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Sale of an undivided 50% interest in lots does not trigger developer’s right of first refusal

Can a party who has a contractual obligation to provide a “right of first offer” to sell additional building lots to another party avoid triggering the right of first offer by selling an undivided 50% interest in those building lots rather than the lots themselves? In a very recent case of the ontario superior court of justice, ducharme j. Held that such a seller can in fact sell a 50% undivided interest without being in violation of the right of first offer.

In 2056668 ontario inc. And fernbrook homes (majormac north) limited et al, fernbrook homes (majormac north) limited (“fernbrook”) had sold a parcel of property to 2056668 ontario inc. (“osmington”). Osmington granted to fernbrook as a collateral advantage to the agreement of purchase and sale an irrevocable right of first offer (“rfo”) to purchase additional lots from osmington. The thrust of the rfo was that osmington was obligated over a period of 60 months, if osmington wished to sell all or any portion of certain additional lots to a third party, to offer those lots to fernbrook prior to offering them to the third party. If fernbrook should choose not to accept the offer, osmington would then be entitled to sell the lots to the third party, provided that the terms were not materially more advantageous than those terms offered to fernbrook.

Osmington subsequently entered into a transaction with aspen ridge homes (“aspen ridge”) whereby osmington would sell an undivided 50% interest in some additional lots to aspen ridge and thereafter osmington and aspen ridge would enter into a co-owners agreement to jointly finance, market and construct their proposed residential development. Since osmington was not selling all or any portion of the additional lots, osmington contended that it was not required to offer the lots to fernbrook. Fernbrook sued for breach of the rfo.

Mr. Justice ducharme agreed with osmington. He maintained that the intent of the parties and the purpose of the clause was for osmington to offer fernbrook an opportunity to purchase any additional lots that osmington did not want to develop on such terms as osmington might offer to another party at arm’s length. Although there were no canadian authorities produced by the parties at court, mr. Justice ducharme was of the view that judgement in favour of osmington would produce the “sensible commercial result”. The justice felt that “a right of first refusal is not to be construed liberally” and that the exercise of same must accord strictly with the terms set out in the agreement.

Given this strict judicial interpretation of rfos, it is imperative that parties seeking to receive the benefit of an rfo obtain a contractual covenant that stipulates specifically which dealings with a parcel of property that is subject to an rfo are prohibited by the vendor. The beneficiary of the rfo fails to do so at his peril because the rfo may be rendered unenforceable.