Proper Drafting Important for Right of First Refusal

Published on: November 2023 | What's Trending

Question, approval tick and rejection cross check marks

First published on Law360 Canada, LexisNexis Canada.

In this article, the first of two, we’re looking at a recent case of the Ontario Superior Court of Justice that deliberated an important legal aspect of rights of first refusal (ROFR) in relation to real property.

A dispute arose in McMullen v. Dilawri Property Holdings Ltd. 2023 ONSC 599, regarding a typical ROFR, one in which the owner of land grants a ROFR to a grantee by which the owner/grantor agrees to provide to the grantee a right to match any future arms’ length third-party offer that the grantor is prepared to accept. In this case, the ROFR grantee was given a five-business day period within which to provide notice of the exercise of the grantee’s right to purchase the property on the same terms and conditions as contained in such acceptable future third-party offer.

As is commonly the case, the ROFR provided that the ROFR would be void if the grantee did not deliver the required notice within such period, except that the ROFR would be reinstated if the third-party purchase failed to proceed to completion. The ROFR grantee properly delivered the required notice thereby resulting in the third-party offer being automatically terminated and the ROFR grantee becoming the purchaser on the same terms and conditions.

The seller waived a condition in the purchase agreement in its favour respecting the review and approval of the purchase agreement by the seller’s accountant. However, the purchaser requested a 60-day extension to the purchaser’s condition regarding its due diligence to satisfy itself respecting the feasibility of the transaction.

The purchase agreement terminated when the seller refused to extend the purchaser’s condition. The following day, the seller entered into a new purchase agreement with a new purchaser. The seller did not offer the ROFR grantee an opportunity to match that offer, the seller taking the position that the ROFR had been extinguished by reason of its prior exercise by the ROFR grantee. The ROFR had been registered on title to the property, so the seller applied for an order that the ROFR was no longer effective, and for an order that the notice of the ROFR should be deleted from its title.

Justice Charles Hackland allowed the application, holding that the ROFR was extinguished by reason of its exercise by the ROFR grantee. The wording of the ROFR did not address the reinstatement of the ROFR in circumstances in which the ROFR had been exercised and the transaction then failed to close. The court ruled that the common law applied: the ROFR was terminated when it was either not exercised, or when the ROFR holder as purchaser terminated the purchase agreement that arose upon the exercise of the ROFR. It would have been possible for the parties to have drafted the ROFR clause so that the reinstatement of the ROFR would occur in the circumstances of this case, and such a clause would have supplanted the common law rule.

The court noted that there is a duty of good faith and honest performance applicable to dealing with ROFRs. However, such a duty did not preclude the applicant from succeeding in this case as the court was convinced that the parties did not contemplate the ROFR surviving once exercised, which survival would have been, in the court’s view, commercially unreasonable. The court also ordered that the notice of the ROFR be removed from title.

The decision is perhaps not surprising given that, had the ROFR been held to apply to the new purchase agreement, the ROFR holder could presumably displace any number of future purchasers by “repeatedly taking up offers received by the owner, and then not [completing] the purchase” as noted by Justice Hackland. But the decision serves as a good starting point to consider complexities associated with ROFRs generally. Is a ROFR an interest in land or merely a personal right?

Might the typical obligation to exactly match the terms of a third-party offer create potentially insurmountable difficulties for the ROFR holder? Is the ROFR revived by changes to the third-party offer? Had the ROFR purchase agreement been terminated by the seller pursuant to its condition regarding approval by its accountant, would the ROFR have been adjudged to be terminated by its exercise in this case? These and some other questions will be considered in part two of this article.

Ray Mikkola would like to thank our Student-at-Law, Pulkit Sahi, for his assistance in writing this blog.