Was Ambiguous “Right of First Refusal to Purchase” Valid?

In a recent land deal case, the court untangled the narrow distinction between a “right of first refusal” and a “right to purchase,” and considered whether such rights granted as part of a redevelopment project had been affected after a drastic change to the project’s scope.

As part of a plan to assemble several mid-town Toronto properties that were ripe for redevelopment, the buyer purchased a two-story building from the seller, Shunock.  The property, which Shunock used as both a residence and office for his orthodontic practice, was bounded by three contiguous properties, which together would form a large swath of prime land. Negotiations were underway with those three other owners to have them partner in the project.

As part of Shunock’s terms of sale, he negotiated the right to purchase up to 3,500 square feet of the main floor of the redeveloped future complex, at a set price. This was confusingly called a “right of first refusal to purchase” (the “Refusal Right”) which term, the court noted, “melds, and to an extent conflates, a ‘right of first refusal’ with a ‘right to purchase’.”

The proper interpretation of Shunock’s Refusal Right became the focus of a post-closing dispute between him and the buyer/new owner. The unforeseen wrinkle was that negotiations had fallen through with the owner of the largest and most desirable of the four targeted properties. This meant that only a much smaller project was now possible.

The buyer of Shunock’s property claimed that the Refusal Right applied only to the envisioned project involving all four pieces of land; to allow Shunock to take as much as 3,500 square feet in a much smaller complex would change the essential character of the redevelopment. Relying on the non-cooperation by the fourth landowner as an unforeseen change, the buyer claimed that Shunock’s Refusal Right had been legally frustrated, and no longer needed to be accommodated.

Shunock countered by saying that the Refusal Right was not contingent on the fourth owner’s participation, and there were no conditions as to the size of the land assembly. He felt that even with the reduced scale, it was not impossible for suitable space to be allocated to him.

The court reviewed the facts.  When the buyer struck a deal with Shunock, it had already reached agreements with two of the other adjacent owners, but the third one was never even discussed. Strictly speaking, the deal with Shunock was not conditional on all four properties being included. The court noted that Shunock was initially unwilling to sell, since the existing property served him well, but when he finally agreed, it was important to him that the Refusal Right was part of the agreement.

Unfortunately the Refusal Right, as drafted, actually merged two terms having different legal meanings. A right to purchase would give Shunock the ability to compel conveyance of the property to him, once certain events fully within his control had occurred. He would have full control over the decision to convey, as well as an immediate interest in land. In contrast, a right of first refusal would give Shunock the right to have the first opportunity to acquire the land, but only if the owner decided to sell. No interest in land was created.

Shunock’s apparent rights did not fit neatly into either definition.  The court was left to examine who was in control of the triggering event, and to take a common-sense look at what the parties must have intended.

Here, Shunock had been approached to sell his property for only one purpose:  to form part of a four-property land-assembly initiative in furtherance of the larger-scale redevelopment project. Although the agreement Shunock signed did not specify the number of properties, some of its terms clearly inferred there would be four. Had the buyer wanted to restrict its obligation to Shunock, it could have added specified contingencies to the agreement.

Next, any doubts as to the parties’ intentions were clarified by how they acted after the contract was signed. A later agreement executed a full five years after Shunock’s deal acknowledged his Refusal Right even if the fourth piece of land was not included. This also supported the conclusion that he had a legal interest in the property, and a right to purchase, regardless of the project’s actual size.

The buyer also fell short of establishing that the contract with Shunock had been legally frustrated, since it could not show that it was impossible to allocate 3,500 square feet of main floor space in the smaller plan. Frustration required an unforeseen, non-culpable supervening event that “radically changed” the contract between the parties, rendering its performance impossible.  Mere inconvenience was not enough.

The court declared that Shunock’s Refusal Right was a valid right to purchase, forming a contingent interest in land that applied even to the smaller-scale project. See: 2284064 Ontario Inc. v. Shunock, 2017 ONSC 7146.