Option to Purchase vs Right of First Refusal?

The Town of Pelham and a private corporation each owned adjacent 30-acre blocks of land. Together they entered into a “coordinated servicing and development” agreement, to facilitate the Town’s goal of building a community center, and the corporation’s goal of building a medical center and retirement residence. Each owner had the right to acquire land from the other in certain circumstances, after giving a Notice of Option to Purchase. In the case of the corporation, its right to buy the Town’s land was contingent on the Town not needing it for its own purposes and was exercisable within one year of the Town granting site plan approval.

The Town did build its community center and had surplus land remaining afterwards. As a means of raising $12 million that would help fund the entire development, it decided to sell that surplus to a third party. The corporation objected; even though it had not yet submitted an application for site plan approval in connection with the planned medical center and retirement residence, it claimed its Option to buy the surplus land prevailed. The Town went to court for a declaration otherwise.

The court agreed to grant the declaration sought by the Town. It also deleted a Notice of Option to Purchase that the corporation had registered on title, based on the incorrect premise that its purchase right was an “interest in land” that could be registered on title.

The court began by examining the difference between a true option to purchase on the one hand, and a right of first refusal on the other, as well as the difference between the legal interests in land obtained under each. It noted that an option to purchase constitutes an equitable interest in land (contingent on the option-holder’s election to exercise it), but a right of first refusal does not. With an option, once certain specified events occur that are solely within the option-holder’s control, and the option is exercised, then the entity holding the option can compel a conveyance of the property to him or her. The option is specifically enforceable at the time the option is granted.

In contrast, a right of first refusal entails a personal, contractual right, but it hinges on obtaining the consent of the person who granted it – it is only at that point that the right of first refusal is converted into an option to purchase. But, unlike a true option, it does not create any rights in property, and is not immediately enforceable by way of an action for specific performance.

Here, the corporation had the opportunity to purchase the Town’s surplus land, but it was only exercisable within one year of a future event, namely obtaining site plan approval for the development of its medical center and retirement residence; otherwise the opportunity became null and void. Not only did the Town have some input into that site plan approval process (which admittedly had to be exercised in good faith), but it also had the right to decide whether it needed the surplus land for purposes of its own.

Since these elements gave the Town some measure of control over whether the corporation could exercise its right at all, it rendered the purchase opportunity more in-line with a right of first refusal – which was personal to the corporation – rather than an option to purchase. Given the legal nature of that first refusal right, this also meant that the corporation’s purchase right was not tantamount to an equitable interest in land that could be registered.

In the end, the court declared that corporation did not have an option to purchase the Town’s surplus land and that the Notice was to be removed from title. See: Pelham (Town) v. Fonthill Gardens Inc., 2019 ONSC 567