Transferring Contracts, Leases and Permits in an Ontario Asset Sale

When a business is sold by assets, the buyer is not taking over the company. It is taking selected assets, and that includes the right to step into customer contracts, the premises lease and the permits that let the business operate.

Whether a third party must agree depends mostly on the wording of each document and on who issues each permit. This article explains how to approach the list and what usually happens if someone says no.

Why an asset sale needs a contract-by-contract approach

In an asset sale the seller's corporation remains the contracting party until a contract is actually assigned. Whether consent is needed turns on the contract's own terms and general contract law, so the right place to start is reading each agreement. Many contracts say they cannot be assigned without the other party's written consent, and some are silent.

By contrast, in a share sale the corporation stays the contracting party, but change-of-control clauses can still require consent. If consent from many counterparties looks difficult, that can be a reason to consider a different structure.

Customer and supplier contracts

• Look for anti-assignment, change-of-control and termination clauses.
• Check whether the contract is personal to the seller, such as a service relationship built on a particular owner.
• Note renewal dates, notice periods and exclusivity terms.
• Decide which contracts are essential and which can be replaced with new agreements signed by the buyer.

A common approach is a consent and assignment letter signed by the counterparty, or a new contract with the buyer. The asset purchase agreement should list the contracts being taken over and say what happens if one cannot be transferred.

Commercial leases and permits

For the premises lease, read the assignment and subletting clause first. Leases often require the landlord's consent and may let the landlord ask for financial information about the buyer, a guarantee or a lease amendment. Whether a landlord may refuse consent, and on what grounds, depends on the lease wording and the law, so have a lawyer review the lease before you commit to a closing date.

Licences and permits are different again. Some can be transferred on application, some must be applied for fresh by the buyer, and some cannot be transferred at all. The answer depends on the body that issued the permit and the type of permit, so contact the issuing office early and ask what it requires and how long it takes.

What moves by law, regardless of the contracts

The GST/HST election is made on Form GST44 completed by seller and buyer. If the seller is a registrant, the buyer must also be a registrant for the election to apply. GST/HST still applies to taxable services the seller will provide, taxable leases or licences, and taxable sales of real property to a buyer who is not a registrant.

If consent is refused, and what to do next

If a counterparty refuses, the usual options are to negotiate (sometimes by offering the buyer's financial strength or a guarantee), replace the contract with a new one, lower the price, delay closing until the issue is resolved, or make the deal conditional on the key consents. The agreement can also exclude a contract and provide for a price adjustment.

• List every contract, lease, licence and permit and mark which need consent.
• Read each assignment, change-of-control and termination clause.
• Approach the landlord and key counterparties early, with the seller's agreement.
• Make closing conditional on essential consents.
• Search for registered security interests on Access Now before closing, remembering it does not cover real property.
• Ask for a WSIB purchase certificate if a business is being acquired.

Frequently asked questions