Why should I check for rent arrears before buying a business?

Whether a landlord can seize a business’s assets for unpaid rent when it is sold turns on the province’s statute, the lease and how the deal is structured. A buyer taking over leased premises may be stepping into a place where the landlord is already owed money, so the arrears question belongs early in due diligence.

What a landlord can do about arrears

In Ontario, the Commercial Tenancies Act deems a lease to include an agreement that, unless otherwise agreed, if rent or any part of it stays unpaid for fifteen days after a day it ought to have been paid, the landlord may re-enter the premises (s. 18(1)). A landlord needs no agreement with the tenant to have the right of distress (s. 3). Section 31(2) bars distress on goods of anyone other than the tenant or a person liable for the rent, but that restriction does not apply in favour of a person whose title is derived by purchase, gift, transfer or assignment from the tenant, so goods bought from the seller may not be protected by it. Ontario’s s. 41 lets a landlord distrain for arrears after a lease ends if the distress is made within six months after it ended, during the continuance of the landlord’s title or interest, and during the possession of the tenant from whom the arrears became due. British Columbia’s Commercial Tenancy Act, ss. 3 and 4, sets the same conditions, with six calendar months. This covers Ontario and BC only. See also the landlord’s right of distress.

Check the lease’s own default terms

The lease may set its own default terms: read what counts as a default and how long the tenant has to cure it. See what to check in the lease.

What to ask for

• A rent ledger from the seller showing what is owing and the date paid to.
• The landlord’s written confirmation, for example an estoppel certificate.
• Your lawyer’s view on pre-closing arrears in the purchase agreement.

BDC’s due diligence guide says to make sure key contracts, such as leases, can be assigned to you if necessary. If the landlord is slow to sign, see what to do if a landlord won’t give an estoppel certificate.