Australia: Re-activation Of Rights Of First Refusal Impacts Lessees

Last Updated: 20 March 2008
Article by Jodie Masson and Justin Lethlean

In Octra Nominees Pty Ltd v Chipper [2007] FCAFC 92, a tenant argued before the full Federal Court that although it had rejected an offer to purchase under a right of first refusal it was entitled to a second offer based on varied terms since the owner had made a variation to the contract for sale it had entered into with a third party purchaser.


  1. The lessee of a farming property (Owner) subleased the property to Mr and Mrs Chipper (Tenant) by way of a lease which contained a right of first refusal.
  2. In November 2004, the Owner made an offer to the Tenant to sell the property for $1,445,000 which was rejected by the Tenant. In August 2005, the Owner informed the Tenant of an impending sale of the property and asked the Tenant if it had now decided to purchase at the previous price. The Tenant did not respond in time.
  3. In early September 2005 the Owner offered to sell the property for $1,445,000 to a third party, Red Valley Pty Limited (Red Valley). This offer was accepted by Red Valley and in mid September 2005, Red Valley and the Owner exchanged contracts.
  4. The Owner and Red Valley then varied the contract for sale in early March 2006. This variation provided for an extension of time for time allowed under a due diligence special condition and an extension of time for payment of the deposit.
  5. In mid March 2006 the Tenant approached the Owner and for the first time said that it was willing to pay the Owner's asking price for the property. The Owner responded by stating that the property had already been sold to Red Valley at the same price as the original contract offered to the Tenant in early November 2005. In May 2006 the Tenant asserted to the Owner that the contract to Red Valley had been renegotiated and that the Tenant wished to exercise its right of first refusal on the terms of the varied contract.
  6. In July 2006, proceedings were commenced in the Federal Court by the Tenant to restrain the sale from the Owner to Red Valley and to seek specific performance of a sale from the Owner to the Tenant. Those proceedings were initially decided in favour of the Tenant (because the contract had been varied) and in December 2006 the Owner appealed that decision to the Full Federal Court.

Court's Decision

  1. The Court decided that sale occurs upon "entry into the binding contract for sale which exhausts the right of first refusal and not the "completion", "transfer" or "conveyance" of the property". The Court held that "the variation in this case was not significant and not capable of giving rise to a right of rescission or termination, nor does it constitute a new offer to sell" and that "any pre-emptive right which was exhausted before the contract was made is not revived as long as the contract, as varied, remains on foot".
  2. The Court held that there is a "right of first refusal, not of first and last refusal. Thus, in the absence of any suggestion of bad faith, prior arrangement, fraud, mistake or misrepresentation, the contract may be later varied between the grantor and the third party purchaser, and this will not revive the right so that a new offer must be made on the varied terms to the grantee. The right is exhausted when an offer to sell is rejected and the offer or a less advantageous offer is accepted by a third party."
  3. The Court did not specify whether a significant variation such as a change to the purchase price would constitute a new offer to sell and it has left this possibility open.

The Court declared that the Tenant had no interest in the property and that the land could be sold to Red Valley without having to be offered to the Tenant.

Practical Tips

A right of first refusal clause must be clear and certain, particularly in relation to the following:

(a) the point at which the right lapses should be made clear, eg by referring to entering into a contract for sale rather than stating that the owner must not "sell the property". The period of operation could include up to exchange of contracts between the owner and third party purchasers or all the way to completion of a sale between the owner and a third party purchaser
(b) what events can enliven the right of first refusal including any variation
(c) how the offer is to be made and accepted, for example, whether the grantor is to include in its notice a full copy of the proposed contract and whether the grantee may accept by written notice, or whether something more formal is required, eg a signed contract and deposit cheque.

It is important to make sure that any right of first or last refusal is very precise and clear to avoid disputes arising at a later stage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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