- A standstill agreement is a contract between the buyer's bank and the seller (as VTB lender) that restricts the seller's ability to take action against the buyer — such as demanding…
- A bank lending money to fund a business acquisition wants to control the pace and manner in which any other creditor — including the seller — can act if the business runs into difficulty.
- A standstill agreement commonly limits the seller's ability to demand payment or accelerate the VTB note without the bank's consent, enforce any security the seller holds (such as a GSA,…
If you are selling your Ontario business and agreeing to a vendor take-back note, there is a good chance the buyer's bank will ask you to sign something called a standstill agreement before it releases the acquisition financing. It is one of the least explained documents in a seller-financed deal, and one that directly limits what you can do if the buyer later runs into trouble.
This article explains what a standstill agreement is, why banks insist on one, and how it differs from the related idea of subordination.
What Is a Standstill Agreement?
A standstill agreement is a contract between the buyer's bank and the seller (as VTB lender) that restricts the seller's ability to take action against the buyer — such as demanding payment, accelerating the note, or enforcing security — for a defined period, or until certain conditions are met. It is signed in favour of the bank, and typically as a condition to the bank funding its loan at closing.
Why the Bank Wants One Before Releasing Financing
A bank lending money to fund a business acquisition wants to control the pace and manner in which any other creditor — including the seller — can act if the business runs into difficulty. Without a standstill, a seller with its own security could theoretically move against the buyer's assets while the bank is still trying to work out a struggling loan, disrupting the bank's own recovery efforts and potentially undermining the value of shared collateral.
By requiring a standstill before advancing funds, the bank ensures it has room to manage a default situation on its own terms first, without the seller acting independently in the meantime.
What a Standstill Typically Restricts
A standstill agreement commonly limits the seller's ability to demand payment or accelerate the VTB note without the bank's consent, enforce any security the seller holds (such as a GSA, share pledge, or guarantee) until the bank has had an opportunity to act, or take steps like a demand letter, lawsuit, or seizure of assets during a defined standstill period following a default.
These restrictions usually apply specifically once the buyer is in default of either the bank loan or the VTB note — a standstill does not typically affect the seller's right to receive scheduled payments while everything is current.
Standstill vs. Subordination: Not the Same Thing
These two concepts often travel together but answer different questions.
| Question | Subordination Agreement | Standstill Agreement |
|---|---|---|
| What does it govern? | The ranking (priority) of debts and security | The seller's ability to act or take enforcement steps |
| When does it apply? | At all times, defining who gets paid first from shared collateral | Typically triggered by a default |
| What is restricted? | Where the seller's claim sits relative to the bank's | Specific actions the seller can take, and when |
| Are they used together? | Often, in the same broader intercreditor arrangement | Often, alongside subordination |
Negotiating Room Within a Standstill
Agreeing to a standstill does not mean giving up every right. Sellers commonly negotiate a defined standstill period rather than an open-ended one, a requirement that the bank notify the seller promptly if the buyer defaults, and confirmation that the standstill does not affect the seller's right to receive scheduled payments while the buyer remains current with the bank.
None of this changes the basic bargain — the bank retains control in a default scenario — but it can meaningfully affect how much visibility and eventual recourse the seller retains.
Frequently asked questions
Do I have to sign a standstill agreement to get my vendor take-back note in place?
If the buyer is also relying on bank financing, the bank will typically make a standstill (often alongside subordination) a condition of releasing its loan, so in practice, refusing to sign usually means the financing — and the deal — does not close.
Does a standstill agreement mean I lose my security entirely?
No. It restricts when and how you can act on that security, particularly during a default, but it does not take the security away. Once the standstill period ends or its conditions are satisfied, your underlying rights remain.
Can the standstill period last forever?
It should not, and this is one of the more important terms to negotiate — a well-drafted standstill defines a specific period or set of conditions rather than leaving the seller restricted indefinitely.
Is a standstill agreement negotiable, or is it just the bank's standard form?
It usually starts as the bank's standard form, but sellers regularly negotiate specific terms within it, especially around notice, duration, and the seller's right to ongoing scheduled payments. Your lawyer should review it before you sign, not after.
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