Exclusivity and No-Shop Clauses in a Letter of Intent: How Long, How Strict and What Happens on Breach

An exclusivity clause, also called a no-shop or standstill clause, is the seller's promise not to look for another buyer for a period of time. During that period the seller will not solicit offers, respond to approaches, share information with anyone else or negotiate a competing sale. In exchange, the buyer commits its own money and time to due diligence, financing and legal work.

It is one of the few provisions in a letter of intent that both sides intend to be binding, and it is usually the one that matters most to the buyer. Without it, a seller can use the buyer's offer to shop for a better one, and the buyer's diligence spend becomes the seller's marketing budget. With it, the buyer has a protected window in which it is the only party the seller can deal with, so a signed purchase agreement is the expected outcome if the business checks out.

For the seller, exclusivity is a real cost. It takes the business off the market, it weakens the seller's leverage once competing buyers have walked away, and if the deal collapses at the end of the period, the seller restarts the process months later with a business that other buyers now know was under contract. The negotiation is therefore about how much protection the buyer needs and how little the seller can safely give.

The period should match the work the buyer has to do, and no more. For a private business in Ontario with clean records, 30 to 45 days of exclusivity is typical. Sixty days is common where the buyer needs bank financing, a landlord's consent to assign the lease or a franchisor's approval. Ninety days or more should be reserved for transactions with a regulatory approval on the critical path, such as a licensed practice or a deal that requires notification under the Competition Act or review under the Investment Canada Act.

Sellers should resist open-ended exclusivity that runs "until the purchase agreement is signed". That gives the buyer control over the seller's calendar. The better structure is a fixed end date, with extension only by the seller's written agreement, and a mechanism that ties any extension to progress: for example, the period extends by 15 days if the buyer has delivered a draft purchase agreement and confirmed in writing that due diligence is complete.

Buyers should insist that the period starts when the seller actually delivers the diligence materials, not on the signing date. A seller who takes three weeks to open the data room has consumed half of a 45-day window before the buyer has read a page.

A buyer-friendly clause covers soliciting, encouraging, discussing, negotiating, providing information and entering into any agreement, with anyone, about any sale of shares, assets or a material part of the business, by merger or otherwise. The seller also agrees to tell the buyer about any unsolicited approach, including who made it and on what terms.

Sellers should negotiate three things:

Scope. Exclusivity should cover the sale of the business, not every transaction the corporation might do. Ordinary-course financing, the sale of surplus equipment and the renewal of a lease should be expressly outside it.

Unsolicited approaches. A seller cannot stop third parties from calling. The clause should prohibit the seller from encouraging or responding substantively, not from receiving the call. Whether the seller must disclose the identity of the person who called is a fair point to negotiate; many sellers agree to disclose the fact and terms of an approach but not the name.

Conditions on the buyer. Exclusivity should be reciprocal in spirit. The seller can ask that it falls away automatically if the buyer fails to deliver a draft purchase agreement by a stated date, proposes a price below the letter of intent without a diligence finding to justify it, or fails to confirm financing by a milestone. These conditions turn exclusivity from a free option into a commitment.

Parties sometimes assume exclusivity obliges the buyer to negotiate in good faith toward a purchase agreement. Canadian law is narrower than that. In Martel Building Ltd. v. Canada the Supreme Court of Canada declined to recognize a duty of care in the conduct of commercial negotiations, and the general rule remains that a party may pursue its own interests in negotiation and walk away from a non-binding term. A letter of intent that says the buyer will "negotiate in good faith" adds a contractual promise, but Canadian courts have treated such promises unevenly: some have enforced them as real obligations, while others have refused to give them much content where the essential terms are still open.

What the law does require is honesty in performing the binding obligations that exist. Bhasin v. Hrynew established an organizing principle of good faith in contractual performance and a duty of honest performance, which means a seller cannot lie to the buyer about compliance with the exclusivity clause, and a buyer cannot knowingly mislead the seller about matters directly linked to the binding terms, for example to obtain an extension of the exclusivity period. In C.M. Callow Inc. v. Zollinger the Supreme Court of Canada held that the duty can be breached by half-truths or misleading silence, not only outright lies. Those duties attach to the binding promises, not to the non-binding deal terms.

The practical lesson is to write down the conduct you expect rather than rely on a good-faith label. If the buyer must deliver a draft agreement within 20 days, say so. If the seller must respond to information requests within five business days, say so. Specific binding obligations are far easier to enforce; "good faith" on its own is mostly an invitation to argue.

A clause that will survive a dispute is specific about six things. First, the period: a start event, an end date and the only ways it can be extended. Second, the restricted conduct: soliciting, encouraging, discussing, negotiating, furnishing information and entering into any letter, agreement or understanding, so that a seller cannot argue that "merely listening" was permitted. Third, the covered transactions: a sale of shares or of all or a material part of the assets, an amalgamation, or any financing that would change control, with ordinary-course dealings excluded. Fourth, who is bound: the corporation, its shareholders, directors and officers, and its advisers and brokers, because sellers rarely run a sale process personally. Fifth, notification: the seller tells the buyer promptly of any approach, with the terms and, if agreed, the identity of the person. Sixth, the consequence of breach: cost reimbursement up to a cap, a fixed fee, or both, and an acknowledgement that an injunction is an appropriate remedy.

Two further points keep the clause fair. It should end automatically if the buyer terminates the letter, so that a seller is never locked up by a buyer who has already walked, and it should state that the seller's obligation is to refrain from dealing with others, not to accept whatever terms the buyer proposes at the end of the period. A seller who signs an exclusivity clause has promised not to shop the business; it has not promised to sell it.

Finally, keep the clause inside the letter's binding section and say so. A reader should be able to find the words "the following provisions are legally binding on the parties" and see exclusivity listed beneath them. Clauses that drift into the non-binding part of a letter, or that are drafted so vaguely that the restricted conduct is unclear, are the ones that produce litigation instead of damages.

Exclusivity is a binding contractual term, and breaking it is a breach of contract. The question is what the buyer can recover.

Damages. The default remedy is damages for the loss caused by the breach. The buyer's wasted diligence, legal and financing costs are the clearest head of loss, although the buyer still has to show that the breach, rather than something else, caused those costs to be wasted. The lost profits of the business the buyer did not get are much harder to recover, because the buyer had no binding right to buy it; the letter said as much. For that reason, well-drafted letters pre-agree the consequence: if the seller breaches exclusivity or sells to someone else within a stated period after the letter ends, the seller reimburses the buyer's documented third-party costs up to a cap, or pays a fixed break fee. Our article on deposits and break fees covers how to draft a fee that a court is more likely to enforce.

Injunction. A buyer who learns of a breach in time can apply to the Superior Court of Justice for an injunction restraining the seller from completing a sale to the competing buyer during the exclusivity period. Courts grant these where the buyer shows a serious issue to be tried, that damages would be an inadequate remedy and that the balance of convenience favours it, which is a fact-specific inquiry, and the buyer must move quickly.

Recovering the deal. Occasionally a seller's breach surfaces after the buyer has agreed every essential term, in which case the buyer may argue that a binding agreement already existed. That argument succeeded in Wallace v. Allen, where the seller refused to close, but only because the letter and the parties' conduct showed an intention to be bound, and even then the buyer recovered damages rather than the business, because the court refused specific performance. It is not a route to count on.

For sellers, the cleanest protection against a remedies dispute is not to breach: keep a log of inbound approaches, respond with a one-line statement that the business is not available, and forward the approach to your lawyer. For both sides, read our guide to negotiating a letter of intent as the seller for how exclusivity fits with the other terms.