AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:
In the real estate
world, a Right of First Refusal (“ROFR”) creates an opportunity for the holder
of the right to match an offer made to purchase a property – it’s a “sort of”
option to purchase that will arise in the future under certain circumstances. In the most common scenario, the owner of the
property has an obligation to offer the property for sale to the holder of the
ROFR when the owner receives a bona fide third-party offer to purchase and
intends to accept the offer. The holder
of the ROFR can then choose to match the terms of the third-party offer and
purchase the property. If the holder of
the ROFR doesn’t choose to match, the ROFR will in most cases be exhausted.
A ROFR is commonly created
through agreement between the owner of a property and the person to whom the
right is granted. Often the ROFR will be
given back to a vendor in a property transaction. The vendor sells the property to the
purchaser, but the purchaser agrees that the vendor will have a ROFR to
re-purchase the property if the purchaser decides to sell. This ROFR is not a true option to re-purchase
that can be exercised by the vendor at its discretion. Instead, the purchaser (the new owner of the
property) must first decide to sell the property, which gives rise to the
obligation to offer it for sale to the vendor (the previous owner of the
property).
Sometimes the ROFR will
be granted in a detailed and lengthy stand-alone agreement prepared by the
parties’ lawyers. Probably more often
than not, though, the ROFR is an afterthought thrown into the schedule of
additional terms attached to an Agreement of Purchase and Sale. Does a statement as simple as “Vendor will
have the first right of refusal to purchase the property from the Purchaser”
create an enforceable ROFR? Maybe. Maybe
not. A judge being asked to enforce the
ROFR would need to “read into” the agreement one or more implied terms: that the
Purchaser must present the Vendor with any offer the Purchaser is prepared to
accept and that the Vendor would then have an opportunity to match the offer,
the Vendor’s right to be exercised, as stated by the Court of Appeal for
Ontario in one decision, “in a reasonable time given the circumstances that
exist when the offer is made.”
The enforceability of
the ROFR is of most importance to the party who is granted the right, so that
party would be well-advised to take the time to craft an agreement that won’t
depend on the Court’s willingness to infer the existence of unwritten
terms. At a minimum, the ROFR should
spell out that when the property owner receives an offer to purchase the
property that the owner is prepared to accept the owner must notify the ROFR
holder of the offer and its terms. And
the ROFR should provide clear direction to the ROFR holder on how to exercise
the right and within what period of time the right must be exercised. The ROFR holder may also want impose
conditions on the terms of third party offers that may be considered by the
property owner so that the owner doesn’t use unreasonable terms such as
excessively high deposit amounts or very short closing dates to render the ROFR
impossible for the right holder to exercise.
This should probably go
without saying, but an agreement for a ROFR should always be made in
writing. In Ontario, legislation called
the Statute of Frauds, R.S.O. 1990, c. S-19 provides the following:
No action
shall be brought to charge any executor or administrator upon any special
promise to answer damages out of the executor’s or administrator’s own estate,
or to charge any person upon any special promise to answer for the debt,
default or miscarriage of any other person, or to charge any person upon any
contract or sale of lands, tenements or hereditaments, or any interest in or
concerning them, unless the agreement upon which the action is brought,
or some memorandum or note thereof is in writing and signed by the party
to be charged therewith or some person thereunto lawfully authorized by the
party.
Generally speaking,
contracts for the sale of land must be in writing to be enforceable. One exception to that rule is the equitable
doctrine of part performance. If it can
be shown that an oral contract was made and that part of the contract was
performed by the parties, then the Court may find the contract is enforceable
in spite of the Statute of Frauds.
As stated in the decision of the Court of Appeal in Erie Sand &
Gravel Ltd. v. Seres’ Farms Ltd.:
The purpose
of s. 4 of the Statute of Frauds is to prevent fraudulent dealings in
land based on perjured evidence. However, Equity will not allow the Statute
of Frauds to be used as an “engine of fraud”. It created the
doctrine of part performance to prevent the Statute of Frauds from being
used as a variant of the unconscionable dealing which it was designed to
remedy: see Hill v. Nova Scotia (Attorney General) [1997] 1
S.C.R. 69, at para. 10. The requirements in s. 4 of the Statute of Frauds must
give way in the face of part performance because the acts of part performance
fulfill the very purpose of the written document – that is, they diminish the
opportunity for fraudulent dealings with land based on perjured evidence.
In the ROFR scenario, if the party seeking to
enforce an oral ROFR has performed some act under the agreement in reliance on
the existence of the ROFR (such as the provision of services), the Court may
support the ROFR. However, nothing
should be taken for granted. If you want
a ROFR, do it right.