A break fee, also called a termination fee, is a clause under which one party to a business sale agrees to pay the other a specified amount if the deal fails to close for a defined reason — a pre-agreed measure of compensation for that specific kind of failure, not a general penalty for any deal that does not close.
In Ontario mid-market practice, a break fee is uncommon at the letter-of-intent stage for smaller deals, where the parties often decide the cost and complexity of negotiating one outweighs the benefit. It appears more often once a deal is larger, more competitive, or once the seller has granted meaningful exclusivity: the buyer has sunk real diligence and legal cost into the process and wants compensation if the seller walks toward a better offer, or the seller wants a disincentive against a buyer who signs an LOI and then loses conviction. A well-drafted break fee names the exact trigger — the buyer walking without a permitted reason such as failed financing or a material adverse change, or the seller breaching exclusivity to accept a competing offer — with carve-outs for reasons that should not trigger payment at all.
Ontario courts will enforce a break fee as ordinary contractual damages, but only if it is tied to a clear trigger and is not structured as a penalty. The governing principle is the same one that applies to any Canadian liquidated damages clause: a court asks whether the figure looks like a genuine pre-estimate of the loss the payee would suffer, or whether it looks like it exists purely to punish the party that walks away. There is, as Ontario counsel advising on these clauses put it, no standard or typical amount — it is a negotiated term that varies with deal size, industry and the specific risks the parties are trying to allocate.
A private equity buyer is pursuing a $15 million platform add-on and asks the seller for sixty days of exclusivity to complete financial, legal and environmental diligence. In exchange for that exclusivity, the buyer agrees to a $250,000 break fee, payable only if the buyer fails to sign a definitive agreement by the exclusivity deadline without a permitted reason such as an adverse diligence finding. If the seller instead breaches exclusivity and sells to a third party during the sixty days, the seller owes the same fee back to the buyer. The trigger, not the dollar figure, is what makes the clause enforceable as damages rather than a penalty.
See also: Exclusivity period · No-shop covenant · Definitive agreement.
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