- Whether you can transfer your lease, and what the landlord can require, depends mainly on what your lease says, so read it first.
- How the deal is structured, as a share sale or an asset sale, can change who sells and who receives the tax treatment, because the lifetime capital gains exemption is available only to an individual selling shares of a small business corporation and not to a corporation selling its own business assets.
- Whether you stay responsible after a transfer is a question to confirm in writing with the landlord and your lawyer.
For many small businesses, the location is a big part of the value. If the lease is in your name and you want to sell, a buyer will almost always want to be sure they can stay in the premises.
This article explains how the lease fits into an Ontario business sale, the questions to ask before approaching your landlord, and what to confirm so you are not left with surprises after closing.
Start with the lease itself
Your lease is a contract, and its wording controls what you can do. Look for the clauses that deal with assignment, subletting, change of control, personal guarantees, renewal rights and the end of the term. A buyer who plans to take over your premises will ask about each one.
Many commercial leases require the landlord's consent before the tenant transfers its rights. What a landlord may ask for in return, and whether consent can be refused, depends on the lease and on the law that applies to it. A lawyer should review your actual lease before you promise anything to a buyer.
How deal structure changes the lease question
In an asset sale, the business assets move from the seller to the buyer, and the gain belongs to the seller. Where the corporation sells its assets, the lifetime capital gains exemption does not apply to the corporation directly. The lease is usually one of the assets that must be transferred, which is when landlord consent becomes important.
If the deal is set up as a share sale instead, the effect on a lease held in your own name is not simple to predict. How this applies depends on your situation, so it is worth confirming with a lawyer. Before you agree on a structure, read your lease closely for any wording about transfers.
What the landlord may ask for
Landlords commonly want to be satisfied that the incoming tenant can pay the rent and run the business. These are common requests, but whether a landlord is entitled to any of them depends on your lease.
- Financial information about the buyer, and sometimes a personal guarantee.
- A security deposit or an increase in the existing deposit.
- Payment of the landlord's legal costs.
- Confirmation that the business use will not change.
- Signed documents formally recording the transfer.
Be careful about sharing personal information about the buyer or your staff. How privacy rules apply to sharing it with a landlord depends on your situation, so it is worth confirming with a lawyer before you do.
Will you stay liable after the transfer?
This is often the biggest concern. Whether that is the case for you depends on the wording of your lease and any consent document. Do not assume you are released simply because a buyer has taken over.
Ask your lawyer to confirm, before closing, whether you will be released, whether any guarantee you signed continues and what protection you can get from the buyer, such as an indemnity.
Other points that touch the lease, and next steps
In an asset sale, the seller and buyer may jointly elect so that no GST/HST is payable on the transfer, using CRA Form GST44, where the buyer acquires all or substantially all of the property reasonably needed to carry on the business. The election is not available where the seller is a GST/HST registrant and the buyer is not a registrant. Even with that election, tax still applies to a taxable lease or licence of property. An accountant should confirm how this affects your deal.
Employees are another consideration. If the buyer employs your employee, the sale does not end the employment, and the employee's service with you carries over for entitlements based on length of employment. The exception is that prior service does not carry over if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day with you or the day of the sale.
- Get a complete copy of the lease and every amendment.
- Highlight the assignment, change-of-control, guarantee and renewal clauses.
- Ask your lawyer to review before approaching the landlord.
- Make the landlord's written consent a condition of the sale agreement.
- Request a written release from future liability and keep it with your closing documents.
Frequently asked questions
Do I need my landlord's permission to sell my business?
It depends on your lease and how the sale is structured. Many leases require consent to a transfer, and some treat a change of control as a transfer. Have a lawyer read the actual clauses.
Can the landlord refuse to consent?
That depends on the lease wording and the law that applies. It is worth getting advice on this early, before you sign a binding sale agreement that relies on the lease.
Am I still responsible for the lease after the buyer takes over?
Any personal guarantee you signed may also matter. Confirm this before closing.
Does the GST/HST election cover the lease?
Not entirely. Even with the election, tax still applies to a taxable lease or licence of property. An accountant can confirm how this applies to your sale.
Sources
- Income Tax Act, s. 110.6 — Justice Laws (federal)
- Excise Tax Act, s. 167 — Justice Laws (federal)
- CRA – GST44 Election Concerning the Acquisition of a Business or Part of a Business — canada.ca
- Ontario – Your guide to the Employment Standards Act: Continuity of employment — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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