How the Courts View Rights of First Refusal
Recent court rulings underscore the critical importance of meticulously fulfilling contractual obligations when exercising a right of first refusal ("ROFR") clause, which grants the holder of the ROFR the opportunity to match any subsequent offer from an arm's-length third party that the property owner is willing to accept. To safeguard against the invalidation of a ROFR clause, it is crucial to grasp the scrupulous interpretation that courts employ to determine the enforceability of a ROFR clause.
In the recent Ontario Superior Court of Justice decision of McMullen v. Diwalri Property Holdings Ltd., the judicial scrutiny applied to ROFR clauses was evident. McMullen involved a standard ROFR scenario: McMullen granted Diwalri a ROFR to purchase a parcel of land owned by McMullen, stipulating that Diwalri would have the chance to match any subsequent third-party offer that McMullen was prepared to accept, provided it was made at arm's length.
McMullen entered into an Agreement of Purchase and Sale ("APS") with Glenview Properties, a third-party. Subsequently, Diwalri elected to exercise its ROFR and duly notified McMullen within the stipulated notice period of Diwalri's intention to acquire the property under the identical terms outlined in the APS with Glenview Properties.
The issue was that the transaction between McMullen and Diwalri did not close. Diwalri requested a 60-day extension to finalize its cost/benefit analysis, but McMullen refused. Consequently, the transaction was automatically terminated. The following day, McMullen entered into a new agreement to sell to a different buyer. McMullen believed it was not obligated to offer Diwalri another ROFR since the previous ROFR had already been exercised and the transaction terminated thereafter.
The court determined that the ROFR was extinguished once it was exercised by Diwalri. This released McMullen from the obligation to present subsequent offers to Diwalri. If the ROFR had been drafted in a manner to address the ROFR's reinstatement in circumstances in which the ROFR had been exercised and the subject transaction subsequently failed to close, then Diwalri may have been successful in its court action.
Understanding Rights of First Refusal and How to Adhere to Court Standards
The legal concept of a ROFR essentially acts as a contractual agreement rather than an ownership right in land. It gives the holder the option to match the terms of any offer made by a third party if the property owner decides to sell. Until the holder exercises its ROFR by matching the third party's offer, it remains a personal agreement rather than a direct claim to the property.
If the property owner ignores the ROFR and sells to a third party, the holder can seek legal intervention to enforce its rights. In some cases, a third-party buyer who is aware of the ROFR may still be bound by its terms. While some jurisdictions may consider a ROFR akin to an ownership interest, most legal systems, including Ontario, treat it as a contractual obligation.
To ensure the ROFR is upheld, it is crucial to follow its terms precisely, including giving timely notice and meeting all specified conditions. Courts typically do not tolerate attempts to bypass ROFR obligations, especially if such attempts appear dishonest, in bad faith or against the terms of the contract. The enforcement of a ROFR relies on adhering to its terms and legal principles governing contracts.
While a ROFR does not grant immediate ownership, the existence of a ROFR is a significant factor in real estate transactions as it provides the holder with the option to purchase the property before it is sold to another party. This distinction is important because, while the holder has the right to match any offer made by a third party, the holder is not obligated to purchase the property if it chooses not to exercise its option. The ROFR ensures that the holder has the first chance to buy the property under the specified conditions, but the holder must still go through the purchasing process to acquire ownership.
In short, it remains crucial to understand the legal consequences of failing to draft a comprehensive ROFR clause.
If you are granting a ROFR or wish to exercise your rights relating to a ROFR, Wildeboer Dellelce LLP has the experience and expertise to ensure that the clause is drafted to meet your objectives, or exercised to ensure that you comply with its provisions.
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.
