Early Commercial Lease Terminations: Best Practices for a Smooth Exit

Jun 27, 2025 | Blog

By Gregory M. Prekupec & Rahul Gupta

Introduction

Despite commercial leases providing the set terms of the relationship between the landlord and tenant, either party may either, wish or to, or must, exit such arrangement prior to such set time frame. Regardless of whether such termination is voluntary or involuntary, both landlord and tenant must consider a variety of factors while proceeding.

Why Terminate Early?

There are a number of reasons which may inform a landlord or tenant’s desire to terminate the relationship early, such as mass destruction, expropriation, loss of financial viability, default of lease covenant(s), and so on.

In the same breath, the parties may wish to mutually terminate the lease agreement, which is often referred to as a surrender. In such a scenario, the tenant returns, or surrenders, its interest in the lease and any remaining options to renew to the landlord.

Termination by Landlord

1. REASONS A LANDLORD MAY WISH TO TERMINATE EARLY

As mentioned above, there may be a variety of reasons why a landlord may wish to terminate the lease early. Additional examples are if, upon the assignment of the lease during the sale of the tenant’s business which occupies the leased premises, the landlord wishes to commence fresh relations with the incoming tenant, which may be done if, for instance, the established rent is significant below market rates and needs to be increased. In such instance, the landlord would terminate the lease with the outgoing tenant and prepare a fresh lease with the commencement dated the same as the closing date for the underlying transaction.

2. SECURITY DEPOSIT

Regardless of the reason for which the lease is terminated, the landlord must determine its rights and obligations with any security deposit it is holding. This is opposed to an assignment of a lease where the incoming and outgoing tenants adjust for the security deposit the landlord is holding. As such, counsel must refer to the relevant provincial legislation to determine whether the landlord must return all or some of the same, and if the landlord can use the deposit to offset any rent arrears.

3. RIGHTS UPON TERMINATION

Upon a tenant’s default under the lease, a landlord may wish to pursue its rights under the same, which may include early termination. However, a landlord may wish to consider its additional rights.

I. Acceleration

Rent acceleration is the landlord demanding the immediate repayment of all rent arrears from the tenant. This provides the landlord the legal ability to take such amount and enforce the same against the tenant through legal proceedings. Due to the high likelihood that rent acceleration may compel a tenant into bankruptcy or insolvency proceedings, or would otherwise significantly impair the tenant’s business operations, a landlord may only look to this remedy upon the breakdown of the relationship with the tenant or a loss of faith in the tenant’s ability to return the business to financial viability; assuming the only reason for the emergence of the rent arrears was an inability to pay.

II. Injunctions

Injunctive relief is the process of obtaining the court’s order to compel an action or omission of the counterparty. In a leasing scenario, a landlord may wish to seek such relief to compel the tenant to cure any default(s) it may have caused under the lease agreement.

III. Additional Rent

Depending on the wording of the underlying lease agreement, any costs which the landlord incurs to enforce its rights under the lease can be charged back to the tenant as additional rent, exclusive of an additional administrative fee on such amount.

IV. Re-Entry

A landlord may be able to access the leased premises and seize the tenant’s assets to settle any arrears. However, a landlord would be prohibited from doing the same should it decide to terminate the lease.

Considerations

A landlord would need to conduct appropriate due diligence to satisfy itself of any concerns which may arise before terminating the lease.

I. Third Party Consent

If title to the underlying property is encumbered, the landlord would need to review all mortgage documentation to determine if the mortgagee needs to consent to early terminations.

II. Environmental Damage

Depending on the tenant’s conduct, the landlord may need to evaluate the environmental state of the premises to determine if the tenant caused any harm. Should any issues arise, the landlord may require the tenant remedy the same by enforcing its indemnity within the lease.

III. Co-Tenancy

If the premises is within a larger complex, the tenant may require such complex be adequately leased, or certain tenants remain within the complex. As such, the landlord’s default for the same may provide other tenants additional leverage for lower rent or may motivate them to also terminate their leases early.

One World Logistics Group Corp. v Sotiri – What Does this Case Mean for Non-Competition Agreements

Jun 23, 2025 | Blog

By Greg Prekupec, Farai Munyurwa, Mercedes Parsons and Javeria Baig

Introduction

Restrictive covenants – such as non-competition and non-solicitation clauses – can be important tools in employment and business contracts protecting business and employer interests. However, they must balance reasonable protection of the business with the individual’s right to work.  In One World Logistics Group Corp. v Sotiri, the Ontario Superior Court of Justice considered whether to grant interim injunctive relief to enforce a 5-year non-competition and non-solicitation clause.

The Facts

In January 2025, the defendant, Mr. Sotiri, sold his shares in his transportation business to One World Logistics Group Corp. (“One World”). The Share Purchase Agreement contained a non-competition and non-solicitation clause. Mr. Sotiri continued working for the business as an employee and signed a confidentiality agreement, but was terminated 4 months later. Following his termination, Mr. Sotiri started an import/export business where he plans to buy and sell used vehicles. One World alleged that Mr. Sotiri breached the non-competition and non-solicit covenants and the duty of confidentiality. One World sought interim injunctive relief to restrict Mr. Sotiri’s from competing pending completion of an injunction motion.

The Decision

The Court declined to enforce the non-competition and non-solicitation covenant at this interim stage, emphasizing several key issues:

  • Overly Broad: The covenant spans 5 years, applies in both Ontario and New York, and covers a very wide scope of activities, which could severely restrict Mr. Sotiri’s livelihood.
  • Doubts on Enforceability: Justice Papageorgiou noted there would likely be “good arguments” against the covenant’s enforceability given the duration, scope, and geographic area of restriction.
  • Compensable In Damages: It was unclear how the allegedly competitive activities would not be compensable in damages.
  • Economic Hardship: Sotiri is 65-year-old and unemployed. Additionally, $70,000 of the $100,000 he was to be paid per the Share Purchase Agreement was held back. After considering this, the Court was not prepared to restrict his ability to earn a living for the next two months until the injunction motion hearing.

Why This Matters for Our Clients

At Dipchand LLP, many of our clients regard restrictive covenants, especially non-competition and non-solicitation clauses, as critical tools for protecting the value of a business post-sale or during sensitive transitions. However, this case shows that overly broad and lengthy restrictions may not suffice in court.

This case stands in interesting contrast to the Ontario Court of Appeal’s decision in Dr. C. Sims Dentistry v Cooke, where a 5 year non-competition clause in a Share Purchase Agreement was upheld. The key distinction here? In Sims, the parties had ongoing employment for over two years post-sale, the clause was geographically limited (15 kilometers), and the Court found the clause to be reasonable and proportionate, emphasizing that both sides had equal bargaining power and legal representation.

Moving Forward: Transition Periods & Enforceability

For Dipchand LLP’s clients, these two cases together underscore a critical point: context matters. While courts are willing to uphold restrictive covenants that are narrowly drafted and clearly tied to protecting legitimate business interests, they will often push back when the clause is:

  • Overly broad in scope or duration
  • Detached from legitimate business needs
  • Imposed without due consideration for post-employment realities

This is especially important during transition periods. For example, when a seller continues to work for the business post-sale, it’s crucial to anticipate what might happen if the relationship ends prematurely. A clause that looks reasonable at signing can feel oppressive later if the employment doesn’t last or if the seller is left without a means to earn a living.

Bottom Line

Restrictive covenants must be tailored very specifically. At Dipchand LLP, we help our clients strike the right balance by protecting the goodwill of the business without drafting clauses that are destined to be unenforceable.

From RSUs to SARs: The ABCs of Equity Compensation in Private Corporations

Jun 20, 2025 | Blog

By Gregory M. Prekupec & Rahul Gupta

Introduction

Employees are often offered shares in their employer as part of the employee’s overall compensation. There are a variety of benefits of doing so, including aligning the motivations of the employees with the shareholders, rewarding an employee’s historical performance, or to encourage future performance and behaviour.

Equity compensation can take a variety of forms, including stock options, restricted share units, deferred share units, share appreciate rights, and phantom share plans. Such form of compensation is applicable to public and private corporations alike, with public corporations having greater prescribed requirements under the rules of the various stock exchanges.

Security Law and M&A Considerations

Generally speaking, equity issuances to grantees (defined below) are generally exempt from prospectus requirements, assuming the satisfaction of certain criteria by the grantor.

Upon the sale of a grantor (defined below), the purchaser may wish to cash out the majority of the outstanding awards or to assume the award structure and substitute the grantor’s shares with its own.

Common Forms of Equity Compensation

As mentioned above, equity compensation can take various forms. However, common forms include:

A. Stock options;

B. Restricted share units;

C. Performance share units;

D. Phantom share plans;

E. Deferred share units;

F. Share appreciation rights; and

G. Employee share purchase plans

Stock Options

A stock option is when an employer (the “grantor”) provides an employee, independent contractor, or other service provider (the “grantee”) with the right, but not the requirement, to purchase shares, or other securities from the grantor at a specified strike price within a certain time frame.

A. Strike Price

A strike price is a fixed price at which the grantee can buy or sell the underlying security. In the case of equity compensation, the grantor will likely provide the strike price of the fair market value of the shares at the time the stock options are provided. In a private corporation, the strike price may be lower than the fair market value of the shares if the grantor’s constating documents allow for the same.  

 B. Term and Vesting Schedule

Grantors tend to provide a date by which the grantees may exercise their options, which may be 5-10 years after the option is provided.

On the other hand, grantors also want to ensure grantees do not exercise such options and then immediately change jobs. Accordingly, stock options must “vest” which means the grantee must work for a specified time frame or achieve certain performance criteria before the grantee can exercise the option.

Options are typically structured such that they all vest at the end of a certain period or in segments over such period. These options may accelerate due to the occurrence of a particular event such as an initial public offering, the sale of the grantor, or the grantee’s termination of employment.

C. Stock Option Plans

Due to the frequency of stock options being issued, grantors typically issue a stock option plan which allow for a series of grants to the grantees. Such plans can vary on a variety of factors, including but not limited to, the size of the grantor, the liquidity of the grantor’s shares, tax considerations, size of the executive body of the grantor, etc.

Stock option plans are usually discretionary to limit the grantor’s liability under such plan. They also can be granted to independent contractors and other service providers, each carrying their distinct tax considerations

Restricted Share Units; Performance Share Units; Deferred Share Units

A restricted share unit (“RSU”) is a conditional right to receive shares or cash without a purchase or strike price. Accordingly, the RSU holder does not actually hold any equity in the grantor, and is therefore not entitled to any voting, dividend, or other rights unless the RSUs are settled in shares. On the other hand, performance share units (“PSU”) are subject to performance based vesting schedules (e.g., the revenue growth of the grantor over a three-year period).

A deferred share unit (“DSU”) is the right to receive cash or shares of the grantor within 1 year of the grantee’s retirement, termination, or death.

PSPs, RSUs, PSUs, and DSUs are all offered on a discretionary basis and grantors are not required to have uniform offerings amongst grantees. In addition, these plans can also be extended to non-employee grantees, each carrying their own tax treatment.

Phantom Share Plans

A phantom share plan (“PSP”) is connected to grantor shares; however, the grantee is not actually issued shares. Rather, the grantee receives access to an account which is credited with hypothetical shares, and the corresponding hypothetical dividends and appreciation (if any). Upon the culmination of the vesting schedule, the grantees are awarded with the phantom account value in cash or shares.

The key differentiator between PSPs and stock option plans is they do not need to be exercised by the grantee as they are settled automatically.

Share Appreciation Rights

Share appreciation rights (“SAR”) are rights afforded to grantees to receive the appreciation of the value of underlying shares in cash over the vesting period. When SARs are offered together with other forms of equity compensation, a grantee can exercise their options and acquire additional shares instead of only receiving cash settlement.

Employee Share Purchase Plans

An Employee Share Purchase Plan (“ESPP”) allows grantees to acquire shares of the grantor per certain time frames at a prescribed price. A grantor can restrict the ESPP as they wish however, grantors usually offer grantees financial assistance such as low-interest loans or matching payments. Private corporations often require grantees under ESPPs enter into a unanimous shareholder agreement as to not affect the management of the grantor.

Concluding Thoughts

Equity compensation continues to be a valuable tool for private corporations seeking to attract, retain, and motivate talent while aligning employee interests with the long-term success of the business. Whether through stock options, RSUs, SARs, or phantom share plans, each structure offers unique benefits and legal considerations for both employers and grantees. As equity-based incentives grow increasingly sophisticated, it is important for corporations to carefully tailor these plans to their operational needs, tax objectives, and corporate governance frameworks. Thoughtful implementation, clear documentation, and ongoing legal guidance are key to maximizing the value of equity compensation while minimizing associated risks.

 

 

Project Freeway Inc. v. ABC Technologies Inc. (2025) ONSC 1048 – The Ontario Superior Court’s interpretation of accelerated earn out provisions in a Share Purchase Agreement.

May 29, 2025 | Blog

By Rutendo Muchinguri

Brief Facts

Project Freeway Inc. (“Seller”) sold all its shares in a group of companies known as Windsor Mold Group of Companies (“Target Companies”) to ABC Technologies Inc. (“Buyer”) for USD$165 million (“Deal”). As part of the Deal, the share purchase agreement (“SPA”) had an earn out provision (“Earn-Out”) which would give the Buyer the obligation to pay over US$26million, spread out over a period of time, to the Seller if the Target Companies achieved certain financial milestones two years after closing of the Deal. There was a caveat to this Earn-Out – if the Buyer directly or indirectly sold or transferred a material portion of the assets of the Business of the Target Companies to a third party without the approval of the Seller, the obligation of the Buyer to pay the Seller would become immediately due and payable as a penalty to the Buyer.

Upon closing of the Deal, the Buyer entered into two transactions (the “Transactions”): a sale and leaseback of the real estate of the Target Companies for over CAD$97million; and a factoring arrangement where the Buyer sold all of the Target Companies’ accounts receivables to HSBC Bank. The Transactions were completed without the prior consent of the Seller.

Over a year after the Transactions, the Seller decided to sue the Buyer on the basis that the Transactions had triggered the acceleration of the Earn-Out by filing an application with the Superior Court of Justice.

Issue

The one issue before the Court was whether the Transactions triggered the accelerated earn-out provision in the SPA making the Buyer liable to pay the Seller over US$26million in one payment.

Court’s Finding

The Court found that neither of the Transactions triggered the accelerated earn-out clause in the SPA. To come to this conclusion, the court stated the following:

  • In interpreting a contract, the Court took a holistic approach which looked at the SPA as a whole (Sattva Capital Corp. v. Creston Moly Corp., 2015 SCC 53);
  • The Court also stated that a contract must be analysed and interpreted in a way that makes business sense and does not lead to a commercially absurd result;
  • The foremost rule is to presume that the parties intended what they included in the contract unless there is evidence to the contrary;
  • The Buyer accepted that the Transactions had been completed without the Seller’s prior consent – however, the Buyer argued that such consent was not required in terms of the SPA;
  • The Buyer alleged that the Transactions do not trigger the accelerated earn-out provision as they were ordinary financing steps; that were publicly disclosed through a press-release prior to completion without any complaint from the Seller and had the effect of generating revenue for the Target Companies which was beneficial to the Seller and the Target Companies;
  • The Court relied on the non-binding Letter of Intent (“LOI”) as an interpretive tool to determine the background facts at the time the parties entered into the SPA. The court relied on the decision of the Ontario Court of Appeal in Ontario First Nations (2008) Limited Partnership v. Ontario Lottery and Gaming Corporation, 2021 ONCA 592, in which it was accepted that a Court is not precluded from considering admissible evidence of the surrounding circumstances at the time a contract is negotiated or formed;
  • The Court aligned with the Buyer’s interpretation – the accelerated Earn Out was drafted in such a way that only a transfer or sale material to the earn-out provision would trigger the acceleration of the Earn Out amount payable to the Seller;
  • The Court stated that there should be some deference to how a Buyer operates a business post closing – the only proviso was that such operation by the Buyer should not adversely impact the Earn-Out. The SPA specifically stated that Buyer was not prohibited from closing, merging or consolidating any acquired facilities of the Target Companies with any of the Buyer’s; and
  • The Court also considered the fact that the Seller had known about the 2 transactions particularly the sale and leaseback transaction prior to closing and due to the Vendor’s sophistication, they ought to have raised the alarm if they had issues with the 2 transactions triggering the accelerated earn out payable to the Seller.

Takeaways

The judgment by Justice Steele serves as a cautionary tale to business lawyers:

  • Non-binding letters of intent and other surrounding documentation prepared prior to execution of a substantive agreement can be used as interpretive tools by the Courts in determining the intention of the Parties;
  • For SPA’s, the Seller must be sure to include specific types of transactions which they are uncomfortable with – in this case, if the Seller did not want the Buyer to enter into factoring arrangements and a sale and leaseback transaction using the Target Companies, the SPA should have stated so clearly;
  • Despite the existence of earn-out provisions in an SPA, the Buyer is still given the freedom to conduct the Business they have acquired in the manner they deem fit provided such freedom does not interrupt with the Seller’s right to receive the earn-out payment; and
  • A delay in acting can be interpreted as acquiescence or acceptance by the aggrieved party – doctrine of laches and acquiescence.
A Legal Guide to Acquisition Finance: Structuring and Navigating Business Transactions

A Legal Guide to Acquisition Finance: Structuring and Navigating Business Transactions

Mar 24, 2025 | Blog

By: Gregory Prekupec and Rahul Gupta 

 

Key Takeaways

Acquisition financing enables businesses to fund acquisitions through debt, equity, or a combination of both, each with distinct risks and benefits. The choice between asset acquisitions, share acquisitions, or amalgamations depends on factors like tax implications, liability risks, and regulatory requirements. Successful acquisition financing requires careful structuring, due diligence, and alignment of financing with business growth objectives.

Introduction

  1. Acquiring a business is a significant milestone, often requiring substantial financial investment. Acquisition financing is a crucial component of this process, providing businesses with the necessary funding to acquire another company.
  2. This guide explores the key aspects of acquisition finance, including types of acquisitions, financing methods, and the unique factors that businesses must consider when structuring such deals.

Understanding Acquisition Finance

  1. Acquisition finance refers to the funding used to purchase a business. This financing can come from debt, equity, or a combination of both. Businesses seeking to acquire another company must carefully evaluate the financial structure that best aligns with their goals, risk tolerance, and long-term growth strategies.
  2. While debt financing typically allows businesses to leverage capital without diluting ownership, equity financing often provides long-term stability without immediate repayment obligations.

Types of Acquisitions

1. There are three primary methods of acquiring a business:

  • Asset Acquisition: The buyer purchases specific assets and liabilities of the target company. This method allows the buyer to select valuable assets while avoiding unwanted liabilities.
  • Share Acquisition: The buyer purchases all outstanding shares of the target company, effectively taking control of all assets and liabilities.
  • Amalgamation: Two companies merge to form a single entity, consolidating their operations, assets, and liabilities.

2. Each method has its advantages and challenges. Asset acquisitions provide flexibility in selecting valuable assets, while share acquisitions ensure full control of the target company. Amalgamations, on the other hand, create synergy by combining resources and expertise.

Choosing the Right Acquisition Method

  1. Several factors influence the selection of an acquisition method, including tax implications, liability issues, regulatory requirements, and the complexity of transferring ownership.
  2. Share acquisitions are generally simpler and require fewer contract assignments, whereas asset acquisitions minimize liability risks but involve additional documentation and third-party consents. Notwithstanding the foregoing, share transactions may require third-party consents to the change of beneficial ownership of the target.

Methods of Financing Acquisitions

Businesses can finance acquisitions through equity financing, debt financing, or a combination of both.

  1. Equity Financing: Involves raising capital by issuing shares or bringing in investors. This approach avoids debt obligations but dilutes ownership.
  2. Debt Financing: Involves borrowing funds from banks or financial institutions. Debt financing can be structured as senior debt, subordinated debt, or mezzanine financing, each with varying levels of risk and interest rates.
  3. Hybrid Financing: A combination of debt and equity, balancing financial leverage while maintaining some degree of ownership control.

Types of Loans Used in Acquisition Financing 

Several loan structures exist to finance acquisitions:

  1. Leveraged Loans: Used for high-risk acquisitions, often carrying higher interest rates.
  2. Asset-Based Loans (ABL): Secured against company assets, providing lenders with collateral.
  3. Investment-Grade Loans: Offered to highly-rated borrowers with lower risk profiles.
  4. Syndication//Bilateral Loans: Loans can be bilateral (single lender) or syndicated (multiple lenders), secured or unsecured, and structured to meet the specific needs of the transaction.

Key Steps in Financing an Acquisition 

Acquisition financing involves multiple steps, including:

  1. Private Sale or Auction: The target company may be acquired through a private negotiation or a competitive auction process.
  2. Loan Structuring: The buyer arranges financing through a lead lender, negotiating terms, interest rates, and repayment structures.
  3. Due Diligence: Buyers and lenders conduct thorough financial and legal assessments of the target company to mitigate risks. Lenders must be satisfied through their due diligence before funding.
  4. Purchase Agreement Execution: The final contract is signed, detailing the terms and conditions of the transaction. Lenders may require a signed purchase agreement in advance of the closing date to review, among other reasons, the material adverse change clause, to ensure the target is more-or-less the same as it was during the due diligence process.
  5. Closing and Fund Transfer: Once all conditions are met, funds are transferred, and the acquisition is completed.

Factors Unique to Acquisition Financing 

Acquisition financing presents unique challenges that businesses must address:

  1. Timing: The acquisition and financing transactions must close simultaneously to ensure a smooth transfer of ownership. Acquisition timing may become further complicated for practitioners if there are corresponding or simultaneous tax-deferred roll-over transaction(s), a franchise acquisition, or lease considerations, among others.
  2. Conditionality: Lenders may impose conditions such as financial covenants, due diligence requirements, and minimum equity contributions.
  3. Existing Debt Management: The target company’s existing debt must be reviewed, restructured, or repaid as part of the financing process.
  4. Security and Guarantees: Lenders often require collateral security, guarantees from the acquiring company, or pledges on the target’s assets.

Conclusion

  1. Acquisition finance is a complex but essential tool for business growth and expansion. Understanding the available financing options, structuring the right deal, and managing the risks involved are critical to a successful acquisition.
  2. Whether through debt, equity, or a combination of both, businesses must carefully evaluate their financing strategy to ensure long-term sustainability and value creation.
  3. By strategically navigating the financing landscape, companies can successfully execute acquisitions and position themselves for future growth.
A Legal Guide to Acquisition Finance: Structuring and Navigating Business Transactions

A Mortgage Investment Corporation:- Key Elements

Mar 10, 2025 | Blog

By: Gregory M. Prekupec and Rutendo Muchinguri

 

A Mortgage Investment Corporation (“MIC”) is defined in the Income Tax Act[1] as a form of a company that has the following key characteristics:

  • Must be a Canadian corporation, either federal or provincial;
  • Its only undertaking is the investing of funds of the corporation;
  • It does not manage or develop any real estate;
  • Has a minimum of 20 Shareholders; and
  • Is tax exempt.

MICs provide an alternative to residential financing outside of traditional financial institutions such as banks and credit unions for individuals who are either self-employed or who cannot qualify for traditional financing. As a result, MICs offer higher risk yet high yield investment.

Typically, the MIC will have a Manager or Administrator, who can be an individual or an entity who is responsible for providing management services of the MIC’s investment portfolio in exchange for management fees. Shareholders of the MIC buy into the share capital of the MIC in exchange for dividends. An MIC is recognised as a “flow through entity” which means that it must pay out all its income as dividends to Shareholders to maintain its tax exemption status.

Depending on how the MIC intends to raise capital, there may be a requirement to register with the Ontario Securities Commission if the MIC publicly offers its shares to the public. In this event, the MIC must register as a reporting issuer with the OSC and go through the prospectus filing process. Alternatively, the MIC may be exempted from the OSC registration requirement if it falls under any one of the prospectus exemptions – accredited investor exemption; offering memorandum exemption or private issuer exemption.

In Ontario, if an MIC directly arranges or sells mortgages in Ontario it must have a  mortgage brokerage licence issued by the Financial Services Regulatory Authority of Ontario. Alternatively, the Manager of the MIC can directly sell mortgages on behalf of the MIC which removes the need for the MIC to need this licence. An MIC that actively solicits investments from the public may need to register as an exempt market dealer with the OSC. Many MICs work with entities that are already registered as exempt market dealer.

MICs provide fairly flexible alternative financing and present interesting challenges for compliance to legal and accounting professionals alike.

[1] Section 130.1 of the Income Tax Act.

Skip to content