In Octra Nominees Pty Ltd v Chipper  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.
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.
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.
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
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
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
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.
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".
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
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
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.
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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