Usually no. Once a seller signs an asset or share purchase agreement and its conditions are met or waived, the agreement is a binding contract, and backing out is a breach. A seller can only exit lawfully if a condition precedent fails, a valid termination right is triggered, or both parties agree to cancel the deal.
That short answer covers most situations, but the question is rarely as simple as it sounds. A signed deal can still collapse for legitimate reasons, and the consequences of an illegitimate walk-away depend on what the buyer chooses to do next. This guide explains when a business purchase agreement becomes binding in Ontario, the narrow paths a seller has to exit, and the remedies a buyer can pursue when a seller tries to renege before closing.
When Is a Business Purchase Agreement Binding?
A business sale in Ontario is usually documented as either an asset purchase agreement (APA), where the buyer acquires specific assets, or a share purchase agreement (SPA), where the buyer acquires the shares of the company that owns the business. Both are binding contracts once signed. The label does not change the basic point: a signed agreement that meets the requirements of contract formation holds both parties to the deal.
For a contract to be enforceable, four elements must be present: an offer, acceptance, consideration (something of value exchanged on each side), and certainty of the essential terms. In a business sale, the essential terms include the purchase price, what is being bought, and the closing date. When those terms are settled and both parties have signed, the agreement is enforceable. Neither side can simply change their mind.
People sometimes assume a deal is not real until closing, when the money and the keys change hands. That is wrong. Closing is the performance of the contract, not its formation. The binding obligation arises at signing. Walking away between signing and closing, without a contractual right to do so, is a breach of an existing contract.
Letters of Intent Are Different
Before a full APA or SPA is signed, the parties often sign a letter of intent (LOI) or term sheet that sets out the proposed deal. Most LOIs are deliberately non-binding on the core commercial terms, with only a few provisions (confidentiality, exclusivity, and the agreement to negotiate in good faith) intended to bind. If a seller backs out at the LOI stage, the analysis is very different and usually far more forgiving to the seller. The rules in this article apply to a signed, binding purchase agreement, not to a non-binding LOI.
Conditions Precedent: When a Seller Can Still Back Out
The most common lawful exit is an unsatisfied condition precedent. A condition precedent is something that must happen before a party is obligated to close. If a genuine condition is not met by the agreed deadline, the deal can be terminated without anyone being in breach.
Typical conditions precedent in a business sale include:
- Financing. The buyer obtaining acceptable financing to fund the purchase.
- Due diligence. The buyer being satisfied with its review of the business, often expressed as a satisfaction condition.
- Regulatory clearance. Approvals under statutes such as the Competition Act, reviewed by the Competition Bureau, where the deal crosses notification thresholds.
- Third-party consents. Landlord consent to assign a lease, consent from key customers or suppliers, or lender consents.
- Board or shareholder approval. Internal corporate approvals on either side.
Two points matter here. First, conditions are usually inserted for the benefit of one party, and that party can choose to waive the condition and proceed. A buyer-benefit financing condition, for example, can be waived by the buyer but not used by the seller as an excuse to exit. A seller cannot rely on a condition that exists for the buyer's protection to escape the deal.
Second, there is a difference between a deal that is still truly conditional and one that has become firm. Once the conditions are satisfied or waived, the agreement is unconditional, and the window to walk away closes. Many agreements also include a drop-dead date (also called an outside date): if closing has not occurred by that date, either party may terminate. A seller hoping to exit should check the agreement carefully for which conditions remain open, who benefits from them, and whether the outside date has passed.
Material Adverse Change (MAC) Clauses
A material adverse change clause, sometimes called a material adverse effect clause, lets a party refuse to close if something seriously damages the target business between signing and closing. Sellers occasionally try to use the mirror image, arguing that a change in their own circumstances justifies an exit, but MAC clauses are usually drafted to protect the buyer.
The bar for triggering a MAC is high. Canadian courts have made clear that a buyer cannot escape a deal over an ordinary downturn or a temporary dip in performance. In the leading Canadian decision on the point, the Ontario Superior Court of Justice in Fairstone Financial Holdings Inc. v. Duo Bank of Canada held that a change must be unexpected, must threaten earnings in a way that is significant when measured over a commercially reasonable period, and is assessed against the specific wording of the clause. The court also gave effect to the contract's carve-outs, which excluded general economic and industry-wide conditions, including the effects of a pandemic, from counting as a MAC unless the target was disproportionately affected compared to others in its industry.
For a seller, the practical takeaway is that a MAC clause is rarely a reliable escape hatch. These clauses are heavily negotiated, fact-specific, and read strictly by the courts. A seller who wants to rely on one needs careful legal advice before acting.
Anticipatory Breach and Repudiation
What happens when a seller signals, before the closing date, that it will not complete the sale? That is anticipatory breach, also called repudiation. The seller does not need to actually fail to close; a clear statement or conduct showing it does not intend to honour the agreement is enough.
When a seller repudiates, the buyer faces a choice. The innocent party can:
- Accept the repudiation, treat the contract as at an end, and sue for damages; or
- Affirm the contract, keep it alive, and hold the seller to the closing, while preserving the right to sue if the seller still refuses to perform.
This election is significant, and it should be made carefully. If the buyer accepts the repudiation but a court later finds the seller's conduct did not actually amount to repudiation, the buyer may itself be in wrongful breach. The safer course is almost always to send a clear written notice, confirm the buyer is ready, willing, and able to close, and demand performance, rather than to walk away in frustration. The choice of remedy then follows from the seller's response.
Buyer Remedies: Specific Performance vs Damages
When a seller breaches a signed agreement, the buyer has two main remedies: damages or specific performance.
Damages are the default. The court awards money to put the buyer in the position it would have been in had the sale closed. This usually means the difference between the contract price and the market value of the business, plus provable consequential losses. Damages work well when the buyer can find a comparable business elsewhere.
Specific performance is a court order requiring the seller to actually complete the sale. It is an equitable, discretionary remedy, and courts grant it only where damages are inadequate, typically because the subject of the sale is unique. The Supreme Court of Canada in Semelhago v. Paramadevan held that specific performance should not be granted as a matter of course, even for real estate, and that the property must be shown to be unique to the extent that a substitute is not readily available. The party seeking the remedy must lead evidence of that uniqueness. This test shapes how specific performance in Ontario applies to business sales.
For a business, uniqueness can arise where the target is genuinely irreplaceable: a business with strategic assets the buyer cannot obtain elsewhere, a specific location, owner-built goodwill, or a holding the buyer needs to combine with its existing operations. A commodity business with many comparable alternatives on the market is far less likely to qualify. Because the remedy is discretionary, no outcome is guaranteed, and the buyer must show it has come to court ready to perform its own side.
Where the deal involves land, a buyer can register a certificate of pending litigation against the title to preserve the status quo while the dispute is resolved. A buyer may also seek an interlocutory injunction to stop the seller from selling the business to someone else before the case is decided. These are powerful tools, but they require prompt action and a strong underlying claim.
Deposits and Forfeiture
Most business sales involve a deposit paid by the buyer. A deposit is more than a part payment; it stands as a guarantee that the buyer will perform its side of the bargain. That distinction drives what happens to the deposit when a deal collapses.
If the seller is the one who breaches, the buyer is normally entitled to the return of its deposit, and can also claim damages for the breach. The seller cannot keep a deposit on a deal it walked away from without justification.
If the buyer is the one who breaches and refuses to close, the deposit may be forfeited to the seller. Ontario courts have long recognised that a true deposit can be forfeited as a consequence of the buyer's default, even where the seller suffered little or no actual loss, because the deposit serves as an earnest of performance. That said, forfeiture is not automatic in every case. A buyer can ask the court for relief from forfeiture where the amount is out of all proportion to the seller's loss and it would be unconscionable to allow the seller to keep it. Whether a payment is a true deposit or merely a part payment depends on the wording of the agreement, which is one more reason the contract drafting matters.
Practical Steps for Each Side
If you are a seller who wants out, do not simply announce you are cancelling. Start by reviewing the agreement for any unsatisfied condition precedent that benefits you, a valid termination right, or a passed outside date. If no lawful exit exists, the most sensible path is usually to negotiate a mutual release with the buyer, which may involve compensating the buyer for agreeing to walk away. Acting unilaterally exposes you to a claim for damages or an order forcing you to complete the sale.
If you are a buyer facing a seller backing out of the business sale, move quickly and deliberately. Preserve all communications, send a written notice confirming you are ready, willing, and able to close, and get legal advice before electing your remedy. Time matters: under Ontario's Limitations Act, 2002, a claim must generally be commenced within two years of the day you knew, or ought to have known, of the breach. If the business is unique and you want it rather than money, raising specific performance and preserving the status quo early can be decisive.
Frequently Asked Questions
Can a seller change their mind after signing a purchase agreement?
Not lawfully, in most cases. A signed asset or share purchase agreement is a binding contract in Ontario. Once its conditions are met or waived, a seller who changes their mind is in breach and can be sued for damages or, where the business is unique, ordered to complete the sale.
What happens if a seller breaches a purchase agreement in Ontario?
The buyer can claim damages to recover the financial loss caused by the failed sale, or seek specific performance to force completion where the business is unique. The buyer is also normally entitled to the return of its deposit. Claims must generally be started within two years of the breach.
Can a buyer force a seller to complete a business sale?
Sometimes. A court can order specific performance, compelling the seller to close, but only where money damages are inadequate because the business is genuinely unique and not readily replaceable. The remedy is discretionary, so a court weighs the facts and the buyer's own readiness to perform before granting it.
Does the seller keep the deposit if the deal falls through?
It depends on who is at fault. If the seller breaches, the buyer normally gets the deposit back plus damages. If the buyer breaches and refuses to close, the deposit may be forfeited to the seller, subject to the buyer's right to ask a court for relief from forfeiture where the amount is disproportionate.
What is anticipatory breach of contract?
Anticipatory breach happens when one party makes clear, before the performance date, that it will not honour the contract. In a business sale, a seller signalling it will not close is an anticipatory breach. The buyer can then accept the repudiation and sue, or affirm the contract and hold the seller to closing.
Sources & Official Resources
Ontario Statutes Cited
- Limitations Act, 2002, SO 2002, c 24, Sch B: Basic Limitation Period (s. 4)
- Courts of Justice Act, RSO 1990, c C.43: Equitable Remedies and Injunctions
Federal Statutes Cited 3. Competition Act, RSC 1985, c C-34: Merger Notification
Government Guidance 4. Competition Bureau Canada: Overview of the Merger Review Process
Case Law 5. Semelhago v. Paramadevan, 1996 CanLII 209 (SCC): Specific Performance and Uniqueness 6. Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (CanLII): Material Adverse Effect
Contact Hadri Law
A signed business purchase agreement is a binding commitment, and a seller who tries to walk away before closing, or a buyer trying to hold a deal together, faces decisions that carry real financial and legal consequences. Whether you are enforcing a deal, defending a termination, or assessing whether a condition precedent or MAC clause gives you a way out, getting advice early protects your position. Our team advises on both mergers and acquisitions and share sale transactions, on the buy-side and the sell-side.
Hadri Law's founder, Nassira El Hadri (Law Society of Ontario, 2021), advises Ontario businesses on M&A, asset and share sales, and commercial contract disputes, drawing on bank and credit union advisory experience and years in secured and unsecured debt recovery across Canada.
We offer a free initial consultation and serve clients in English, French, Spanish, and Catalan.
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This article is for general information only and does not constitute legal advice. Reading or relying on it does not create a solicitor-client relationship with Hadri Law Professional Corporation.
