22 February 2022
4 min read
#Property, Planning & Development, #Dispute Resolution & Litigation
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A first right of refusal is a contractual right granted to a person to purchase land before the proprietor enters into an agreement to sell the land to a third party. In effect, the right grants to the person an opportunity to buy the land before any other person.
The decision of Butchart & Anor v Sinnamon & Ors [2021] QSC 317 is important in clarifying the obligations of a seller where a residential sale contract grants the purchaser a bare right of first refusal.
This case is important for sellers and buyers alike and emphasises the need for contracts to be carefully drafted where parties contemplate a first right of refusal.
Mr Sinnamon owned and subdivided a piece of land into two lots, Lot 30 and 31, respectively. In 2019, Mr Sinnamon sold Lot 31 to Mr and Mrs Butchart. The sale contract contained a special condition that granted a bare right of refusal to the Butcharts:
“The Seller, who also owns Lot 30…..agrees to give the Buyer first right of refusal to purchase Lot 30…when the Seller is looking to sell at a future date”.
The parties agreed upon the special condition, which was not professionally drafted.
On 13 July 2021, Mr Sinnamon signed a contract to sell Lot 30 for $1.17 million to the second respondent. Shortly before the contract was to settle, Mr Butchart commenced proceedings against Mr Sinnamon claiming that he had not afforded them their first right of refusal. Mr Butchart argued that the special condition obliged Mr Sinnamon to contact the Butcharts when he was ready and willing to contract with a third party purchaser, inform them of the terms upon which he was willing to contract and offer them Lot 30 on those terms before entering into a contract with the third party.
Mr Sinnamon argued that the special condition required less of him and that he had sufficiently complied with this condition when he contacted Mr Butchart and asked him if he wanted to purchase the land for $1.2 million before contracting with the second respondent. The evidence suggested that Mr Butchart told Mr Sinnamon that he could not afford to buy the land unless there was a 12 month settlement.
The court found that the Butcharts’ right of first refusal was exhausted when Mr Sinnamon asked Mr Butchart if the Butcharts wanted to buy the land for $1.2 million and Mr Butchart said that they could not purchase it for that price unless there was a 12 month settlement.
In requiring the contract to provide for a 12 month settlement, to which Mr Sinnamon did not agree with, Mr Butchart decided not to buy the land. The clause did not impose a further obligation on Mr Sinnamon to make a second offer to the Butcharts at a reduced price of $1.17 million before contracting with the second respondent.
The drafting and content of ‘first right of refusal’ clauses vary significantly, with some clauses containing detailed procedures and others being considerably less sophisticated. In each case, the obligations created by the clause will depend on the content of the clause and the context in which it was drafted.
In determining Mr Sinnamon’s obligations under the special condition, Dalton J found that the brevity of the special condition was a relevant consideration. Where the special condition contained a bare right of refusal and did not provide a procedure to be followed according to that right, Mr Sinnamon was only required to afford the Butcharts a reasonable opportunity to buy or refuse the land at a price that he would genuinely accept before contracting to sell the land to a third party.
However, Dalton J clarified that in certain commercial contexts where the parties have become ‘commercially entangled’, a bare right of refusal may impose more stringent obligations on the grantor. In each case, the court will carefully consider the facts, circumstances and conduct of the parties involved.
The content of a bare right of refusal and the context in which it is made will impact the obligations created by the clause.
If the clause is made in the context of an uncomplicated arm’s length sale of residential land, a reasonable opportunity to buy or refuse the land before contracting with a third party is all that is required. However, if the parties are commercially involved, a bare right of refusal may impose more onerous obligations on the grantor.
Legal advice should be obtained if a party wishes to include a first right of refusal clause in a sale contract for residential or commercial land, or if you are looking to enforce this right.
If you have any questions about this article or would like assistance with this issue, please contact us or send us your enquiry here.
Authors: Marguerite Xavier & Georgia Bailey
Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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