CAN THE BENEFICIARY OF A RIGHT OF FIRST REFUSAL TO PURCHASE REQUIRE THE SELLER TO SELL THE PROPERTY AS IT WAS DESCRIBED AT THE TIME OF THE AGREEMENT NOTWITHSTANDING THAT THE PROPERTY WAS THEREAFTER SUBSTANTIALLY MODIFIED AND ITS VALUE INCREASED?

(U. Cayouette Inc. vs. Georgette Rouleau-Beaudoin 2017 QCCS 3624)

Key Facts

1956 Robert acquires some vacant land (the "Property")

1958 Robert and brother Bruno operate a hardware store (the "HS) at a site adjacent to the Property

1958-1971 Robert allows HS to use the Property without charge to store material used in its business

1971 Robert sells the Property to HS for $15,000. The contract includes a right of first refusal ("ROFR") in favour of Robert to purchase the Property according to the same terms and conditions. There was no discussion between the parties regarding the transmission of the ROFR to Robert's heirs nor any restriction that would prevent its assignment or transfer to a third party.

1971-1977 HS continues to store its material on the Property. It builds hangars on the Property of which Robert was fully aware since he was still active in the HS business.

1977 Robert sells his entire interest in HS. None of the parties considers the impact of the sale on the ROFR.

1984 A major fire destroys the hangars on the Property. HS builds a warehouse to store its material at a cost of $250,000. Robert, who resides close by, is fully aware of the new construction. No one objects or raised the matter of the ROFR.

1991 Robert passes away and his wife, Georgette, ("G"), becomes his sole heir and legatee.

2013 HS is put up for sale and a third party expresses an interest to purchase all of its assets, including the Property. The municipal evaluation of the Property is $260,700 for the land and $151,100 for the building. 

Position of HS

The ROFR was entered into to assure that in the event that HS wished to sell the Property, Robert could purchase it according to the same terms and conditions as the third-party offer.

The ROFR was granted exclusively to Robert and could not be transferred to any third party, either by contract or to his heirs.

Robert implicitly renounced the ROFR by never objecting to the construction of hangars or the warehouse although he knew full well that such construction would substantially increase the value of the Property. Moreover, when Robert sold his interest in HS, the ROFR was never discussed. Finally, the ROFR could not remain in effect indefinitely.

By seeking to acquire title to the Property for $15,000, G is acting abusively since the land portion is worth $260,700 i.e. 25 times the offering price. Moreover, the land and the warehouse cannot be separated so G is seeking to acquire the whole, having a value of $400,000, for only $15,000.

Position of G

Considering that HS used Robert's land gratuitously for 20 years before acquiring it, it is only fair that G should benefit from any increase in value.

There is no legal basis to restrict the general rule of law that recognizes the transmission of property to one's heirs upon death.

Although Robert was fully aware of the construction of the hangar and warehouse, HS should have attempted to renegotiate the ROFR prior to building the warehouse and must alone assume the risks and consequences for not doing so.

The construction of the warehouse was not a sale and did not trigger the ROFR.

The ROFR could only be triggered by a sale, which only HS could decide to do, and the fact that it did not consider doing so until 2013 should have no bearing on the legal enforceability of the ROFR

Analysis and Decision of the Court

Since the general rule of law is that all rights are transmissible upon death, save and except those that are strictly personal and that the evidence on the whole did not support a finding that ROFR was strictly personal to Robert, G is legally entitled to benefit therefrom.

Although it is possible to waive and renounce the benefits of the ROFR, such waiver and renunciation must be clear, precise and unequivocal which the evidence did not support in this case. Conduct that was subject to different reasonable interpretations would not suffice to renounce a contractual right. 

The court identified 6 different hypotheses to resolve the dispute:

·      G purchases land only for $15,000 and HS retains ownership of the warehouse or sells it to someone else.

·      G purchases land for $15,000 and gets warehouse as a bonus.

·      G purchases land for $15,000 and pays fair market value for the warehouse.

·      G purchases all assets of HS for fair market value including the land and the warehouse.

·      G has no further rights in the Property because the object of ROFR no longer exists as it was. The Property became part of a different economic whole that HS cannot be forced to dismantle since to do so would harm its operations and interfere with its fundamental property rights.

·      HS pays G the fair market value of the land less $15,000.

The ROFR is a restriction on the right of property and therefore should be interpreted restrictively. ROFR is not a right in property but a personal right to become owner of property according to the terms and conditions of the contract. 

Property rights are guaranteed and protected by the Quebec Charter of Rights and Freedoms

ROFR is a preliminary contract without any retroactive effect. It was only when HS decided to sell its assets, including the Property, 30 years after the ROFR was created, that it became exigible.

In order to interpret the ROFR and decide whether the warehouse should be included, the court tried to determine the probable common intention of the parties when the ROFR was created.

The fact that the parties described the object of the ROFR as "vacant" land is relevant as it points in the direction that any construction on the land should not be included.

For 13 years prior to the ROFR, HS used the land to store materials in tent like structures. The parties knew how the Property was being used when the ROFR was created and nevertheless described its object as "vacant" land.

After the sale to HS, the latter invested more heavily in sophisticated storage structures on the Property. The court concluded that HS's intention to do so may have been the reason that Robert agreed to sell to HS i.e. the Property was needed by HS for its economic viability.

Robert inherited the Property which had a sentimental value for him so if HS decided one day that it no longer needed it, Robert wanted it back hence the ROFR. The economics of the transaction were secondary to him.

Considering the restrictive interpretation to be given to ROFR the protection accorded by law to the protection of property rights together with the evidence as a whole, the court concluded that the ROFR should be interpreted to permit G to acquire the land for $15,000 and HS to keep the warehouse. Logistically, HS could pay G the fair market value of the land less $15,000 in full satisfaction of the ROFR.

One challenge of drafting good contracts is to attempt to peer into the future without a crystal ball. The parties together with their experienced legal advisor should make the effort to look ahead and try to anticipate issues that could arise going forward in order to deal with those that they are able to identify before the contract is concluded.