2017 Harvest

2017 Harvest

Friday, January 11, 2013

Can a right of first refusal bind non-parties?

That general question was at the heart of a recent Ontario Court of Appeal ruling on an estate matter.  Parents owned a property; they wanted to sell it to one of their three children, but the other two kids opposed the sale; in order to appease everyone, the parents proposed an agreement that would allow the property to go to the one child, but with a right of first refusal on the part of the other two kids in case the property-owner child ever decided to sell.  The other two kids wanted to keep the property in the family.

The agreement was executed by the three children, including the right of first refusal and a provision stating that notice of the agreement could be registered on title to the property.  Later, the property was transferred from the one child to her and her husband as joint tenants, with the husband having agreed to be bound by the previous agreement (including the right of first refusal).  The agreement was subsequently registered on title to the property, with the undertaking of the husband appended.

The whole situation ended up in Court because of disagreement between the siblings and their children over what could happen with the property on the death of the property-owner sibling (and her husband).  Was the agreement binding on the heirs of the property-owner?  Those heirs raised the issue of privity of contract, which was described by the Court of Appeal as follows:

The doctrine of privity of contract stands for the proposition that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it. This doctrine has two very distinct components or aspects. On the one hand, it precludes parties to a contract from imposing liabilities or obligations on third parties. On the other hand, it prevents third parties from obtaining rights or benefits under a contract. See London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC), [1992] 3 S.C.R. 299, at para. 200.
There are established exceptions to the second aspect of the doctrine. In certain situations, the courts will permit strangers to enforce the contract and take the benefit of its provisions. The established exceptions are agency, trust, assignment or assumption, exceptions established by statute, and restrictive covenants. See Greenwood Shopping Plaza Ltd. v. Beattie et al.,1980 CanLII 202 (SCC), [1980] 2 S.C.R. 228, at para. 11.

The Court noted that, at first blush, it might seems as if privity of contract applies in this case and that the heirs of the property-owner sibling are not bound by the right of first refusal.  However, death does not terminate a contract unless the contract is "based on personal considerations, skill or confidence (a personal contract)."  The estate of the owner would be in the position of the owner, bound by the agreement.

What if the property is then conveyed by the estate to the heirs?  The Court found that the heirs, too, would be bound by the right of first refusal.  The estate would pass title to the property to the heirs subject to the requirements in the agreement.  Not only do those heirs have actual notice of the agreement (in this case), but they "are volunteers in the sense that they give no consideration for title to the Property".  The heirs cannot stand in a better position than did the estate.

The Court of Appeal also ruled that the Agreement containing the right of first refusal was properly registrable against title to the property under the Land Titles Act.  The Court says the following with respect to the nature of the interest held by a holder of a right of first refusal:

What did the holder have before crystallization? The holder had an interest in the unregistered equity that arose at the point of crystallization. To be sure, the holder is not entitled to the equity, as that entitlement arises on crystallization. But the holder has an interest in it, in the sense that the holder has something more than a mere spes or hope. The holder, prior to crystallization, has the recognised legal interest that will swell into an equitable right on crystallization. In the language of s. 71(1), the holder is a person “… interested in [an] unregistered … [equity] in registered land…”. Accordingly, rights of first refusal over land can be protected by registration under s. 71(1).

Read the decision at: Benzie v. Hania.