SBS Sealants Inc. v. Robroy Industries Limited et al.

[Indexed as SBS Sealants Inc. v. Robroy Industries Ltd.]

59 O.R. (3d) 257

[2002] O.J. No. 1535

Docket No. C35686

Court of Appeal for Ontario,

Finlayson, Carthy and Cronk JJ.A.

April 25, 2002

Real property -- Right of first refusal -- Waiver -- Right of first refusal contained in lease -- Landlord receiving offer to purchase subject to tenant's right of first refusal -- Tenant given opportunity to exercise right of first refusal -- Tenant indicating unwillingness to match price contained in offer to purchase -- First agreement treated as nullity and landlord accepting second agreement that was not subject to tenant's right of first refusal -- Right of first refusal remaining operative -- Waiver of right of first refusal not established -- Right of first refusal becoming equitable interest in land -- Right of first refusal having priority over offer to purchase -- Tenant entitled to specific performance -- No equitable grounds to refuse decree of specific performance.

Sale of land -- Specific performance -- Right of first refusal -- Waiver -- Right of first refusal contained in lease -- Landlord receiving offer to purchase subject to tenant's right of first refusal -- Tenant given opportunity to exercise right of first refusal -- Tenant indicating unwillingness to match price contained in offer to purchase -- First agreement treated as nullity and landlord accepting second agreement that was not subject to tenant's right of first refusal -- Right of first refusal remaining operative -- Waiver of right of first refusal not established -- Right of first refusal becoming equitable interest in land -- Right of first refusal having priority over offer to purchase -- Tenant entitled to specific performance -- No equitable grounds to refuse decree of specific performance.

In April 1994, R Ltd. as landlord signed a lease with W. Ltd. as tenant. The lease contained a right of first refusal that stated: "If the landlord, during the term of the lease, finds a qualified purchaser for the building, the tenant will be given the right of first refusal to purchase same." In November 1998, R Ltd. signed an agreement to sell the premises to SBS, and the agreement was made subject to W Ltd.'s right of first refusal. When W Ltd. pointed out that the agreement included property not owned by R. Ltd., the agreement was treated as a nullity. Then all three parties met and, at the meeting, W Ltd.'s representative made it known that it would not buy at the proposed price. On December 18, 1998, R Ltd. and SBS entered into a second agreement, which made no reference to the right of first refusal. The price in the second agreement was the same as in the first agreement less the value of W Ltd.'s property. The second agreement was conditional on an environmental assessment report, but before the report was released, W Ltd. purported to exercise its right of first refusal. R Ltd. then entered into an agreement to sell to W Ltd., and SBS responded with an action for specific performance. W Ltd. also sought specific performance. The trial judge held that W Ltd.'s right of first refusal was too uncertain to be enforced, particularly because it contained no time period during which it could be exercised. The trial judge granted specific performance to SBS, and W Ltd. appealed.

Held, the appeal should be allowed.

The provision in the lease was not defective as a right of first refusal. The parties here knew precisely what was meant by the words used. The purpose of the right of first refusal was to give the tenant an opportunity to match any offer the owner was prepared to accept. Where, as here, all offers that the owner was prepared to accept are subject to the right of first refusal, a specific time provision would be counterproductive in that it could not be written to embrace all potential offers and the timing provisions in them. An implied term must be read into such agreements that the offer will be presented and the right exercised in a reasonable time given the circumstances that exist when the offer is made. The effect of W Ltd.'s having a right of first refusal is that the right would move from a contractual right to an equitable interest in land and become an option to purchase at the moment that SBS made an offer that R. Ltd. was prepared to accept. The question then was whether the equities barred W Ltd. from asserting its interest.

The trial judge did not deal with waiver but the reasons do not suggest that W Ltd. was giving up any legal entitlements, at least not intentionally, and the parties did not treat W Ltd.'s conduct as a waiver. W Ltd.'s representative was being a businessman seeking the lowest price for a purchase and then making an offer at the offering price. W Ltd. did not waive its right of first refusal. Once it was found that W Ltd.'s representative conducted himself as a businessman, even with some guile, but that his conduct secured him no advantage, there was no basis to deny W Ltd.'s entitlement as a matter of the equities. Although the trial judge was less than impressed, none of W Ltd.'s conduct, however characterized, had any effect on the contractual relations between any of the parties. The only effect was that R Ltd. and SBS naïvely believed that W Ltd. was not interested and therefore ignored its interest. The option to purchase, however, was operative. Thus, SBS took its interest with notice of W Ltd.'s pri or interest and no equity stands in the way of W Ltd.'s claim to specific performance.

APPEAL from a judgment of Herold J., [2000] O.J. No. 4862 (S.C.J.) in an action for specific performance.

Cases referred to Baykey v. North West Office Furniture Ltd. (1992), 22 R.P.R. (2d) 67 (B.C.S.C.); Harris v. McNeely (2000), 2000 5649 (ON CA), 47 O.R. (3d) 161, 31 R.P.R. (3d) 249 (C.A.); McFarland v. Hauser (1977), 1977 ALTASCAD 87, 2 Alta. L.R. (2d) 289, 3 A.R. 449 (C.A.), revd (1978), 1978 164 (SCC), [1979] 1 S.C.R. 337, 23 N.R. 362, 7 Alta. L.R. (2d) 204, 88 D.L.R. (3d) 449, 12 A.R. 332; Royal Trust Corp. of Canada v. Mahoney (1993), 34 R.P.R. (2d) 65; Sniderman v. Richman, [1995] O.J. No. 4683 (Gen. Div.) Authorities referred to Sharpe, R.J., Injunctions and Specific Performance, looseleaf (Toronto: Emond Montgomery Publications Ltd., 2001)

Timothy C. Flannery, for appellant. Michael Farace, for respondent. D.R. Arthurs, for defendant Robroy Industries Ltd.

The judgment of the court was delivered by

CARTHY J.A.: --

Introduction

[1] Robroy Industries Limited is the owner of an industrial property in the County of Wellington and has signed two agreements to sell the property, one to SBS Sealants Inc. and the other to the tenant of the property, Wavell Electric Ltd. The issue on appeal is whether SBS or Wavell is entitled to specific performance. The trial judge made the award in favour of SBS, and Wavell appeals, seeking the reciprocal award in its favour. For the reasons that follow, I would allow the appeal.

Facts

[2] In April 1994, Wavell entered into a five-year lease of the premises with a right of first refusal during the term of the lease. In November 1998, Robroy entered into an agreement of purchase and sale with SBS providing for the sale of the land, building and certain of the contents for $628,000. That agreement was by its terms made subject to Wavell's right of first refusal and was immediately forwarded to Wavell, who pointed out that it owned some of the contents Robroy was purporting to sell. As a result, the agreement was treated as a nullity and the representatives of the three parties met at the plant to identify and appraise the value of the chattels that would not be part of the sale.

[3] From this point forward, on the trial judge's findings, Andrew Lindsay, the Wavell representative, made it known to all concerned that he considered the offering price too high and that he would not consider buying at the price SBS was considering. He was so convincing that SBS and Robroy entered into a second agreement on December 18, 1998, making no reference to the right of first refusal. That agreement, which was for the same amount as the original agreement less the value of the tenant's chattels, was conditional on the result of a forthcoming environmental assessment.

[4] Before the environmental assessment report was released, Wavell indicated to Robroy that it was indeed going to exercise its right of first refusal. Following satisfaction of the condition, Robroy entered into an agreement of purchase and sale with Wavell on the same terms as the agreement of December 18th with SBS minus the environmental condition. That set the framework for the action that followed, with both SBS and Wavell seeking specific performance and Robroy standing in the middle.

[5] Each of the claimants elected to restrict its claim to specific performance and, in any event, the trial judge found that neither had proved damages.

Analysis

[6] Feldman J.A. clearly stated the legal status and effect of a right of first refusal in Harris v. McNeely (2000), 2000 5649 (ON CA), 47 O.R. (3d) 161, 31 R.P.R. (3d) 249 (C.A.) at para. 12 [p. 165 O.R.] as follows:

The analysis turns on the legal status and effect of a right of first refusal. Two decisions from the Supreme Court of Canada and one from this court have established the following propositions:

(1) A right of first refusal is a personal right which does not run with the land. [Footnote omitted]

(2) At the point in time when the grantor of the right receives an offer to purchase the grantor's interest which the grantor is prepared to accept, the grantee's right of first refusal is converted into an option to purchase which is an equitable interest in the land.

(3) Where land is transferred in breach of the agreement containing the right of first refusal and the transferee takes with notice of the restriction which bound the transferor/grantor, the transferee is liable to be joined and bound by an order of specific performance requiring the transferor/grantor to transfer the land to the grantee with the option.

[7] Applying these principles to the facts of this case, Wavell, if it had a right of first refusal, would move from having a contractual right to having an equitable interest in the land and an option to purchase at the moment that SBS made an offer that Robroy was prepared to accept. The question, then, is whether the equities bar Wavell from asserting its interest.

[8] The trial judge's analysis took a very different direction. Armed with the trial judgments in Baykey v. North West Office Furniture Ltd. (1992), 22 R.P.R. (2d) 67 (B.C.S.C.), Sniderman v. Richman, [1995] O.J. No. 4683 (Gen. Div.), and Royal Trust Corp. of Canada v. Mahoney, [1993] O.J. No. 1944 (Gen. Div.), he found the right of first refusal provision in the lease to be too vague and uncertain to be enforced, particularly because it contained no time period during which it could be exercised.

[9] That finding left the trial judge with two executed agreements to contend with and, after considering all of the circumstances, he eventually gave precedence to the earlier of the two agreements.

[10] The provision in the Wavell lease reads:

If the landlord, during the term of this lease, finds a qualified purchaser for the building, the tenant will be given the right of first refusal to purchase same.

[11] I do not agree that the above-cited provision is defective as a right of first refusal and thus my reasoning from this point forward diverges from the path taken by the trial judge.

[12] A similar provision for a right of first refusal in a lease was considered in McFarland v. Hauser (1977), 1977 ALTASCAD 87, 3 A.R. 449 (C.A.), revd on different grounds (1978), 1978 164 (SCC), [1979] 1 S.C.R. 337. That provision read:

Both parties hereby agree that in the event of the land being sold, the lease will terminate at the end of the term then in progress, being further agreed that the Lessee shall at all times have the first option to meet or decline the purchase offer.

[13] In response to an argument that the clause was void for uncertainty, Clement J.A., speaking for all five members of the Court of Appeal panel, said at para. 50:

The term under consideration here is to the effect that "the lessee shall at all times have the first option to meet or decline the purchase offer". It may be that these words did not give McFarland much flexibility or room within which to manoeuvre, but the words seem clear enough to me. Whatever proposed purchase offer was to be made with Sunderland was required to be put to McFarland so that he could match it. If he failed, then Hauser had satisfied his obligation. The option of February 28, 1974 provided for a sale price of $190,000.00, with $1.00 down to be exercised by March 8, 1974 by payment of $10,000.00 down, possession subject to the lease by July 1, 1974. In my opinion there is no difficulty in reading the above language to require Hauser to put the above terms up to McFarland and request him to say "yes" or "no". All McFarland had to say was "yes" or "no". If "yes" then he took over as if he was Sutherland and had every obligation set forth in the option, no more and no less. I fail to see any uncertainty in this respect.

[14] The Supreme Court of Canada agreed with the reasons of Clement J.A. on this issue without further comment.

[15] I can see no material difference between the clause under consideration in McFarland and the one before this court. The parties here knew precisely what was meant by the words used, as evidenced by their inclusion of a condition in the first sale agreement and the later compliance by Robroy when Wavell made its demand for execution of an identical agreement.

[16] The purpose of the right of first refusal was to give the tenant an opportunity to match any offer the owner was prepared to accept. Such offers might be open for hours or days and the time for presentation, consideration and an election must, of necessity, be whatever is reasonable in the circumstances. A time for acceptance would be a sensible term if the right of first refusal also provided that the owner must obtain an offer from the proposed purchaser conditional on the non-exercise of the right of first refusal. In that case the offeror would know and be bound by the time provisions in the option. However, where, as here, all offers that the owner was prepared to accept -- even unilateral ones -- are subject to the right of first refusal, a specific time provision would be counterproductive in that it could not be written to embrace all potential offers and the timing provisions in them. An implied term must be read into such agreements before the court, namely, that the offer will be presented and the right exercised in a reasonable time given the circumstances that exist when the offer is made.

[17] On my analysis up to this point it must be concluded that at some point in the discussions leading to the execution of the agreement between Robroy and SBS on December 18, 1998, Wavell's contractual right ripened into an option and an equitable interest in the property. SBS was aware of this interest. Unless Wavell is disentitled by waiver, being out of time, or some equitable principle standing in the way of specific performance, its interest must prevail over that of SBS.

Waiver

[18] The trial judge rejected the evidence of Andrew Lindsay (the Wavell representative) and preferred the evidence of Lou Kirchner (the Robroy representative) as to what occurred on December 18. Specifically, he found, at paras. 13 and 18:

There is evidence before me which, in the circumstances, I find reliable that Andrew Lindsay was indicating to any who would listen that he had no intention of paying the amount which SBS was considering. I appreciate that Mr. Lindsay may well have been simply playing his cards close to his vest -- he impressed me as a very shrewd and obviously very successful businessman. It is entirely conceivable that he would try to low ball the value of the building as much as possible since his company Wavell would be the ultimate beneficiary of a low purchase price if they chose to exercise the right of first refusal. Whatever Mr. Lindsay's reasons may have been, I have no hesitation whatsoever in accepting the evidence that he was intentionally giving the impression, at least, that he was not interested in the building in the price range which was being discussed.

Mr. Kirchner was so certain of Mr. Lindsay's position as it had been expressed to him that when Kirchner met with the real estate agent, Doug Finlay, and Scott Gray, the representative of SBS, to negotiate the new Agreement of Purchase and Sale, the question of whether or not to incorporate a condition into the agreement with respect to the right of first refusal came up on several occasions -- Gray and Finlay agree that it was probably at least four times -- and Kirchner made it abundantly clear that he was so satisfied from his meeting with Mr. Lindsay that Wavell was not interested in purchasing the property that a condition would not have to be included; accordingly no such condition was included in the December 18th agreement.

[19] Scott Gray, on behalf of SBS, put it this way in cross- examination:

Q. All right. Did Mr. Lindsay ever say anything different about what that right of first refusal meant?

A. He never discussed it because every conversation I ever had with him he wasn't going to buy the building.

Q. Now, that interests me. You've indicated in your testimony early that that was your assumption. Did he ever say to you outright"I am not going to buy this building."

A. Yes, he did, on more than one occasion.

Q. Well, I understood, sir, that he talked to you about price. That's what I heard your evidence earlier.

A. And that, that is my evidence still is that he had said that he would not pay more than $400,000 for the building, that I was crazy.

Q. All right. Now, you're a smart businessman, sir. You realize that having heard that if he had a right and had to match whatever offer you went in, would you not agree with me it would make sense for him to try to entice you to make the lowest possible offer? After all, if he had to match it, wouldn't that make good business sense?

A. I never, it never entered my thought process, but I would agree that, sure. We were both looking at buying the building as it turns out, that, fine, yeah.

[20] The trial judge does not deal with waiver, probably because of his finding that the right of first refusal was a nullity (although this did not deter him from other provisional findings). In any event, I do not read his reasons as suggesting that Mr. Lindsay, whom he described as "very bright and probably a good poker player", was giving up any legal entitlements, at least not intentionally. Nor did the other parties treat his conduct as a waiver. They predicted his future conduct on the basis of what he was saying; that is, that he would not exercise his right. But that is very different from giving up the right. And when Mr. Lindsay asserted Wavell's entitlement in January there was a minimum of fuss before Robroy acknowledged the right by a second agreement.

[21] As I see it, Mr. Lindsay was being a businessman, if a little too sharp for some, doing what businessmen do -- seeking the lowest price for a purchase. He did not succeed. SBS held steady with its offering price and Mr. Lindsay's disingenuousness was displayed. He did want it at the offering price! However, no one's position was altered by the December 18 agreement and, in the end, events would have run in the same path if the agreement had been made, as had the earlier one, conditional on the right of first refusal, except that this litigation would not have been necessary.

[22] I therefore conclude that Wavell did not waive its right of first refusal.

Timing of Exercise of the Option

[23] At para. 32 of his reasons, the trial judge had this to say as to timing:

I have concluded in all of the circumstances of the case at bar that the option is so vague as to be void and unenforceable. While it might be argued (as it was by Wavell) that the parties knew what was required in terms of matching a prior offer, no one knew, or could have known, the time period during which the right had to be exercised. Even if I had not so concluded, I would have concluded, in the absence of any specified time during which it should be exercised, that the delay in this case was fatal to its enforcement. It is not at all clear just what that period of delay is. Mr. Lindsay's evidence with respect to when he knew about the December 18th, Agreement of Purchase and Sale between SBS and Robroy is at best a moving target. His evidence at one point was that he did not know until approximately January 11, 1998, at another that he knew on perhaps the Monday after December 18th (December 21st). He purported to indicate verbally his intention to exercise his right of first refusal on January 22nd, followed up by a letter on January 26th, and an actual written offer which was submitted on February 8, 1999. The time periods reflected by this course of conduct make it clear why a right of first refusal must have clear time limits set out failing which it will be void for uncertainty.

[24] The trial judge, of course, was not directing himself to an implied term in the lease covenant for presentation and acceptance of an offer. This is not a case where we can assess timeliness in the context of an owner saying to the tenant"I have an offer and require your response in three days." Here, the owner did not present the offer before it became an agreement with SBS. That agreement locked in the equitable interest of Wavell within the interest acquired by SBS. No one was kept waiting for an answer with an offer dangling in anticipation. And no one was detrimentally affected by the timing of Wavell's assertion of its option because everyone was awaiting the completion of the environmental assessment. In these circumstances and in that context it is my conclusion that Wavell acted within a reasonable time.

The Equities

[25] Once it is found that Mr. Lindsay conducted himself as a businessman, even with some guile, and that his conduct secured him no advantage, it is difficult to see how any equity could intervene against Wavell's entitlement. Sharpe J.A. discusses the doctrine of clean hands in his text Injunctions and Specific Performance, looseleaf (Toronto: Emond Montgomery Publications Ltd., 2001) at para. 1.1030. The author makes it clear through the authorities cited that the misconduct complained of must have secured a person an advantage in the very contract sought to be enforced. It is not a doctrine admitting of a general moral assessment of the plaintiff. Here the trial judge was much less than impressed by Mr. Lindsay, but none of Mr. Lindsay's conduct, however characterized, had any effect on the contractual relations between any of the parties. The only effect was that SBS and Robroy naïvely believed Wavell was not interested and therefore ignored its interest. The option to purchase in the hands of Wavell was operative before and after the ultimate signature to the agreement of December 18th and no advantage was secured by Wavell through the conduct of Mr. Lindsay.

Conclusion

[26] Thus, I find the right of first refusal enforceable as a contract, that it became an option and gave Wavell an equitable interest in the property when Robroy decided to accept the SBS offer on December 18, that SBS took its interest with notice of the prior interest of Wavell, that Wavell acted within a reasonable time to exercise its option, and that no equity stands in the way of Wavell's claim to specific performance.

[27] The appeal should be allowed and the judgment revised accordingly with a closing date of July 15, 2002 for the transaction.

[28] The trial judge ordered that there be no costs to any of the parties. This was reasonable when SBS succeeded because SBS and Robroy intentionally omitted the condition from their agreement that would have avoided the litigation. With Wavell's success, the considerations change. It should have its costs throughout on a partial indemnity scale against both Robroy and SBS. Its bill of costs for the appeal has been filed and I would fix those costs at $7,500 plus GST for fees and $505.54 including GST for disbursements. We are not in a position to assess trial costs and they must be referred for assessment. The cross-appeal by SBS as to the disposition of costs at trial is now redundant and should be dismissed without costs.

Order accordingly.