Rights of First Refusal – give them the attention they deserve

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:  

In the real estate world, a Right of First Refusal (“ROFR”) creates an opportunity for the holder of the right to match an offer made to purchase a property – it’s a “sort of” option to purchase that will arise in the future under certain circumstances.  In the most common scenario, the owner of the property has an obligation to offer the property for sale to the holder of the ROFR when the owner receives a bona fide third-party offer to purchase and intends to accept the offer.  The holder of the ROFR can then choose to match the terms of the third-party offer and purchase the property.  If the holder of the ROFR doesn’t choose to match, the ROFR will in most cases be exhausted.

A ROFR is commonly created through agreement between the owner of a property and the person to whom the right is granted.  Often the ROFR will be given back to a vendor in a property transaction.  The vendor sells the property to the purchaser, but the purchaser agrees that the vendor will have a ROFR to re-purchase the property if the purchaser decides to sell.  This ROFR is not a true option to re-purchase that can be exercised by the vendor at its discretion.  Instead, the purchaser (the new owner of the property) must first decide to sell the property, which gives rise to the obligation to offer it for sale to the vendor (the previous owner of the property).

Sometimes the ROFR will be granted in a detailed and lengthy stand-alone agreement prepared by the parties’ lawyers.  Probably more often than not, though, the ROFR is an afterthought thrown into the schedule of additional terms attached to an Agreement of Purchase and Sale.  Does a statement as simple as “Vendor will have the first right of refusal to purchase the property from the Purchaser” create an enforceable ROFR?  Maybe. Maybe not.  A judge being asked to enforce the ROFR would need to “read into” the agreement one or more implied terms: that the Purchaser must present the Vendor with any offer the Purchaser is prepared to accept and that the Vendor would then have an opportunity to match the offer, the Vendor’s right to be exercised, as stated by the Court of Appeal for Ontario in one decision, “in a reasonable time given the circumstances that exist when the offer is made.”

The enforceability of the ROFR is of most importance to the party who is granted the right, so that party would be well-advised to take the time to craft an agreement that won’t depend on the Court’s willingness to infer the existence of unwritten terms.  At a minimum, the ROFR should spell out that when the property owner receives an offer to purchase the property that the owner is prepared to accept the owner must notify the ROFR holder of the offer and its terms.  And the ROFR should provide clear direction to the ROFR holder on how to exercise the right and within what period of time the right must be exercised.  The ROFR holder may also want impose conditions on the terms of third party offers that may be considered by the property owner so that the owner doesn’t use unreasonable terms such as excessively high deposit amounts or very short closing dates to render the ROFR impossible for the right holder to exercise.

This should probably go without saying, but an agreement for a ROFR should always be made in writing.  In Ontario, legislation called the Statute of Frauds, R.S.O. 1990, c. S-19 provides the following:

No action shall be brought to charge any executor or administrator upon any special promise to answer damages out of the executor’s or administrator’s own estate, or to charge any person upon any special promise to answer for the debt, default or miscarriage of any other person, or to charge any person upon any contract or sale of lands, tenements or hereditaments, or any interest in or concerning them, unless the agreement upon which the action is brought, or some memorandum or note thereof is in writing and signed by the party to be charged therewith or some person thereunto lawfully authorized by the party.

Generally speaking, contracts for the sale of land must be in writing to be enforceable.  One exception to that rule is the equitable doctrine of part performance.  If it can be shown that an oral contract was made and that part of the contract was performed by the parties, then the Court may find the contract is enforceable in spite of the Statute of Frauds.  As stated in the decision of the Court of Appeal in Erie Sand & Gravel Ltd. v. Seres’ Farms Ltd.:

The purpose of s. 4 of the Statute of Frauds is to prevent fraudulent dealings in land based on perjured evidence. However, Equity will not allow the Statute of Frauds to be used as an "engine of fraud". It created the doctrine of part performance to prevent the Statute of Frauds from being used as a variant of the unconscionable dealing which it was designed to remedy: see Hill v. Nova Scotia (Attorney General) [1997] 1 S.C.R. 69, at para. 10. The requirements in s. 4 of the Statute of Frauds must give way in the face of part performance because the acts of part performance fulfill the very purpose of the written document - that is, they diminish the opportunity for fraudulent dealings with land based on perjured evidence.

In the ROFR scenario, if the party seeking to enforce an oral ROFR has performed some act under the agreement in reliance on the existence of the ROFR (such as the provision of services), the Court may support the ROFR.  However, nothing should be taken for granted.  If you want a ROFR, do it right.

Seller's Family's remorse not grounds to set aside farm transaction, says Alberta Court

Several years ago, a young couple purchased farm land from an 86 year old man, a bachelor most of his life (the "Vendor").  The couple had leased the land for a number of years, and paid about $600,000 for two quarter sections (160 acres x 2).  The Vendor's youngest brother more recently commenced an action in the Alberta Court of Queen's Bench on behalf of the Vendor to set aside the land transaction based either on the exercise of undue influence by the purchasers or on the notion that the transaction was unconscionable.  At the time the case was heard, the Vendor was 93 years old and living in a care facility.  He died between the time of the hearing and the release of the Court's decision.

The Vendor's family was upset that the land purchased for $600,000 in 2010 was later appraised at a value of between $1.67 million and $3.9 million.  And, moreover, within two years of purchasing the two quarter sections, the young couple subdivided out a 43-acre parcel and a 79-acre parcel that they then listed for sale at $835,000 and $1.38 million, respectively.

On the issue of undue influence, the Court cited the test set out by the Supreme Court of Canada in the case of Geffen v. Goodman Estate:

What then must a plaintiff establish in order to trigger a presumption of undue influence? In my view, the inquiry should begin with an examination of the relationship between the parties. The first question to be addressed in all cases is whether the potential for domination inheres in the nature of the relationship itself. This test embraces those relationships which equity has already recognized as giving rise to the presumption, such as solicitor and client, parent and child, and guardian and ward, as well as other relationships of dependency which defy easy categorization.

Having established the requisite type of relationship to support the presumption, the next phase of the inquiry involves an examination of the nature of the transaction. When dealing with commercial transactions, I believe that the plaintiff should be obliged to show, in addition to the required relationship between the parties, that the contract worked unfairness either in the sense that he or she was unduly disadvantaged by it or that the defendant was unduly benefited by it. ...

Once the plaintiff has established that the circumstances are such as to trigger the application of the presumption, i.e., that apart from the details of the particular impugned transaction the nature of the relationship between the plaintiff and defendant was such that the potential for influence existed, the onus moves to the defendant to rebut it. As Lord Evershed M.R. stated in Zamet v. Hyman, supra, at p. 938, the plaintiff must be shown to have entered into the transaction as a result of his own "full, free and informed thought". Substantively, this may entail a showing that no actual influence was deployed in the particular transaction, that the plaintiff had independent advice, and so on. Additionally, I agree with those authors who suggest that the magnitude of the disadvantage or benefit is cogent evidence going to the issue of whether influence was exercised. [Emphasis added]

[Emphasis added]

The Court found that the relationship between the Vendor and the young couple was not one in which there was potential for domination of the Vendor by the young couple.  Their relationship was one of lessor and lessees, and of friends and neighbours.  The Vendor was not dependent on the young couple, they were not family, there was no position of trust, and the Vendor was not in a position where he had to sell his land for financial reasons.

And even if the Court had found the relationship to be one in which undue influence could be presumed, the Court would not have found that actual undue influence was exerted in this case.  Instead, the Court found that the Vendor was someone who was not coerced into selling his land.  He had no children of his own and had no family who wanted to purchase or farm his land.  He wanted to sell the land and for the land to remain in agricultural use.  He sold the land at what amounted to a discounted price in relation to the actual market value, but the Vendor had expressed his willingness to sell at a discount knowing that the land would remain agricultural.

Of course, very shortly after the young couple purchased the land, they proceeded to apply for consent from the municipality to subdivide the land.  It appears that the young couple had discussed the possibility of subdivision with the Vendor for the purpose of family planning.  The Vendor provided a letter in support of the application and mentioned that the purpose was for "future ranch planning" for the young couple and their three children.  The decision by the young couple to put two parcels up for sale outside their family at a price that far exceeded the original purchase price of the entire two quarters came as a disappointing surprise to the Vendor's family.

However, the Court did not find that this made the transaction between the Vendor and the young couple unconscionable and subject to being set aside.  The Court found that none of the following elements of the test for an unconscionable transaction were satisfied:

1. a grossly unfair and improvident transaction;

2. that the victim lacked independent legal advice or other suitable advice;

3. that there was an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and

4. that the other party knowingly took advantage of this vulnerability.

Cain v Clarica Life Insurance Company, 2005 ABCA 437 (CanLII), 384 AR 11, at para 32.

The action to set aside the transaction was dismissed.  As the Court noted in conclusion: "seller's remorse, or seller's family's remorse, is not grounds to set aside the transaction".

Read the decision at: Burby v Ball.

Title Insurance and the costs of defending title to your property

Most real estate transactions in Ontario today involve title insurance.  Purchasers obtain title insurance to protect against unknown defects in title that crop up after the closing of the transaction, and title insurance policies generally include coverage for legal costs associated with defending title to a property.  As an example, if you purchase a property and then a neighbour commences a claim for adverse possession of part of the property (i.e. a claim that the neighbour is the true owner of something you thought you purchased), the title insurance coverage may include payment of the costs of defending the claim.

The issue of what legal costs may be covered by a title insurance policy, or what other costs may be covered, is normally a matter of interpretation of the contract as between the insured property owner and the title insurer.  However, Ontario courts have recently looked at what effect cost recovery under a title insurance policy should have on the awarding of costs in litigation.  If a property owner receives a payment from his or her insurer pursuant to a title insurance policy, should the owner also be entitled to a costs award against the other party in a dispute?  Is there a risk of double recovery?  Should that matter?

In 2011, the Ontario Court of Appeal ruled in Krawchuk v. Scherbak that a private insurance exception can apply to permit double recovery: "where a plaintiff recovers under an insurance policy for which he has paid the premiums, the insurance monies are not deductible from damages payable by the tortfeasor".  In that case, Ms. Krawchuk had purchased a house with serious latent defects based on misrepresentations by the vendors.  She had made a claim for coverage under her title insurance policy and settled that claim with the title insurer in exchange for a payment.  The defendants in the action argued that Ms. Krawchuk's recovery in the court action (which did not involve the title insurer) should be reduced in relation to the payment received under the title insurance policy.  Otherwise, they argued, Ms. Krawchuk would receive a windfall - double recovery.  The Court of Appeal found that double recovery was permitted in that case because it would be inequitable to allow the vendors (the tortfeasors or wrongdoers) to gain an advantaged based on benefits earned by Ms. Krawchuk through the payment of insurance premiums.

But what about a case where there is no tort or wrongdoing?  In a case decided in 2016, a judge of the Ontario Superior Court of Justice found that there was no wrongdoing and, on that basis, deducted title insurance proceeds from an award of costs to the successful parties.  The case involved use by one neighbour of a roadway that ran through another neighbour's property.  The road was not a public highway, and the owners of the road made an application to the Court for a ruling that the road was not an "access road" as defined by the Road Access Act and for an order closing the road.  The neighbours made a counter-application seeking the opposite orders.

The Court agreed with the road owners that the road was not an "access road" and issued an order preventing the neighbours from using it.  Not surprisingly, the road owners had looked to their title insurance policy for coverage in the matter, which affected title to their property.  They received a payment of roughly $25,000 from their title insurer.  The application judge found that the road owners used "those fund[s] to defend the application ... rather than accepting payment in compensation for the inconvenience of providing ... access."  That is, the road owners could have simply kept the $25,000 as disturbance compensation and allowed use of the road to continue (in which case they would not have incurred litigation costs).  Instead, the road owners used the funds received to fund the litigation and were successful in avoiding the disturbance that would have been caused by ongoing use of the road.

Based on that distinction, the application judge deducted the $25,000 title insurance payment from the overall costs awarded to the successful road owners in the case.  He distinguished the case from the Krawchuk v. Scherbak case heard by the Court of Appeal on the basis that there was no tort or wrongdoing involved.  This was simply a case about whether an "access road" under the Road Access Act did or did not exist.  In the absence of a tort or wrongdoing, the application judge was not prepared to allow a double recovery by the road owners through an award of costs.

Read the decision at: Gouett v Mullins.

"Shared water does not necessarily make good neighbours" Part 2 - The Appeal

In September, 2013, I wrote about a case involving the post-purchase discovery of an underground waterline on a farm.  The purchaser of a 97-acre hobby farm did not know that the vendor, who retained a three-acre parcel next to the farm where he had built his retirement home, continued to receive water from a spring on the 97-acre farm through an underground line that also supplied other neighbours.  Rather than disclosing the existence of the line and his expectation that he would continue to receive the water supply, the vendor provided a statutory declaration on the date of closing stating that he was "not aware of any person or persons ... having any claim or interest in the said lands or any part thereof adverse to or inconsistent with [his] title and that [he was] positive that none such exists."

After the waterline was discovered, the matter ended up in court and the trial judge declared that there was no prescriptive easement for the line and that the vendor was not entitled to an injunction to prevent the new purchaser from taking steps to interfere with the quality or quantity of the water supply.  The judge also found that the waterline constituted a "latent defect" and that the vendor was liable for negligent misrepresentation.  He awarded the purchaser $25,500 in damages along with nearly $115,000 in costs.

The vendor appealed the decision of the trial judge on negligent misrepresentation and damages to the Court of Appeal.  The Court of Appeal agreed with the trial judge's finding that the vendor had a duty of care not to make false statements to the purchaser, which arose "specifically from respondent's foreseeable and reasonable reliance on the appellant's representations contained in the statutory declaration."  And, since the vendor himself was a person with an alleged continuing interest in the land being purchased by the purchaser, he "knew, or, at the very least, ought to have known, that his representation to the contrary, in a statutory declaration executed under oath, was false."

The appeal was dismissed with costs to the purchaser in the amount of $22,000.

Read the appeal decision at: Hanisch v. McKean.

BC Court: Aborted sale should have proceeded - vendor did not conceal property's propensity to flood

The purchaser of a 60-year-old residential property (Lot A) on Salt Spring Island in BC chose not to complete the purchase on the closing date because of alleged latent defects.  The purchaser alleged that a dam or berm constructed on a neighbouring property encroached on Lot A and also caused Lot A to flood.  He took the position that the dam and the flooding were latent defects not discoverable on reasonable inspection and that the vendor of Lot A knew about the dam and earlier flooding and should have disclosed them to the purchaser.

The purchaser did discover the presence of the dam shortly before the closing date.  The vendor's efforts to satisfy him that the property had no flooding problems were unsuccesful.  So the transaction did not close and the vendor sued the purchaser for loss of value (Lot A was ultimately sold to another purchaser at a lower price) and other losses including loss of rent and interest.

The BC Supreme Court found that the vendor did not fail to disclose a latent defect (i.e. a propensity to flood).  As stated by the Court: "The doctrine of caveat emptor applies in real estate transactions with respect to defects that are discoverable on reasonable inspection.  A vendor does not have to disclose patent defects; rather, a vendor must only disclose latent defects."  On the evidence before it, the Court found that there was only one relevant flooding event and that was caused by vandalism combined with poorly maintained highway ditches - not by the dam encroachment.  This was not a latent defect known to the vendor.

Also, the sale contract provided for an inspection to confirm property boundaries, which would have revealed the actual boundaries and whether there were any encroachments (i.e. the dam).  However, the purchaser did not complete an inspection.  If there was an encroachment, the Court found that it could have been identified by reasonable observation (i.e. a patent defect).  Moreover, the encroachment that did exist was a minor one and in no way rendered the residential premises unfit for habitation.

The purchaser was bound to close the transaction and, as a result of his failure to do so, was found liable to pay damages including the decrease in the sale price obtained by the vendor and various carrying costs incurred when the property had to be offered for sale again.

Read the decision at: Ganges Kangro Properties Ltd. v. Shepard.

Court dismisses contamination claim against former gas station as out of time

The Ontario Superior Court of Justice has thrown out a contamination claim against a former gas station as being out of time.  The Defendants in the claim, McColl-Frontenac Inc. and Imperial Oil Limited, previously owned and/or operated a gas station on the lands at issue in the claim.  The Plainitffs, who later purchased the lands from intermediate owners, claimed that contamination on the property was caused by the former gas station operation. 

The Defendants brought a motion for summary judgment asking that the Court dismiss the claim based on the expiry of the relevant limitation period.  In this case, the limitation period was two years and had expired before the Defendants say the Plaintiffs knew they had a claim or should have known they had a claim against the Defendants. 

The evidence showed that the Plaintiffs obtained environmental reports when they purchased their property (actually two contiguous properties owned by two companies with a common directing mind).  At least one of the reports identified that the property had been used as a gas station at some point in the past.  The Defendants argued that a reasonable person would have made inquiries to find out who owned/operated the gas station.  The Court agreed:

With the exercise of very little effort, between March 2006 and May 2006, the plaintiffs could quickly have determined that McColl-Frontenac and Texaco (now Imperial Oil) had leased the Bolton Oak property in the 1950s and 1960s.  This information could be obtained by searching publicly accessible records at the land registry office and entails minimal expense.

[...]

Put another way, it would be glaringly apparent to any reasonable commercial land purchaser acquiring land known to contain petroleum contamination that, as between:

            a)         prior use of the property as a veterinary hospital by the vendor; and

            b)         prior use (pre-vendor) of the property as a gas station;

the more likely, if not obvious, responsible candidates for the cause of the petroleum contamination would have been those associated with the gas station.

On this basis, the Court granted summary judgment and dismissed the claim.  The Court also rejected an argument that there was continuing damage that extended the time in which to bring an action.  The Court found that the Plaintiffs had not pleaded any continuing damage and, further, that there was no evidence of continuing damage (the evidence was that the contamination was there, but not increasing or changing).

Read the decision at: Bolton Oak Inc. et al. v. McColl-Frontenac Inc. et al.

Vendor liable to tenants for winter wheat revenue lost when rental property sold

The Superior Court has awarded a couple the revenue associated with a wheat crop they lost when their landlord sold a farm out from underneath them. The defendant, Wendy Wilson, was the owner of two farms.  In 2002, she decided, after decades of carrying on a farming operation, to rent out her two farms.  The plaintiffs, Leslie and Tammy Young, were a husband and wife team who own approximately 600 acres of land and rent a further 1,000 acres on which they grow various crops including corn, soybeans and wheat.  They leased the two farms from Wilson and had already planted winter wheat on one of the farms in the fall of 2007 when they discovered that Wilson had listed the property for sale. 

Ms. Wilson sold the farm in question on April 30, 2008, with a closing date of May 2008. There is evidence, which was accepted by the judge in this case, that the purchaser knew that the crop of wheat was as a result of a tenant’s efforts. The judge also accepted that the purchaser was told by the vendor’s agent, that the tenant’s input costs were $9,000.00, which the purchaser agreed to pay. The purchaser did not deal directly with the tenant. This litigation arose because Ms. Wilson sold the purchaser a crop of wheat which she did not own.

The wheat crop was valued at more than $43,000 and the court awarded damages to the plaintiffs in this amount.

Read the decision at: Young v. Wilson.