Brian Madigan LL.B., Broker
BRMadigan@iSourceRealEstate.com

RE/MAX West Realty Inc.,
Brokerage
Independently owned and operated

96 Rexdale Blvd. 
Toronto, Ontario 


Phone: 416-745-2300
Toll Free: 1-888-507-0817

 

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Understanding the Sale of Business Agreement (OREA Form 502)

September 10, 2013 - Updated: September 10, 2013

 

Sale of Business Agreement Explained

 

We will have a look at the standard form Agreement for the sale of a business in leased premises as developed by OREA. It is FORM 502.

 

We will only look at those clauses which specifically deal with the business transaction.

 

There are other clauses which are included in many other documents and those clauses have been reviewed elsewhere. You will find a sample copy of the entire agreement reproduced for reference below.

 

The Deal

 

The buyer agrees to purchase from the seller the following:

all the assets of the Business known as.............................................................................................

(including the chattels, fixtures and inventory of the Business set out in schedule "A" as are now located upon the premises and inspected and approved by Buyer) situated at ............................................................................................................................................(the "Business") together with the lease of the premises, and the trade name and goodwill of the Business (the "Assets").

 

This clause outlines the basic structure of the deal. If for some reason, you do not wish to follow this plan, then, you will be required to make the necessary changes.

 

All the assets of the business are to be shown in Schedule “A”. These include:

 

  • Chattels
  • Fixtures and
  • Inventory

 

Those items are naturally physical, tangible assets. They are presently located upon the premises. The buyer acknowledges having inspected and approved these assets. This does create the potential for confusion since other assets which are not presently situate upon the premises, or which have not been inspected or approved may be intended to be part of the sale.

In those cases, use another schedule. In fact, use additional schedules, as many as may be necessary to document:

 

  • Assets included, but offsite
  • Assets included, but not inspected or approved
  • Assets not included (to eliminate any potential confusion)

 

In fact, it would be wise to have those schedules and just enter “nil” if there is nothing on the list. This demonstrates that the real estate practitioner directed his mind to the matter.

 

So, what else is included? The lease is mentioned. It should clearly be attached to the agreement. All parts of the lease, including the rules and regulations should be attached for clarity. This would include any extensions or amendments. In many circumstances, it is the lease which gives value to the business.

 

We then turn to two intangible assets which are included:

 

  1. the trade name and
  2. goodwill.

 

You will see that the deal is structured as an asset purchase. It is not a share purchase, so if that were otherwise the intention, this is the wrong document to use.

 

In addition, this transaction mentions that it is to be completed under the Bulk Sales Act, so the practitioner must be cognizant of the bulk sales procedures.

 

Purchase Price         

 

Have a look at the clause dealing with purchase price. It says:

 

“…. which total Purchase Price includes the amount of $.....................................................in respect of inventory of the Business.”

 

So, it is made clear that inventory is included in the total purchase price.

 

If the total purchase price is $100,000.00 and there is $30,000.00 of inventory, then it should read “100 and 30”. If the second number is left blank, inventory is still included in the $100,000.00, but there’s no allocation.

 

If it were the intention to pay for inventory in addition, on closing, then it should read “130 and 30”. If inventory is to be in addition, but the amount is unknown, and to be counted on closing, then the above words should be struck out or deleted, and a separate clause indicating that inventory will be counted, and paid for as an adjustment on closing should be added.

 

Deposit

 

This clause appears in the same form as in other OREA agreements. However, it should be noted that the purchaser is limited to a 10% deposit in order to comply with the bulk sales procedures.

 

Schedules

 

In compliance with other standard OREA forms, this form takes the approach that the balance due will be set out in Schedule “A”. Like other forms, Schedule “A” is to contain the specific clauses related to this particular deal. In addition, there is a reference to other schedules being included.

 

There is a possibility for slight confusion here, since at the outset of the agreement reference was made to another Schedule “A”, this one being a list of inventory.

 

Accordingly, I would suggest the following for your consideration:

 

Schedule “A”              - agreement provisions

Schedule “B”              - assets included, onsite

Schedule “C”              - assets included, offsite

Schedule “D”              - assets included, not inspected or approved

Schedule “E”              - assets, not included          

Schedule “F”              - Lease, Lease Extensions, Lease Amendments

Schedule “G”              - any restrictions on use of premises

Schedule “H”              - any Franchise Agreement  

Schedule “I”               - any Supplier’s Agreement       

Schedule “J”               - Profit and Loss Statement

Schedule “K”              - Balance Sheet

Schedule “L”              - Statement of Liabilities

Schedule “M”             - Waiver of Bulk Sales required statements

Schedule “N”              - Bulk Sales Affidavit, disclosure

Schedule “O”              - Current Inventory list

Schedule “P”              - a copy of licence(s), if any

Schedule “Q”              - a copy of patents, copyrights, trademarks

Schedule “R”              - a copy of equipment leases

Schedule “S”              - a copy of chattel mortgages

Schedule “T”              - a copy of receivable assignment (if factoring)

Schedule “U”              - a list of employees to be assumed

Schedule “V”              - a list of employees to be terminated

Schedule “W”             - a list of any operational agreements

Schedule “X”              - a list of customers

Schedule “Y”              -  

Schedule “Z”              -

Schedule “AA”           -

 

You will notice that there is a rather extensive list of documents that are required to be reviewed and examined for even the least complex business sales. For the more complicated transactions, many more documents should be included in the Document Disclosure Package. The time to review and examine the documents is ahead of time, that is, preferably before an Offer.

 

However, that’s likely improbable. So, let’s move then to the “due diligence period” that is, while the conditions are still in place. Without an Offer, sellers will be reluctant to agree to making all these documents available for inspection.

 

Clauses Not Reviewed

 

The following clauses were not reviewed, 1 Irrevocability, 2 Completion Date, 4 Notices, 15 Tender,  16 Agreement in Writing, 17 Time and Date, 18 Successors and Assigns.

 

The Excise Tax Act Clause (HST)

Here is the clause as set forth:

 

3. HST: The parties hereto agree that this transaction shall be a taxable supply in accordance with the provisions of the Excise Tax Act (Canada), R.S.C. 1985, e-15, as amended. The Seller and Buyer agree to file the necessary Form electing not to have the Harmonized Sales Tax (HST) apply. The Buyer agrees to file the requisite election Form containing the prescribed information, together with a return for the Buyer’s reporting period in which the transaction occurs, under the Excise Tax Act (Canada), as amended, on or prior to the date prescribed by such Act for making such election.

 

The purpose of this clause is to exempt the sale from the imposition of the HST on the sale. The joint election will permit each of the parties to file their own HST returns. The seller will not be obliged to collect HST on the sale proceeds. The buyer, will not have to finance it, pay it and then claim it back. Naturally, both parties must be registered.

 

Non-Competition Clause

 

Here is the clause in the agreement:

 

5. NON-COMPETITION: Seller and the undersigned.........................................................................................jointly and severally covenant not to carry on or be engaged in or concerned with (either directly or indirectly in any manner whatsoever including without limitation as a principal, agent, partner or shareholder) any business competitive with or similar to the Business as presently carried on, within a radius of..............................kilometers of the premises for....................months after completion. The aforesaid covenant shall survive the completion of the transaction provided for herein.

 

Not every business sale requires a non-competition covenant, but most do. Please note that the intention is to have both the owner and the proprietor sign the agreement. Watch out! This is the clause that got Conrad black into trouble.

 

Assume you are buying ABC Pool Repair Company Ltd. It is owned by John Smith. After you buy the business you don’t want John Smith to set up  shop as XYZ Pool Service Co. It’s important to have both the vendor and John Smith sign the non-competition agreement.

 

The two matters that are relevant in the case of this business are time and distance. How far away would you be prepared to service customers? How many seasons would you need to ensure that the customers will remain.

 

These are questions not only of the buyer, but also of the real estate practitioners handling the negotiations.

 

In order to ensure that the agreement is binding upon John Smith, the agreement is executed under seal. Since the matter of the seal is rarely explained, it is suggested that some monetary consideration flow to John Smith in the transaction. This will avoid any potential problem associated with the independent enforcement of the agreement.

 

Sellers Statements (Representations and Warranties)

 

A condition is a deal-breaker. If it turns out to be untrue, the agreement is not completed. Warranties are contractual commitments. The deal will be closed, if they are untrue, and the buyer will accept damages. Representations are statements, believed were made to be true, but if not, depending upon how material they are, there is either a damage award, or no compensation at all.

 

This is the clause for Asset Ownership:                

 

6. SELLER REPRESENTS AND WARRANTS that:

 

(a) the Assets are now and shall at the time of completion be owned by Seller free and clear of all encumbrances, liens or charges and no other person has now or shall at the time of closing have any interest in the assets except

....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

 

 

This is a very clear and direct statement. The assets are free and clear. They are owned outright. There are no liabilities associated with the assets unless identified.

 

Don’t forget about factoring and floating charges. They affect all assets even though they are unlike a chattel mortgage on a vehicle.

 

The other statement here is that no other person has an interest. So, don’t forget about the co-signor!

 

Let’s assume that John Smith ran into financial difficulty and he arranged for his wife Mary to co-sign the company’s revolving line of credit with one of the suppliers. She HAS and interest in the goods supplied under that contract. So, her interest should be mentioned here.

 

It is important to take note of the two time periods:

 

  1. now, the date of the agreement, and
  2. the date of closing.

 

There is a continuing obligation to update the information to ensure that full, complete and accurate disclosure has been made.

 

This is the clause for Residency

 

SELLER REPRESENTS AND WARRANTS that:

 

          (b) Seller is not now and shall not at the time of completion be a non-resident person within the meaning of Section 116 of the Income Tax Act (Canada);

 

This is a standard clause. It allows compliance with the Income Tax Act and the withholding tax provisions. Ordinarily, the withholding tax amount is 25% of the purchase price, sometimes, in commercial cases, 50%. So, compliance is absolutely essential.

 

If the amount is not withheld by the buyer, it must be paid again. Please note, that it is not the equity or net proceeds, after discharge of any outstanding indebtedness, it is 25% (or 50%, as the case may be) of the gross purchase price. So, be very careful here.

 

This is the clause for Defaults, Lawsuits, and Potential Claims

 

 

SELLER REPRESENTS AND WARRANTS that:

           

          (c) Seller is not in default of any agreements related to the Business and there are no actions, suits or proceedings against or on behalf of the Seller, pending or threatened, which may affect the Business, and the Seller is not aware of any existing grounds on which any such action, suit or proceeding might be commenced;

 

The default representation is a difficult one. While most of the time, one would like to think that they have complied with all agreements, in all respects, all the time, the fact of the matter is that in all likelihood, many contracts are in default, to some extent. Everything is not perfect.

 

Possibly, there is a payment due, which has not yet been paid.

 

The real issue here is one of materiality. Perhaps, the default might be material, only if it exceeds a certain amount, for example, $2,500.00.

 

On the lawsuits issue, many people misread the statement. They think it just means lawsuits against the business. That is not the case, the seller could be either the defendant, or the plaintiff having initiated the lawsuit. In addition, there is an expanded meaning which includes threatened lawsuits. Again, that’s more difficult to quantify. Naturally, just about all lawsuits would have an “affect” upon the business.

 

And, then, there is a further expansion to the meaning. This representation includes any knowledge the seller may have concerning “any grounds” upon which an action “might” be commenced. That’s very, very broad wording. It seems to require disclosure of just about everything that happened in or about the premises or the business during the relevant time period.

 

While the Limitations Act seems to preclude lawsuits after 2 years, the relevant information has to come to the attention of the injured party first, then the time period starts to run. So, the relevant time period can actually easily go back a decade or more. Modifying this provision, on behalf of the seller, in some way would be helpful.

 

This is the clause for Lease

 

SELLER REPRESENTS AND WARRANTS that:

 

(d) there is a good, valid and subsisting lease of the premises for a term of.........................years at a monthly rental of $..........................................................................................................................expiring

on the...................................day of......................................., 20............. (a copy of which lease is attached hereto);

 

The Lease clause calls for a quick summary:

 

  • Term
  • Monthly rental
  • Expiration date

 

The clause calls for a copy of the Lease to be attached. By extension, this would include the entire document consisting of any extensions, amendments and also any applicable rules and regulations.

 

The clause doesn’t specify whether any additional rent, that is “TMI”, taxes, maintenance and insurance is to be identified, but it would clarify matters if this were specified.

 

The expiration date should be the next renewal, and not the furthest date possible, if all such renewals and extensions were to take place.

 

This is the clause for the Employees

 

SELLER REPRESENTS AND WARRANTS that:

 

(e) there are not now and shall not at the time of completion be any employees of the Business except the following, all of whom can be dismissed on the minimum applicable statutory notice period without further liability:

............................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

 

In respect to this clause, the real estate practitioner is expected to be familiar with the laws of employment, wrongful dismissal, and trade unions.

 

Under the Employment Standards Act, there is a statutory notice period which must be given in respect to termination without cause. The Act sets out the minimum obligation. The common law rules of wrongful dismissal could provide for payments in excess of the minimums set forth. In some cases, 18 to 24 months of full compensation, salary, wages, bonuses, stock options and benefits may be required.

 

If there are any members of a trade union, their termination payments are covered under the collective agreement. Who is going to pay? Is there enough money available to satisfy this contingent liability?

 

The statement, without amendment says:

 

  • Here’s a list of all employees
  • They can all be terminated upon payment of the minimum amounts indicated in the Employment Standards Act

 

The real estate practitioner must know the status of each employee. It would be wise, in the case of uncertainty, of any longer term employee, to secure a legal opinion.

 

This is the clause for the Financial Statements

 

SELLER REPRESENTS AND WARRANTS that:

 

(f) the Business has been carried on in the ordinary course and all financial statements and other information provided to Buyer are true, accurate and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and Seller shall, at the time of completion, have no liabilities, contingent or otherwise, except as reflected therein or in the statement to be delivered pursuant to the Bulk Sales Act (none of which shall be inconsistent with past practice or materially adverse);

 

This statement is clear. Financial statements ARE to be provided. If not, then, this clause must be amended. The statements referred to in the Real Estate and Business Brokers Act, 2002 (s.21 Regulation 567/05) will include the profit and loss statement and the balance sheet.

 

Those statements are to be:

 

  • True, accurate and correct (in all material respects)
  • Prepared in accordance with generally accepted accounting principles
  • Applied on a consistent basis

 

In addition, there will be no liabilities other than those mentioned in the statement or specified in the bulk sales statement to be delivered.

 

Without modification to this clause, statements are required. If a Waiver is to be signed, then that should be made clear in the documents.

 

You will also notice that this provision confirms the truth, accuracy and correctness of all other information provided. This could be difficult to accomplish. A real estate practitioner might be wise to tone this statement down somewhat. Common amendments made by the legal community include the reference at the outset “to the best of the sellers’ knowledge, information and belief”. In this way, it’s now somewhat less than a “guarantee”.

 

This is the clause for Business As Usual

 

SELLER REPRESENTS AND WARRANTS that:

                                

          (g) no expenditures shall be made out of the ordinary course of business prior to closing and the Business shall be carried on up to the time of completion in the ordinary course and in a commercially reasonable manner with a view to preserving the goodwill of the Business; and

 

 

 

Here, we have the seller’s promise to run the business as usual until the closing date in accordance with the following principles:

 

  • No expenditures out of the ordinary course of business
  • Carry on the business in the ordinary course
  • Carry on business as commercially reasonable
  • Preserve the goodwill

 

This, of course, is an Undertaking. Later, if there is some problem during this time period, there is an opportunity for the buyer to complain.

 

To modify this, the buyer could be allowed to attend and monitor the business during this intervening period. Then, at the end, the buyer would have to elect to complete the transaction, and waive any future complaints about the seller’s conduct during this period. There would have been an opportunity to scrutinize the seller’s conduct.

 

So, a modification could be that “the seller will, with the buyer’s assistance…”.

 

 

This is the clause for the Tangible Assets

 

SELLER REPRESENTS AND WARRANTS that:

 

(h) the tangible Assets are now and shall at the time of completion be in good condition, subject only in the case of equipment to reasonable wear and tear.

 

This statement just deals with the tangible assets. That means assets with a physical existence. The bundle of rights that go with the deal, any intellectual property, or other intangibles are not included here.

 

The statement is “good condition”, “reasonable wear and tear, excepted”. But, does that make sense? What if some items were in poor repair? Must they be fixed? Possibly, they really didn’t overall count much toward the value. This clause requires them to be handed over in good condition.

 

The reference generally should be “as is” condition, for the low-end items, and possibly some requirement to repair the more significant, higher priced material items. A price could be established for an item to be material, for example, $2,500.00.

 

Note that the phone number, the alarm access codes and the website are all intangibles. They are not mentioned at all, but they should be in the same condition and useful for the purpose for which they were intended. The phone number should still be owned and subject to transfer, the security codes should work, or new ones obtained, the website should be up and running with the domain name registered.

 

Naturally, there should be an additional clause dealing with the intangibles.

 

Covenants made by the Seller                    

 

Here is the clause as it appears in the Agreement: 

 

7. SELLER COVENANTS:

 

(a) to comply with Section 6 of the Retail Sales Tax Act;

 

(b) to comply with the Bulk Sales Act;

 

(c) to deliver to Buyer at or before the time of completion the written consent of the lessor to the assignment of the lease of the premises to Buyer; and

 

(d) to indemnify and save harmless the Buyer from and against all liabilities, claims and demands in connection with the purchased business existing or incurred as at the time of completion and not shown on the financial statements provided to the Buyer or in the statement delivered pursuant to the Bulk Sales Act or expressly agreed to be assumed by the Buyer in this Agreement.

 

 

These are covenants. They are promises. They are undertakings, all made by the Seller.

 

Retail Sales Tax Clearance Certificate

 

And, yes, there still is a Retail Sales Tax Act which is in full force and effect in Ontario notwithstanding the HST. The Harmonized Sales Tax is a system organized for the collection of taxes between the provincial and federal governments.

 

S. 6 of the RST, requires a vendor (who is also a tax collector and tax remitter) to report a transaction to be concluded under the Bulk Sales Act, and to obtain a clearance certificate issued by the Minister.

 

The Minister will issue the clearance certificate upon payment of the taxes, penalties and interest, or upon the filing of proper security or the entry into an arrangement satisfactory to the Minister for payment.

 

Without the clearance certificate, the Seller remains liable, and the Purchaser as well, incurs an obligation to pay the Seller’s taxes, penalties and interest in respect to fuel tax, gasoline tax, race track tax, retail sales tax, tobacco tax, and alcohol and gaming fees and taxes (lotteries).

 

With the clearance certificate, the purchaser will not incur liability.

 

The application for the issuance of the appropriate clearance certificate will be made by the seller’s accountant or lawyer to be made available at the time of closing.

 

Since it is so important, real estate practitioners are cautioned to make this a condition, and to have a clause extending the closing date, if required.

 

Bulk Sales Act Compliance

 

This is a transaction completed under the Bulk Sales Act. Without the Waiver, the buyer is entitled to the financial statements. Even with the Waiver, the buyer is entitled to certain minimum information.

 

Assignment of Lease

 

This particular form is used for businesses in leased premises. If the property is owned, then the standard form commercial agreement should be used, in conjunction with this form suitably amended to reflect ownership.

 

This is so essential to the transaction that one would think that the lease assignment should be a condition. What if the deal closes, and the landlord subsequently changes his mind?

 

 

Real estate practitioners are cautioned to step this up to a condition, and to have a clause extending the closing date, if required.

 

Indemnification

 

We do have a small problem with the indemnity clause.

 

As it reads, it applies to liabilities, claims and demands:

                                                                                             

  • Not shown in the financial statements provided, OR
  • Not shown in the Bulk Sales Act Affidavit, provided, OR
  • Not expressly agreed to be assumed

 

So, what does this mean? It covers unknown liabilities AND it covers all liabilities that have not been agreed to be assumed. Effectively, you would want to ensure that it covers any liability, known or unknown, if that liability has not been agreed to be assumed by the buyer.

 

There is a slight issue of interpretation concerning the second “OR”, and whether that is to be read conjunctively or disjunctively.

 

From the seller’s perspective, financial statements might be provided, but the statements themselves do not necessarily mention all liabilities of every nature and kind whatsoever. The buyer is placed on inquiry to seek more detail but fails to do so. Then what happens? There might be insurance coverage to protect the seller, would this be sufficient. The coverage may even protect the new buyer if the insurance were transferred.

 

If the seller disclosed the liability and it is clear in the statements (either the financials or the bulk sales affidavit), then it may be reasonable to assume that the buyer knows about it and will take it on. But, that’s not the case if the last statement “not agreed to be assumed” is read disjunctively. Known liabilities all stay with the seller, no matter what UNLESS, the buyer, in writing agrees to assume them.

 

This means that for purposes of clarification, the real estate practitioner will need to address this issue. The Assumption of Liabilities Clause will need to be mentioned specifically in the documentation.

 

This provision might not be the best from the buyer’s perspective either. The clause reads “incurred” which suggests contractual agreement. It might be broadened to include “occurred”. The reason here is that some insurance policies are written on an “occurrence basis” and others on a “claims made basis”. Let’s assume that a tort claim occurred (but was unknown) prior to the closing and the claim did not come forward until after the closing. There would be coverage under the first policy but not under the second.

 

The other issue from the perspective of the buyer is whether there will be anyone around afterwards to satisfy this obligation.

 

If the buyer is purchasing the business from ABC Pool Company with John Smith as the President and sole shareholder, then the buyer should have a indemnification agreement signed by John Smith. ABC pool Company may have no funds at all, 6 months after the sale, or may have been wound up. In such cases, there would be no one available to satisfy the claim.

 

Therefore, the buyer should consider:

 

  • Having the owner-proprietor responsible
  • Establishing a vendor-take-back with a right of set-off
  • Having moneys heldback or set aside for a limited period of time after closing

 

In any event, this issue should be identified, clarified and resolved in the agreement.

                

 

Investment Canada Warranty      

 

Here is clause # 8:

 

 

8. BUYER REPRESENTS AND WARRANTS that Buyer is not now and shall not at the time of completion be a non-eligible person within the meaning of the Investment Canada Act.

Have a look at this statement from the Investment Canada website:

 

“Does the Investment Canada Act apply to me?

If you are not a Canadian citizen or a permanent resident, within the meaning of the Immigration Act (ie. a person who has been ordinarily resident in Canada for not more than one year after the time at which he/she first became eligible to apply for Canadian citizenship), then you are a non-Canadian and must comply with the provisions of the Investment Canada Act.

For the purposes of the Act, a non-Canadian includes any entity that is not controlled or beneficially owned by Canadians.

If you are a non-Canadian, then you MUST either file a Notification or an Application for Review of the investment unless a specific  exemption applies.”

 

The Act applies to Non-Canadians. The intent is to determine whether there is a net benefit to Canada if the transaction is allowed to proceed. It applies to businesses with a value of $5,000,000.00 or more.

 

If the buyer is Non-Canadian, then an application will need to be made by the buyer to seek approval.

 

Buyer’s Covenants - Sales Taxes

 

Have a look at this provision:

 

9. BUYER COVENANTS to pay all applicable retail sales tax and federal sales tax on completion (or furnish appropriate exemption certificates) eligible in respect to this transaction.

 

The buyer for the bulk sale must agree to comply not only with the Retail Sales Tax, but also the HST on closing.

 

This obligation is an agreement or undertaking. It was not made a condition. A Seller may wish to consider elevating this obligation to a condition. If the taxes are not paid, the seller is still liable.

 

This liability continues even if a Clearance certificate is issued (s.6 (4) Retail Sales Tax Act).

 

Seller’s Representations, Warranties and Covenants Elevated to “Conditions”

 

You might be interested in this clause:

 

10. THE OBLIGATION OF BUYER to complete this transaction shall be subject to satisfaction of the following conditions (which may be waived in whole or in part by Buyer without prejudice to any claim for breach of covenant, representation or warranty):

 

(a) the representations and warranties of Seller shall be true at and as of completion as if given at that time;

 

(b) Seller shall have performed all covenants to be performed by Seller at or prior to the time of completion.

 

This is a very interesting part of this Agreement. The Seller’s representations, warranties and covenants all became conditions. This means that the buyer has a “walk-away” if anything goes wrong, no matter how trivial.

 

Previously, I had suggested that the lease assignment and the retail sales tax clearance be “conditions”. The reason was based upon their importance in the transaction.

 

From the Seller’s perspective here, there should be a modification to either specific matters which are properly enumerated, or should contain the qualification to matters of “material significance” or “material importance” in the transaction. Just leaving it open-ended appears rather unwise!

 

And, although this is a great clause from the buyer’s point of view, make sure it’s still there when the deal is done. If you are tempted to delete it because the seller wants to remove it, then, remember it would be wise to put something in again concerning the lease and the clearance certificate.     

 

 

Inventory is Included with the Sale           

 

Here is the clause dealing with inventory:

 

11. INVENTORY: Prior to completion, either party may elect by written notice to the other that the inventory shall be physically counted after the close of business on the day prior to completion and valued at Seller's cost thereof in which case the total Purchase Price shall be increased or decreased to the extent that the valuation so obtained is greater than or less than the amount set for inventory stated above. Failing such an election, neither Seller nor Buyer may dispute the amount of valuation of inventory.

 

There is no doubt about it, this FORM is drafted on the expectation that the value of the inventory is included in the price. If, for some reason, that’s not what you want, then you will have to make the necessary changes, to have it say otherwise. The problem is just “not filling in the inventory value”.

 

That will not work. For the Form to work, delete the references to inventory and state clearly: “inventory not included”.

 

This might make sense. The buyer is a Ford dealer and buys an old GM dealership about to close down. The new buyer will have no relationship with GM. The seller, has the right to return, transfer or re-sell the GM inventory. But, in the deal, let’s make sure that the vehicles are not included and will be removed at the seller’s expense.

 

Given that the Form expects inventory to be included, and an amount specified for inventory of the first page, there is a possibility of adjustment.

 

Assuming $100,000.00 for the business plus $30,000.00 for the inventory, the total purchase price will be $130,000.00.

 

Please note that commissions will be calculated on the basis of the total purchase price, namely $130,000.00.

 

Now, we come to the closing date, and we have $20,000.00 in inventory. Here are the steps to be followed:

 

Election

 

Either party, in this case the buyer may elect to give notice of a physical count.

 

If the inventory were $40,000.00, then the seller would give notice.

 

If it were uncertain, but neither party thought that it was material, then the allocated inventory price would stand.

 

But, remember the allocated inventory price is just an estimate.

 

Physical Count and Valuation

 

On the day before closing, the inventory is physically counted, by both parties, or by an independent valuator. Some inventory is damaged, stale, repairable, or irreparable. That inventory should be discarded and not counted.

 

Depending upon the nature of the business, the parties should agree upon the method of determining the status and valuing the inventory. Cameras are one thing, even if they are a year old, but cup cakes and baked goods are another.

 

The default valuation method is the seller’s cost.

 

Purchase Price Adjustment

 

There is going to be an adjustment in the inventory value and the purchase price: $10,000.00 more, or less depending upon the value.

 

But, just to make sure, have another look at the allocation on page 1, and re-read this clause. Assume, the purchase price said $130,000.00 and the inventory value was simply omitted. If the inventory were $20,000.00, then the purchase price would be adjusted upwards to $150,000.00. And, it’s even worse in the inventory were $40,000.00, since we are now at an adjusted purchase price of $170,000.00.

 

If you are a real estate practitioner, do not leave this blank. Take it out or delete it, but don’t leave it blank.

 

Consequences of No election

 

If there is no notice of an election, then the inventory stands. Note that the day of closing is too late. There is no specific number of days for the notice, but presumably, the day of closing is not the time to be giving such a notice. In any event, if the other party agrees, then it’s never too late.

 

Adjustments Between the Parties on Closing

 

Here is the adjustment clause:

 

12. ADJUSTMENTS: Any business taxes, insurance, rent, hydro, water, fuel, employee's wages and vacation pay and usual prepaid items being transferred to Buyer, as applicable, shall be apportioned and allowed to the day of completion, the day of completion itself to be apportioned to the Buyer.

 

This is noticeably different from the similar clause in the standard form agreement of purchase and sale. We are adjusting business taxes and insurance. The business taxes might be included in the TMI.

 

There is a question outstanding as to whether the insurance policy can be transferred. Some insurers will not permit it. They require a fresh application by the new buyer. Rent is also to be adjusted including the TMI. Hydro, water and fuel are also to be adjusted along with the usual items.

 

The problem with saying the usual items, is that there are no usual items other than the ones already mentioned. But, it could include items specifically noted including hot water tank rental, furnace rental, cable TV, satellite dish fees, internet access fees, alarm systems, and charges for landscaping, snow removal and so on. There could also be prepaid advertisements, sponsorships of teams, and the promotional participation in a local business group. However, they are all far from being “usual”, so they should be mentioned, negotiated and specified upfront.

 

Now, we come to the big one: the EMPLOYEES! Wages and vacation pay are in, but bonuses and benefits are out. That hardly seems fair.

 

Remember that the only employees affected are those whose names are mentioned in the agreement under Clause 6 (e). If you are the buyer, you truly want the seller to contribute proportionately towards those year end bonuses, particularly if you close the deal in November and they are paid out just before Christmas.

 

 

Documents Evidencing the Transfer

 

Have a look at this clause:

 

13. THE BILL OF SALE and other transfer documents are to be prepared at Seller's expense and any security documents are to be prepared at the expense of Buyer, and each party is to pay the costs of registration of their own documents.

 

On closing there will have to be a document which conveys the assets from the seller to the buyer. This is the Bill of Sale. It’s not always registered but if the buyer decides to finance the sale, then there will likely be a registration under the Personal Property Security Act (PPSA).

 

The lease should also be registered if it provides for a term or renewals to exceed three years.

 

This document will attach lists of all the assets. The source document is the Agreement of Purchase and Sale. So, make sure that all the lists are true, accurate and correct, right from the beginning.

 

It is usual practice to reduce the continuing agreements from both sides into a document described as an Undertaking. This document is intended to avoid application of the doctrine of merger. But, if you added that clause to the agreement, then it wouldn’t be required later.

 

Seller’s Risk of Loss

 

Here is the applicable clause:

 

14. RISK: All the assets of the Business shall be and remain at risk of Seller until the completion of the transaction provided for herein.

 

This clause makes sense, but there is no requirement for the Seller to have insurance, at all, or in the event of loss to hold the proceeds of insurance for the benefit of the buyer.

 

In addition, matters are complicated because the buyer may not have an insurable interest in all of the assets to be transferred as part of the sale.

 

Further, there are issues related to insurance and the valuation of inventory if the sale were to proceed. There are other issues associated with the valuation of the business, notwithstanding substantial loss.

 

It would seem that a clause not dissimilar to the one contained in the standard form commercial agreement of purchase and sale would be helpful to a buyer.

 

In addition, in the event of substantial loss, the seller might be afforded the opportunity to wind-up the deal without the potential of a lawsuit.

 

In any event, this is probably an item which requires further negotiation.

 

CONCLUSION

 

This is simply a standard form. Nothing more than that! If it suits your circumstances, use it. If it falls short of the task, then change it appropriately.

 

Every real estate practitioner needs to know what the default clauses say, without amendment. Then, they should be considered, paragraph by paragraph, line by line and word by word.

 

The document must be explained in full to the client. The client MUST know and APPRECIATE that the document can be modified, clarified and changed to suit their circumstances. This is a working document. A vast array of schedules is appropriate for full disclosure.

 

The client’s informed consent to proceed further is required at every step. This INFORMED CONSENT should be documented at every stage.

 

 

 

 

Reproduced below is a copy of the agreement without as commentary for ease of review:

 

 

Sample Copy of Agreement

 

Agreement of Purchase and Sale

Business in Leased Premises Under the Bulk Sales Act (Ontario)

 

Form 502  

for use in the Province of Ontario

 

 

This Agreement of Purchase and Sale dated this.................................... day of ................................................ 20.........

 

BUYER,................................................................................, agrees to purchase from

(Full legal names of all Buyers)

 

SELLER,................................................................................, the following

(Full legal names of all Sellers)

 

all the assets of the Business known as.............................................................................................

(including the chattels, fixtures and inventory of the Business set out in schedule "A" as are now located upon the premises and inspected and approved by Buyer) situated at .............................................................................................................................................(the "Business") together with the lease of the premises, and the trade name and goodwill of the Business (the "Assets").

 

PURCHASE PRICE:

Dollars (CDN$)....................................................................................................................Dollars

which total Purchase Price includes the amount of $.....................................................in respect of inventory of the Business.

 

 

DEPOSIT: Buyer submits .......................................................................................................................................

(Herewith/Upon Acceptance/as otherwise described in this Agreement)

................................................................................................................. Dollars (CDN$).......................................

by negotiable cheque payable to........................................................................................................ “Deposit Holder”

to be held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion.

 

For the purposes of this Agreement, “Upon Acceptance” shall mean that the Buyer is required to deliver the deposit to the Deposit Holder within 24 hours of the acceptance of this Agreement. The parties to this Agreement hereby acknowledge that,  unless otherwise provided for in this Agreement, the Deposit Holder shall place the deposit in trust in the Deposit Holder’s non-interest bearing Real Estate Trust Account and no interest shall be earned, received or paid on the deposit.

 

Buyer agrees to pay the balance as more particularly set out in Schedule A attached.

 

SCHEDULE(S) A.......................................................................attached hereto form(s) part of this Agreement.

 

1. IRREVOCABILITY: This offer shall be irrevocable by (Seller/Buyer).......................................... until ....................... a.m./p.m. on

the .................................. day of ................................................ 20........., after which time, if not accepted, this offer shall be null and void and the deposit shall be returned to the Buyer in full without interest.

 

 

2. COMPLETION DATE: This Agreement shall be completed by no later than 6:00 p.m. on the ................................ day of ..........................................., 20......... . Upon completion, vacant possession of the property shall be given to the Buyer unless otherwise provided for in this Agreement.

 

 

3. HST: The parties hereto agree that this transaction shall be a taxable supply in accordance with the provisions of the Excise Tax Act (Canada), R.S.C. 1985, e-15, as amended. The Seller and Buyer agree to file the necessary Form electing not to have the Harmonized Sales Tax (HST) apply. The Buyer agrees to file the requisite election Form containing the prescribed information, together with a return for the Buyer’s reporting period in which the transaction occurs, under the Excise Tax Act (Canada), as amended, on or prior to the date prescribed by such Act for making such election.

 

 

4. NOTICES: The Seller hereby appoints the Listing Brokerage as agent for the Seller for the purpose of giving and receiving notices pursuant to this Agreement. Where a Brokerage (Buyer’s Brokerage) has entered into a representation agreement with the Buyer, the Buyer hereby appoints the Buyer’s Brokerage as agent for the purpose of giving and receiving notices pursuant to this Agreement. Where a Brokerage represents both the Seller and the Buyer (multiple representation), the Brokerage shall not be appointed or authorized to be agent for either the Buyer or the Seller for the purpose of giving and receiving notices. Any notice relating hereto or provided for herein shall be in writing. In addition to any provision contained herein and in any Schedule hereto, this offer, any counter-offer, notice of acceptance thereof or any notice to be given or received pursuant to this Agreement or any Schedule hereto (any of them, “Document”) shall be deemed given and received when delivered personally or hand delivered to the Address for Service provided in the Acknowledgement below, or where a facsimile number or email address is provided herein, when transmitted electronically to that facsimile number or email address, respectively, in which case, the signature(s) of the party (parties) shall be deemed to be original.

 

FAX No.: .............................................FAX No.:……………………………. .........................................................................

(For delivery of Documents to Seller) (For delivery of Documents to Buyer)

 

Email Address: ....................................Email Address: .........................................

 

(For delivery of Documents to Seller) (For delivery of Documents to Buyer)

 

 

5. NON-COMPETITION: Seller and the undersigned.........................................................................................jointly and severally covenant not to carry on or be engaged in or concerned with (either directly or indirectly in any manner whatsoever including without limitation as a principal, agent, partner or shareholder) any business competitive with or similar to the Business as presently carried on, within a radius of..............................kilometers of the premises for....................months after completion. The aforesaid covenant shall survive the completion of the transaction provided for herein.

 

 

6. SELLER REPRESENTS AND WARRANTS that:

 

(a) the Assets are now and shall at the time of completion be owned by Seller free and clear of all encumbrances, liens or charges and no other person has now or shall at the time of closing have any interest in the assets except

....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

 

(b) Seller is not now and shall not at the time of completion be a non-resident person within the meaning of Section 116 of the Income Tax Act (Canada);

 

(c) Seller is not in default of any agreements related to the Business and there are no actions, suits or proceedings against or on behalf of the Seller, pending or threatened, which may affect the Business, and the Seller is not aware of any existing grounds on which any such action, suit or proceeding might be commenced;

 

(d) there is a good, valid and subsisting lease of the premises for a term of.........................years at a monthly rental of $..........................................................................................................................expiring

on the...................................day of......................................., 20............. (a copy of which lease is attached hereto);

 

(e) there are not now and shall not at the time of completion be any employees of the Business except the following, all of whom can be dismissed on the minimum applicable statutory notice period without further liability:

....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

                                                                                                                 

(f) the Business has been carried on in the ordinary course and all financial statements and other information provided to Buyer are true, accurate and correct in all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and Seller shall, at the time of completion, have no liabilities, contingent or otherwise, except as reflected therein or in the statement to be delivered pursuant to the Bulk Sales Act (none of which shall be inconsistent with past practice or materially adverse);

 

(g) no expenditures shall be made out of the ordinary course of business prior to closing and the Business shall be carried on up to the time of completion in the ordinary course and in a commercially reasonable manner with a view to preserving the goodwill of the Business; and

 

(h) the tangible Assets are now and shall at the time of completion be in good condition, subject only in the case of equipment to reasonable wear and tear.

 

 

7. SELLER COVENANTS:

 

(a) to comply with Section 6 of the Retail Sales Tax Act;

 

(b) to comply with the Bulk Sales Act;

 

(c) to deliver to Buyer at or before the time of completion the written consent of the lessor to the assignment of the lease of the premises to Buyer; and

 

(d) to indemnify and save harmless the Buyer from and against all liabilities, claims and demands in connection with the purchased business existing or incurred as at the time of completion and not shown on the financial statements provided to the Buyer or in the statement delivered pursuant to the Bulk Sales Act or expressly agreed to be assumed by the Buyer in this Agreement.

 

 

8. BUYER REPRESENTS AND WARRANTS that Buyer is not now and shall not at the time of completion be a non-eligible person within the meaning of the Investment Canada Act.

 

 

9. BUYER COVENANTS to pay all applicable retail sales tax and federal sales tax on completion (or furnish appropriate exemption certificates) eligible in respect to this transaction.

 

 

10. THE OBLIGATION OF BUYER to complete this transaction shall be subject to satisfaction of the following conditions (which may be waived in whole or in part by Buyer without prejudice to any claim for breach of covenant, representation or warranty):

 

(a) the representations and warranties of Seller shall be true at and as of completion as if given at that time;

 

(b) Seller shall have performed all covenants to be performed by Seller at or prior to the time of completion.

 

 

11. INVENTORY: Prior to completion, either party may elect by written notice to the other that the inventory shall be physically counted after the close of business on the day prior to completion and valued at Seller's cost thereof in which case the total Purchase Price shall be increased or decreased to the extent that the valuation so obtained is greater than or less than the amount set for inventory stated above. Failing such an election, neither Seller nor Buyer may dispute the amount of valuation of inventory.

 

12. ADJUSTMENTS: Any business taxes, insurance, rent, hydro, water, fuel, employee's wages and vacation pay and usual prepaid items being transferred to Buyer, as applicable, shall be apportioned and allowed to the day of completion, the day of completion itself to be apportioned to the Buyer.

 

 

13. THE BILL OF SALE and other transfer documents are to be prepared at Seller's expense and any security documents are to be prepared at the expense of Buyer, and each party is to pay the costs of registration of their own documents.

 

 

14. RISK: All the assets of the Business shall be and remain at risk of Seller until the completion of the transaction provided for herein.

 

 

15. TENDER: Any tender of documents or money hereunder may be made upon Seller or Buyer or their respective lawyers on the day set for completion. Money shall be tendered with funds drawn on a lawyer’s trust account in the form of a bank draft, certified cheque or wire transfer using the Large Value Transfer System.

 

 

16. AGREEMENT IN WRITING: This offer when accepted shall constitute a binding agreement of purchase and sale, and time shall in all respects be of the essence of this Agreement. There is no representation, warranty, collateral agreement or condition affecting this Agreement other than as expressed herein. If there is conflict or discrepancy between any provision added to this Agreement (including any Schedule attached hereto) and any provision in the standard pre-set portion hereof, the added provision shall supersede the standard pre-set provision to the extent of such conflict. For the purposes of this Agreement, Seller means vendor and Buyer means purchaser. This Agreement shall be read with all changes of gender or number required by the context.

 

 

17. TIME AND DATE: Any reference to a time and date in this Agreement shall mean the time and date where the Business is located.

 

 

18. SUCCESSORS AND ASSIGNS: The heirs, executors, administrators, successors and assigns of the undersigned are bound by the terms herein.

 

 

SIGNED, SEALED AND DELIVERED in the presence of: IN WITNESS whereof I have hereunto set my hand and seal:

................................................................................

(Witness)

................................................................................ DATE...................................

(Buyer) (Seal)

................................................................................

(Witness)

................................................................................ DATE...................................

(Buyer) (Seal)

 

 

I, the Undersigned Seller, agree to the above offer. I hereby irrevocably instruct my lawyer to pay directly to the brokerage(s)  with whom I have agreed to pay commission, the unpaid balance of the commission together with applicable Harmonized Sales Tax (and any other taxes as may hereafter be applicable), from the proceeds of the sale prior to any payment to the undersigned on completion, as advised by the brokerage(s) to my lawyer.

 

SIGNED, SEALED AND DELIVERED in the presence of: IN WITNESS whereof I have hereunto set my hand and seal:

................................................................................

(Witness)

................................................................................ DATE...................................

(Seller) (Seal)

................................................................................

(Witness)

................................................................................ DATE...................................

(Seller) (Seal)

 

 

THE UNDERSIGNED...................................................................in consideration

of Buyer entering into this Agreement, hereby executes this Agreement for the purpose of Clause 5.

 

SIGNED, SEALED AND DELIVERED in the presence of: IN WITNESS whereof I have hereunto set my hand and seal:

................................................................................

(Witness)

................................................................................ DATE...................................

(Seal)

 

 

 

CONFIRMATION OF ACCEPTANCE: Notwithstanding anything contained herein to the contrary, I confirm this Agreement with all changes both typed and written was finally accepted by all parties at...................a.m./p.m. this.....................day

of................................................................., 20...........

 

...................................................................

(Signature of Seller or Buyer)

 

 

ACKNOWLEDGEMENT

 

I acknowledge receipt of my signed copy of this accepted Agreement of Purchase and Sale and I authorize the Brokerage to forward a copy to my lawyer.

.

______________________

Seller

 

I acknowledge receipt of my signed copy of this accepted Agreement of Purchase and Sale and I authorize the Brokerage to forward a copy to my lawyer.

 

______________________

Buyer

.

 

 

INFORMATION ON BROKERAGE(S)

Listing Brokerage................................................................................................................... Tel.No.(................)...................................

.....................................................................................................................................

Co-op/Buyer Brokerage....................................................................................................................

Tel.No.(................)...................................

 

 

                               

COMMISSION TRUST AGREEMENT       

 

To: Co-operating Brokerage shown on the foregoing Agreement of Purchase and Sale:

In consideration for the Co-operating Brokerage procuring the foregoing Agreement of Purchase and Sale, I hereby declare that all moneys received or receivable by me in connection with the Transaction as contemplated in the MLS Rules and Regulations of my Real Estate Board shall be receivable and held in trust. This agreement shall constitute a Commission Trust Agreement as defined in the MLS Rules and shall be subject to and governed by the MLS Rules pertaining to Commission Trust.

 

DATED as of the date and time of the acceptance of the foregoing Agreement of Purchase and Sale. Acknowledged by:

 

 

...........................................................................................................

(Authorized to bind the Listing Brokerage)

 

 

 

...........................................................................................................

(Authorized to bind the Co-operating Brokerage)

 

 

.............................................................................................................................................

 

Schedule A

Agreement of Purchase and Sale – Business in Leased Premises

 

 

This Schedule is attached to and forms part of the Agreement of Purchase and Sale between:

 

BUYER,...............................................................................................................................and

 

SELLER,..............................................................................................................................

for the purchase and sale of ............................................................................................................................................. dated the ......................................... day of .................................., 20......... .

 

Buyer agrees to pay the balance as follows:       

 

 

 

 

(space left for the inclusion of additional terms and conditions of sale)

 

 

 

 

 

This form must be initialled by all parties to the Agreement of Purchase and Sale.

 

Note: provision is also made for each page to be initialled by all parties.           

 

In addition, the third party owner of the business, if he is to be a guarantor, in addition to a non-competitor, should sign to this effect, should receive a copy of the Agreement, and should sign an Acknowledgement to that effect.

 

Brian Madigan LL.B., Broker

www.iSourceRealEstate.com

 


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Brian Madigan LL.B. Broker

RE/MAX West Realty Inc. Brokerage

Independently owned and operated

96 Rexdale Blvd. , Toronto Ontario,

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