When does ownership of the equipment and inventory pass to the buyer in an Ontario business purchase?

In an asset purchase, equipment and inventory change hands at some point. Ontario’s Sale of Goods Act has rules on when property and risk in goods pass. This page covers Ontario only; check the rules where you are with a lawyer. It deals with goods, which the Act defines as all chattels personal other than things in action and money, plus the further items the definition lists. Receivables are things in action; see how receivables are transferred. Ask your lawyer which closing documents will evidence the transfer.

Intention decides

Section 18(1) says that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties intend. Section 18(2) says that, to ascertain that intention, regard is had to the terms of the contract, the conduct of the parties and the circumstances of the case. Section 17 adds that, where there is a contract for the sale of unascertained goods, no property passes until the goods are ascertained. Ask your lawyer whether the agreement says when title passes. BDC notes that buyers and sellers will typically decide how much of the purchase price is paid immediately upon closing and how much is held back in escrow or made subject to conditions; ask how that fits with when title passes.

The default rules

Section 19 begins “Unless a different intention appears” and then sets rules for ascertaining the parties’ intention. Rule 1 covers an unconditional contract for the sale of specific goods in a deliverable state. There the property passes when the contract is made, and it is immaterial whether the time of payment or delivery or both is postponed. Like the other rules, it applies only where no different intention appears. Rules 2 to 5 cover other cases, such as goods the seller is bound to put into a deliverable state, where property does not pass until that is done and the buyer has notice of it. Ask your lawyer which rule, if any, fits your agreement.

Risk follows property

Under section 21, unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer. After that they are at the buyer’s risk whether or not delivery has been made. Where delivery has been delayed through the fault of either the buyer or the seller, the goods are at the risk of the party in fault for any loss that might not have occurred but for the fault. Section 21 also says that nothing in it affects the duties or liabilities of either the seller or the buyer as a bailee of the goods of the other party. Section 8 applies where there is an agreement to sell specific goods and they perish without fault of the seller or buyer before the risk passes to the buyer: the agreement is avoided. Ask your insurer and lawyer when your coverage must start; see whether you need new insurance the moment you take over.

The seller’s lender

Ownership passing does not by itself clear a security interest. Section 25(1) of the Personal Property Security Act deals with collateral that gives rise to proceeds and provides that the security interest continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest, and that it extends to the proceeds. Other provisions of the Act can change that result, such as section 28(1): a buyer of goods from a seller who sells them in the ordinary course of business takes them free from a security interest given by the seller, even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement. Ask your lawyer which provisions apply to your purchase. See what public searches to run before closing.