A right of first refusal grants one party certain rights before these rights becomes available to anyone else. In the context of a property or leasing transaction, it is usually a contractual right to purchase or to decline purchasing, before the grantor is allowed to transact with someone else.
The wordings of right of refusal clauses can vary greatly. On one end, one may have a very detailed clause which describes the mechanism of offer and acceptance. On the other end, one may have a very simple clause where the grantor gives the grantee a right of first refusal with no reference to an option, to the terms or an offer to the purchase.
The case of Butchart & Anor v Sinnamon & Ors  QSC 317 (“Butchart v Sinnamon”) relates more to the later example above and examines the obligations of a seller where a purchaser was granted a bare right of first refusal in a sale of residential land.
In Butchart v Sinnamon, Mr Sinnamon owned a parcel of land which he subdivided into Lots 30 and 31. In 2019, Mr Sinnamon and the Butcharts entered into a contract for the sale of Lot 31 which contained a special condition right of refusal in favour of the Butcharts with the following words (“Special Condition”):
“The Seller, who also owns Lot 30, 330 Priors Pocket Road, Moggill QLD 4070, agrees to give the Buyer first right of refusal to purchase Lot 30, 330 Priors Pocket Road, Moggill QLD 4070 when the Seller is looking to sell at a future date.”
The Butcharts claimed that Mr Sinnamon had not afforded them with their right of refusal before he signed a contract to sell Lot 30 to a third party. They argued that the Special Condition required Mr Sinnamon to contact them once the sale reached a stage where a third party and the terms of the sale had been identified and to offer the Butcharts on those terms before contracting with the third party. Conversely, Mr Sinnamon argued that less was required of him.
Evidence suggested that, prior to the marketing of Lot 30, Mr Sinnamon had contacted Mr Butchart and asked whether he wanted to buy it at a price of approximately $1.2 million. There was further evidence to suggest that Mr Butchart advised then they were not in a position to buy the Lot unless payment was deferred by 12 months.
The bare right of refusal in this case was merely a right to refuse an opportunity to buy the land. It would be sufficient if a reasonable opportunity to buy or refuse to buy at the price the grantor genuinely wanted, was given to the grantee before the grantor had contracted to sell the land to anyone else. As such, the judge held that Mr Sinnamon had discharged his obligation under the Special Condition when he gave the Butcharts an opportunity to purchase the lot at a price of “approximately $1.2 million” which the Butcharts had refused unless the obligation to pay for the land was deferred.
What was interesting to note was that if the parties were commercially entangled, the construction of a bare right of refusal might be different. The Judge contrasted this case with the case of White Property Developments Ltd v Richmond Growth Pty Ltd & Ors  FCA 26 (“White Property v Richmond”) where the wordings of the right of first refusal was similarly as simple and undetailed. In White Property v Richmond, Richmond Growth (the grantor of the right of refusal) had bought right to acquire a land whereby White Property (the grantee of the right of refusal) was an experience shopping centre developer whom had spent professional time and effort in assisting Richmond Growth to obtain council approval for the development of a shopping centre. The context of the right was more complicated given the extensive involvement of White Property in obtaining council’s approval. Hence, the right of refusal was construed as a right to accept an offer on terms (or subsequent offer on more favourable terms) upon which the property would actually be sold by the grantor.
The wordings of the Special Condition nor the context in which the right had arisen obliged Mr Sinnamon to give the Butcharts a second or subsequent opportunity to match the more favourable terms offered by the third party.
In conclusion, one should look at the following in construing the meaning and corresponding obligation arising from a right of refusal:
- the content of the right of refusal; and
- in the absence of content of the right, the surrounding facts, circumstance and conduct of the parties.
Where there is no specific procedure or mechanism prescribed by the right of refusal, and in the context of a simple arm’s length transaction, all that is required by the grantor is to offer the grantee an opportunity to refuse or accept at a price he or she genuinely wants.
One should seek legal advice in order to ensure that the wordings of a right of first refusal is, in the case of a buyer or lessee, sufficient to protect their interest or, in the case of a seller or landlord, one which obligation under the right is sufficiently limited.
Please contact the writer should you wish to discuss or require assistance with your property and leasing matters.
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