How do break fees work in a business sale letter of intent?

A break fee, sometimes called a termination fee, is a clause in which one party agrees to pay the other a specified amount if the deal fails to close for a defined reason. Treadstone Law, an Ontario firm, describes it as pre-agreed compensation for a particular kind of failed transaction rather than a general penalty. It also says Ontario has no statutory rule requiring, capping or standardizing break fees in a business sale. Other provinces run their own regimes, so confirm the position where you are.

Where it sits in the letter of intent

BDC explains that a letter of intent is not meant to be fully binding unless expressly stated, but can create binding obligations such as confidentiality and exclusivity where it says so. If a break fee is meant to be enforceable, ask your lawyer to confirm the letter makes it binding, and which other clauses are binding and which are not. See the letter of intent entry for the basics.

How a fee is triggered

Treadstone Law says a clause generally names the exact circumstances that trigger payment. A buyer-triggered fee applies if the buyer walks away without a permitted reason, such as a failed financing condition. A seller-triggered fee applies if the seller breaches exclusivity, accepts a competing offer or otherwise causes the deal to fail. Treadstone Law adds that most clauses exclude certain reasons for walking away from triggering the fee, and warns that because the trigger wording does the real work, a vague clause can be argued over more than it is worth.

Break fee, exclusivity and deposit

Exclusivity stops the seller from shopping the deal elsewhere. A break fee requires payment if the deal fails for the agreed reason. Treadstone Law describes a deposit as money actually paid and held, often in trust, that may become non-refundable under specified circumstances. It adds that a properly drafted break fee is generally enforceable in Ontario if it is tied to a clear trigger and a court would not treat it as a penalty, and that a lawyer should review the specific clause.

Questions for a seller to ask

Ask what exactly triggers the fee, who pays it, whether it is tied to a financing or due diligence condition and what the buyer gets in return, such as longer exclusivity. Ask also how it fits with the closing conditions in the purchase agreement.