with.

This article explains in plain terms how consent to assign a commercial lease generally works in Ontario, what to look for in your lease and what to do if the landlord says no. The details turn on your lease wording and the facts, so a lawyer should read the document before you commit to a buyer.

What assignment and consent mean

Assigning a lease means transferring your rights and obligations as tenant to the buyer. Whether your lease restricts this, and whether it requires the landlord's written consent, depends on the wording of your lease, so read the clause before you promise the premises to a buyer. A restriction like this usually exists because the landlord chose you as a tenant and wants to be satisfied the replacement can pay the rent and run the business.

Whether you sell the assets of the business or the shares of your company can change what your lease asks of you. How this applies depends on your lease and your deal, so check the wording rather than assuming either way, and confirm with a lawyer.

What to check in the lease first

• The assignment and subletting clause: does it require consent, and does it say the landlord cannot unreasonably withhold it?
• Any clause treating a change of control of the company as an assignment.
• Whether you stay liable for the rent after assigning, sometimes under a guarantee or a clause keeping the original tenant on the hook.
• Whether the landlord can charge for reviewing the request or can take back the premises instead of consenting.
• The remaining term and renewal options, since a buyer will want security of location.

How a landlord's refusal is treated depends on the lease wording and on the facts, such as the buyer's finances and experience. It is worth confirming with a lawyer before you rely on any assumption about whether a refusal would stand up.

Asking for consent

Approach the landlord early but only once you and the buyer have reached real terms. Landlords commonly ask about the buyer's financial strength, business experience and intended use, and may want a personal guarantee or a deposit. Prepare a short package so the request is easy to approve.

• Written request to the landlord that follows the notice rules in the lease.
• Buyer's financial information and a short description of its experience.
• A description of the intended use of the premises.
• A draft of the assignment document for the landlord to review.
• Confirmation of any guarantee the buyer or you will give.

Keep copies of everything you send and the dates, in case a dispute arises later about when the request was made.

If the landlord refuses or delays

A refusal is not always the end. Sometimes the landlord's concern can be met with a guarantee, a larger deposit or a short lease amendment. If the lease limits the landlord's right to refuse, a lawyer can tell you whether the reason given is likely to stand up. If it does not, you may need a different structure, a new lease for the buyer or a decision not to proceed.

This is why the purchase agreement should make landlord consent a condition of closing, with a clear deadline and a right for either side to walk away if consent is not obtained. Without that, you could be bound to a sale that cannot deliver the location.

Other pieces of the sale tied to the lease

Moving the lease does not settle everything. If the buyer keeps your staff, their past service carries over for Employment Standards Act purposes. A GST/HST election, where available, does not remove tax on taxable leases and licences. Your lawyer and accountant should look at those items alongside the lease.

Next steps: find your lease and every amendment, read the assignment clause, tell your lawyer about the buyer before contacting the landlord, and build the consent condition into the offer.

Frequently asked questions