What if due diligence shows the business has no written lease?

A business may be operating on a handshake, or on a lease that expired and was never replaced. If due diligence shows that, start by finding out what the seller and the landlord each say the arrangement is, and what rent has actually been paid and accepted. This page uses Ontario and British Columbia as examples. Other provinces have their own rules, so ask a lawyer where the premises are.

What the statutes say about oral tenancies

Ontario’s Commercial Tenancies Act, in section 74, refers to a tenant’s lease or right of occupation “whether created by writing or by parol”, so an unwritten tenancy is not outside the Act. Section 28 of the Commercial Tenancies Act says a month’s notice to quit, ending with the month, is sufficient to end a monthly tenancy. Ontario’s Statute of Frauds, in section 1(2), says all leases and terms of years are void unless made by deed. Section 3 then says sections 1 and 2 do not apply to a lease, or an agreement for a lease, not exceeding three years from the making of it, where the rent reserved to the landlord during that term meets the minimum share of the full improved value of the thing demised that section 3 sets. So a short oral lease is not void merely for lack of writing if section 3 is met; whether it is met is a question of fact for your lawyer. British Columbia’s Commercial Tenancy Act, in section 18, lets a landlord apply to the Supreme Court of British Columbia for possession where a lease or right of occupation, “whether created in writing or verbally”, has expired or been determined and the tenant wrongfully refuses, on written demand, to go out of possession. Section 18(2) extends that to week-to-week, month-to-month and year-to-year tenancies, tenancies at will, and all other terms, tenancies, holdings or occupations.

What it means for a buyer

The two tenancy Acts’ provisions above deal with how a tenancy is ended and how a landlord can get possession. None of the provisions above gives the buyer a term to rely on. If the seller is overholding after a lease ended, see what if a commercial tenant is holding over after the lease expires. Whether an oral arrangement binds a landlord to anything longer than the notice period is a question for your lawyer.

What to ask for

• A new written lease between the landlord and the buyer, signed before closing, with the term and renewal rights you need.
• Or a written assignment of the seller’s tenancy, with the landlord’s written consent, if the landlord accepts that a tenancy exists.
• A written statement from the landlord of the current rent, any arrears and the tenancy’s status.
• A closing condition in the purchase agreement that lets you walk away if none of this is delivered.

Ask whether your lender will want to see the lease, and raise it early. The lease review checklist lists what to read once a document exists.