Court File and Parties

COURT FILE NO.: CV-22-90550 DATE: 2023/01/25 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Margaret McMullen, Applicant AND Dilawri Property Holdings Ltd., Respondent

BEFORE: The Honourable Justice Charles T. Hackland

COUNSEL: Alyssa Tomkins and Jennifer Therrien, counsel for the Applicant Michael J.A. Beeson, counsel for the Respondent

HEARD: January 20, 2023 (Ottawa)

Judgement on an Application

[1] This is an Application brought on an emergency basis, seeking a Declaration pursuant to Rules 14.05(3)(d) and 14.05(3)(e) of the Rules of Civil Procedure, that the right of first refusal (ROFR) registered on the Applicant’s property, in favour of the Respondent, has been extinguished, as well as an Order removing the ROFR from title to the property. The Applicant has entered into an Agreement of Purchase and Sale (APS) for the property with a third party, the closing of which transaction has been extended to January 31, 2023 in order to deal with the ROFR issue herein.

[2] The ROFR was granted by the Applicant Margaret McMullen (Ms. McMullen) in favour of the Respondent Dilawri Property Holdings Ltd. (Dilawri Holdings) in November of 2019 as part of a transaction in which her numbered company sold three parcels of land to the respondent. There was a fourth adjoining parcel of land which she retained and on which she granted the ROFR.

[3] On January 17, 2022, Glenview Properties Inc. (“Glenview”) entered into an Agreement for Purchase and Sale (APS) for the property with Ms. McMullen (the “Glenview APS”). The Glenview APS contemplated the Respondent exercising its rights under the ROFR. As matters transpired the Glenview APS was provided to the Respondent who notified the Applicant on January 25, 2022, (within the required five business days provided for in the ROFR), that it would exercise its ROFR to purchase the property on the same terms and conditions as the Glenview APS.

[4] However, this transaction was never completed. The Applicant notified the Respondent of the waiver of her condition requiring the terms of the transaction be reviewed by her accountant and be satisfactory to her in her sole and absolute discretion, failing which the transaction would be deemed terminated. The Respondent Dilawri Holdings then had until May 16, 2022 to notify the Applicant of waiver or fulfillment of its conditions, one of which required that the buyer be satisfied in its sole discretion “generally as to the feasibility of developing the Property in the manner and at a cost suitable to the Buyer in its sole subjective opinion.” As the May 16, 2022 date approached, the Respondent, through its solicitor, sought a 60 day extension to complete its investigations into the feasibility of the transaction.

[5] On May 16, 2022 the parties and their solicitors met via videoconference to further discuss the Respondent’s request for an extension of time to waive this condition. The Applicant declined to agree to the requested extension and the transaction terminated on May 16, 2022. On that same day the Applicant agreed to accept another offer on the property, signing an APS with the new purchaser the following day. This new APS has not been provided to the Respondent, as the Applicant takes the position that the ROFR terminated when it was exercised by the Respondent.

[6] The Applicant has refused to produce the new APS on the basis that it contains a confidentiality clause and the details of the transaction constitute sensitive commercial information. In a recent motion before my colleague Justice Williams, the court declined to order production of the new APS, see McMullen v. Dilawri Property Holdings Ltd, 2022 ONSC 7182.

[7] The Respondent has concerns that the new purchaser is apparently the same company (Glenview) that had offered to purchase the property in the earlier APS that had triggered the Respondent’s ROFR. The concern also arises from the fact that the new offer was accepted the same day the ROFR transaction terminated due to the Respondent not waiving the condition that it be satisfied as to the economic viability of the transaction.

[8] Justice Williams held, and I respectfully agree, that the circumstances surrounding the latest APS are irrelevant to the issue before the court in this Application, which is the meaning to be attributed to the ROFR granted in 2019. This is a matter of contractual interpretation. As did Justice Williams, I accept the applicant’s submission that if she had brought this application before she received a second offer to purchase the property, she would have made precisely the same arguments on this Application.

Legal Principles

[9] It is a well-settled common law principle, not disputed by the parties in this Application, that if a right of first refusal is not exercised by its holder when a bona fide offer is made by a third party to purchase the property, it is spent and has no continuing force and effect. Similarly, a right of first refusal is extinguished once it is exercised, even if the grantee later declines to purchase the property. Once extinguished, the grantor is not required to submit a subsequent third-party offer for the property to the grantee. On the other hand, it is open to the parties to a ROFR to depart from the common law rules by providing that a right of first refusal can be a continuing right in specified circumstances. However, the words of the ROFR must provide for such a result.

[10] The above principles are summarized by Wachowich J. in Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1992), 89 D.L.R. (4th) 168 (Alta. Q.B.): “as mentioned previously, a right of first refusal is spent if it is not exercised once it has been triggered by the receipt of a bona fide offer by the vendor. In the present case, if Nestegg had decided not to exercise its right of first refusal upon being advised of the Interpro offer, assuming this offer to be bona fide, then Nestegg's right of first refusal would have ceased to exist. I am of the view that Nestegg should be in no better position for having chosen to exercise its right of first refusal and then later repudiate the agreement. The same consequence attaches as if it had not been exercised at all; the right of first refusal is determined”.

Analysis

[11] The question to be decided in this Application is whether the terms of the ROFR are sufficient to contract out of the well understood common law rule that the ROFR is terminated once the holder of the ROFR either declines to act on the offer once presented, or, as in the present case, takes up the offer and subsequently terminates the transaction.

[12] The ROFR registered on the subject property provides:

[13] The Applicant has set out in her factum the relevant rules of contractual interpretation, which apply to this ROFR. They are taken from the decision of the Supreme Court in Sattva Capital Corp v. Creston Moly Corp., 2014 SCC 53 and can be summarized as follows:

a. The purpose of the interpretation of a contract is to determine the intent of the parties and the scope of their understanding. To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.

b. While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract. While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.

c. The nature of the evidence relied upon as surrounding circumstances should consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting.

d. These surrounding circumstances cannot violate the parol evidence rule which precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing. To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties.

e. Courts should avoid interpretations of a contract that would result in an absurdity, repugnancy, or inconsistency which reasonable people could not have contemplated. under the circumstances.

[14] It can be seen that the words of the ROFR first provide that when the owner receives a binding offer to purchase the property acceptable to the owner from an arm’s length third-party (in this case the Glenview APS), the offer must be presented to the buyer (the Respondent Dilawri Holdings) who has five business days to deliver a notice to the owner (Ms. McMullen) of its intention to purchase the property on the same terms and conditions as the offer the owner received. Importantly, the ROFR then goes on to specifically address the situation when the buyer does not deliver a notice of intention to purchase the property. The concluding sentence of the ROFR provides:

Should the buyer not deliver written notice to the owner of its intention to purchase the ROFR Property within the ROFR Notice Period this ROFR shall be null and void and of no further force or Effect, however, Notwithstanding the foregoing, should the transaction contemplated in the Hazeldean Purchase Agreement not be completed for any reason, this ROFR shall be reinstated.

[15] The issue in this case is under what circumstances the ROFR “reinstated”? On the plain meaning of the words used, the ROFR is reinstated when the buyer has not delivered to the owner a notice of intention to purchase the property and the original transaction has not been completed. The parties do not dispute this. But another question arises, being the pivotal question in this case: is the ROFR reinstated when the buyer does deliver to the owner a written notice of intention to purchase the property? The court is of the opinion the above quoted clause does not purport to answer that question. However the established common law provides a clear answer, which is that the ROFR, because it has been exercised, is spent, or stated otherwise, is null and void.

[16] The Applicant argues, in my view correctly, that the ROFR reinstatement is subject to a specified prior condition, or condition precedent, which is that the buyer has not exercised its ROFR, which is the scenario discussed in the text immediately before the reference explaining when the ROFR is reinstated. The ROFR is silent as to the circumstance where, as in the present case, the buyer has exercised its right to take up the offer. It was open to the Respondent Dilawri Holdings, who originally prepared the ROFR clause, to have provided that the ROFR is also reinstated when the notice of intention to purchase the property is delivered by the buyer (the ROFR holder). That situation is not addressed in contrast to the situation when the ROFR is not exercised, which is specifically addressed.

[17] The Respondent submits the reinstatement provision should be interpreted to apply to any situation where the original transaction between the owner and the third party offeror is not completed for any reason. This would mean that any offer to purchase which the owner receives on an ongoing basis would be subject to the Respondent’s ROFR. Such an interpretation would arise from the phrase “notwithstanding the foregoing” being interpreted to mean “in any event”. The Respondent contends the reference in the ROFR to when the buyer does not deliver a notice of intention to purchase, thereby rendering the ROFR is null and void, is a complete or discrete thought separate from a subsequent different thought or matter, being the reference to the original transaction not being completed for any reason, resulting in a reinstatement of the ROFR. The Respondent contends a reinstatement of the ROFR occurs in all cases when the original transaction is not completed.

[18] In the court’s opinion the phrase “Notwithstanding the foregoing” is properly explained by interpreting “the foregoing” to refer to the immediately preceding references to the circumstance where the buyer does not deliver a notice of intention to purchase the property. This phrase serves to connect the thoughts so the meaning is that even when (or notwithstanding that) the buyer does not exercise the ROFR, if the original transaction is not completed for any reason, the ROFR is reinstated.

[19] What is left unanswered is the question of whether reinstatement of the ROFR occurs when the ROFR has been exercised by the ROFR holder and the transaction between the third party offeror and the owner is not completed. I would observe that because the exercise of a ROFR results in the termination of the original APS between the owner and the third-party offeror, there is no longer a transaction between them to be completed. The original APS (the Glenview APS) was terminated. Therefore, contrary to the Respondent’s interpretation, the non-completion of a transaction that no longer exists can hardly be a triggering event for the reinstatement of the ROFR. This strongly suggests the reinstatement clause was not intended to apply to a scenario such as occurred in this case, where the ROFR had been exercised.

[20] On the Respondent’s interpretation of the ROFR, when the Buyer exercises its right to purchase the property but chooses not to complete the purchase, and by doing so has prevented the owner from completing the original transaction with the offeree, the ROFR would be reinstated. This would permit the ROFR holder to repeatedly take up offers received by the owner and then not complete the purchase. This would be well beyond the normal rights of a party holding a ROFR and would seem to be commercially unreasonable. Such a right, which is a reversal of the common law rule, would have to be clearly set out and not implied from non-specific wording.

[21] The courts have recognized a duty of good faith and honest performance in the exercise of options to purchase and ROFRs, see Greta Energy Inc. v. Pembina Pipeline Corp, 2022 ONCA 783, applying Callow Inc. v Zollinger, 2020 SCC 45. The Respondent points out the Applicant would have a remedy if the Respondent were to use its ROFR rights in an oppressive or inappropriate manner. While this may be true, it does not warrant an unduly broad interpretation of the ROFR which, in the court’s view, would have been outside the parties contemplation when the ROFR was acquired by the Respondent in 2019.

Disposition

[22] In summary, the court concludes that the terms of the ROFR do not contemplate the reinstatement of the ROFR after the ROFR has been exercised, as occurred when the Respondent exercised its right to purchase the property in relation to the Glenview APS. The exercise of the Respondent’s ROFR resulted in the application of the common law rule that the ROFR, once exercised, was then spent and was null and void.

[23] A Declaration will issue that the Respondent’s ROFR registered on title of the property is extinguished and the Notice of Right of First Refusal (registered as instrument OC2173211 in the Land Registry Office #4) is ordered to be removed from the title of the property.

[24] With respect to costs, the Applicant is to provide her written costs submissions to the court within 14 days of the release of this endorsement and the Respondent will deliver its costs submission to the court within 14 days of receiving the Applicant’s submission.

Justice Charles T. Hackland Date: January 25, 2023