What happens to the commercial lease when I buy a business?

If the location matters to the business, the lease is one of the first documents to read. The lease is a contract between the tenant and the landlord. Buying the business does not change who signed it, so the real question is who will be the tenant after closing, and whether the landlord has to agree.

The deal structure changes the question

If you buy the assets, you are not the tenant, so the lease has to be assigned to you or replaced with a new lease in your name. If you buy the shares of the company that holds the lease, the tenant is the same company. In that case, ask whether the lease treats a change in the company’s ownership as something the landlord must approve. BDC advises buyers to make sure key contracts, such as leases, can be assigned to them if necessary.

Landlord consent and the Ontario rule

Check whether the lease forbids assignment without the landlord’s consent. In Ontario, section 23(1) of the Commercial Tenancies Act says that, in a lease with such a clause, the clause is deemed to be subject to a proviso that the licence or consent is not to be unreasonably withheld, unless the lease contains an express provision to the contrary. Under section 23(2), if the landlord refuses or neglects to consent, the tenant or the assignee may apply to a judge of the Superior Court of Justice for an order determining whether the consent is unreasonably withheld. This is an Ontario rule, so check the law in your own province, and remember the lease may displace the Ontario default, so read the clause itself.

Licences tied to the premises

A new location or a new operator can also touch municipal licensing. The City of Saskatoon, for example, says that businesses operating from commercial, institutional and industrial zoned properties there require a Commercial Business Licence, with a separate application for each location. Ask the municipality where the premises sit what a change of owner or occupant requires.

What to settle before closing

• Ask for the full lease and every amendment, and confirm the remaining term and renewal rights.
• Find the transfer and change-of-control clauses, and ask whether the landlord will consent in writing.
• Make landlord consent a closing condition. BDC notes that leases or contracts may need third-party consent before they can be transferred to a new owner.
• Ask whether the seller or a guarantor stays liable after the transfer.