In the landscape of Canadian commercial real estate, the right of first refusal (ROFR) is a powerful contractual tool capable of materially shaping transactions. While ROFRs are conceptually straightforward and generally well understood in single-asset deals, they become significantly more complex in the context of package or portfolio transactions, where multiple properties are sold as a bundle and one or more are subject to ROFRs held by multiple parties.
These transactions raise difficult questions, such as: (i) when is a ROFR triggered by a portfolio sale; (ii) does a ROFR apply only to the encumbered asset or to the entire portfolio; and (iii) how can vendors preserve deal certainty while remaining compliant with contractual obligations?
This blog examines the limited Canadian jurisprudence on portfolio ROFRs and outlines practical strategies for vendors and purchasers navigating portfolio sales.
The Contractual Nature of ROFRs
ROFRs are creatures of contract. Accordingly, the analysis of any claim must begin with the precise language of the agreement that creates or grants the right.
Typically, a ROFR gives the holder of the right the opportunity to match a bona fide third-party offer that the vendor is prepared to accept. If exercised within the specified period, the ROFR results in a binding agreement on the same terms. If waived, the vendor may proceed with the third-party transaction. While this framework is straightforward when viewed in isolation, its application becomes far less certain in portfolio transactions.
Limited and Conflicting Jurisprudence
Little has been written in Canada in the real estate context on portfolio ROFRs, and there is limited and contradictory direction from the courts.
Budget Car Rentals Toronto Ltd. v Petro-Canada
In Budget Car Rentals, the Ontario Court of Appeal considered the scope and operation of a ROFR in the context of a bulk asset sale. In this case, the vendor sold all of its marketing and refinery assets in eastern Canada for a single, aggregated purchase price (amounting to hundreds of millions of dollars) without first providing the ROFR holder an opportunity to purchase the subject property to which the right applied.
Ultimately, the court found that the ROFR was not applicable in the context of the specific portfolio sale. The court found that although the ROFR "amounted to an option to purchase under certain conditions", the contractual conditions for its exercise had not been strictly met. Specifically, (i) the vendor had not obtained a signed offer, and (ii) the sale included a number of assets (such as the business assets) as opposed to just the property subject to the right.
Alim Holdings Ltd. v Tom Howe Holdings Ltd
In contrast, in Alim Holdings, the British Columbia Court of Appeal found that a ROFR was applicable in the context of a portfolio sale.
This case concerned a proposed sale of two subdivided parcels: Parcel A and Parcel B. Parcel A was leased to White Spot Limited (WSL) and Parcel B was leased to CIRP Management Ltd. (CIRP). Each lease contained a ROFR in favour of the respective tenant over its leased parcel.
Tom Howe Holdings Ltd. and R.S.H Investments Ltd. (the Vendor) elected to market the two properties as a portfolio, taking the view that a combined sale would maximize value. The Vendor retained Colliers Macaulay Nicolls Inc. (Colliers) to approach both WSL and CIRP regarding a potential acquisition of both parcels for C$11.5 million. WSL advised that it was not prepared to make an offer at that time, leading Colliers to assume that WSL would not exercise its ROFR.
Alim Holdings Inc. (Alim), a neighbouring property owner, subsequently offered to purchase both parcels for C$10 million, with no allocation of price between the parcels. The accepted offer was expressly conditional upon the satisfaction or waiver of conditions precedent relating to the two ROFR holders. CIRP declined to exercise its ROFR. WSL, however, upon receiving notice of the accepted offer, elected to exercise its ROFR and sought to acquire both parcels on the terms set out in the agreement by circulating a letter to the Vendor.
The Vendor advised Alim that WSL had exercised its ROFR. In response, Alim delivered a proposed amending agreement that allocated the purchase price between Parcel A and Parcel B. The Vendor refused to execute the amending amendment and instead notified Alim that the conditions precedent in the accepted offer had not been satisfied or waived, rendering the agreement null and void. The Vendor then proceeded with a sale to WSL. This sale was not completed, however, as Alim commenced an action against the Vendor for breach of the purchase agreement and subsequently obtained an injunction restraining the Vendor from transferring the properties to WSL.
In considering the accepted offer in the context of the portfolio sale over ROFR-encumbered lands, the court held that a ROFR may be triggered by a portfolio sale unless the agreement expressly limits its application, such as offers solely for the encumbered property. In the court's view, an offer to purchase a property subject to a ROFR, even if it includes other assets, is nevertheless an offer to purchase that property and can engage ROFR obligations.
The court ultimately determined that WSL did not have the right to purchase both parcels; instead, it was entitled to purchase only Parcel A. Additionally, the court concluded that WSL's letter constituted an effective exercise of its ROFR. Consequently, the conditions precedent outlined in the accepted offer were not satisfied, rendering the accepted offer null and void. As a result, Alim's appeal was dismissed.
Adesa Auctions of Canada Corp. v Southern Railway of British Columbia
In Adesa Auctions, the British Columbia Supreme Court considered the scope and operation of a ROFR in a portfolio sale involving five parcels of land collectively valued at C$16 million. The defendant, Southern Railway of British Columbia Limited (SR), held a ROFR over one of the five parcels. Adesa Auctions of Canada Corp. (Adesa) provided a ROFR notice to SR that could have been interpreted as either an offer to sell the encumbered parcel for the bulk price of all five parcels or an offer to sell the entire portfolio of parcels. Importantly, there was no allocation of price among the parcels.
The court held that the ROFR notice was invalid. In doing so, the court stated that (i) Adesa could not circumvent the ROFR with respect to the encumbered parcel by deciding to sell the parcel as a portfolio and (ii) SR could not be forced to purchase five lots in order to preserve its rights with respect to the single ROFR parcel. Although not directly addressed by the court, the decision implies that the vendor was under an obligation to allocate a purchase price to the ROFR-encumbered property.
Practical Challenges for Vendors
In light of the foregoing, portfolio transactions involving ROFR-encumbered properties present recurring challenges for vendors.
First, most ROFRs are drafted to apply to a specific property. Offering an entire portfolio to a ROFR holder may not constitute compliance with the ROFR, as the holder cannot be compelled to acquire assets beyond the encumbered property. Attempting to condition the exercise of the ROFR on the purchase of additional properties may expose the vendor to allegations of non-compliance and risks of failure to meet contractual obligations.
Second, where a ROFR holder elects to purchase the specific property subject to its right, the vendor is left to confront a practical and commercial dilemma: how does that partial exercise affect the third-party purchaser who intended to acquire the portfolio as a whole?
Structuring Portfolio Sales Involving ROFRs
While judicial interpretation may vary, it appears that when structuring a portfolio sale of properties that includes one or more ROFR-encumbered properties, the safest solution is for the vendor to present each ROFR holder with a purchase and sale agreement (PSA) tailored to each specific property. The PSA should closely mirror the terms of the head PSA with the portfolio buyer, incorporating relevant allocations such as the purchase price for each property, vendor-take-back mortgage terms, and other key details (assuming the vendor is required by the ROFR).
The portfolio buyer should then be provided the opportunity to acquire any properties not purchased by the ROFR holders. If a ROFR holder exercises its right, the property should be carved out of the portfolio transaction. As a result, the portfolio buyer may not receive the full portfolio of properties as initially anticipated. This notion underscores the significant impact ROFRs may have on the structure and outcome of such transactions, and demonstrates the risks associated with pursuing a portfolio transaction. However, this approach helps to ensure vendors are meeting their contractual obligations by abiding by the terms of applicable ROFRs.
Vendors and purchasers should also consider the following best practices:
- Prepare a substantially finalized and executed purchase and sale agreement (PSA) before approaching ROFR holders. What is presented to each ROFR holder should be carefully considered based on the terms of the particular ROFR. Depending on the language of the ROFR, a vendor may be obligated to re-issue the ROFR offer if material terms change in the head PSA. A more complete PSA reduces the risk of re-engagement if material terms change.
- As a corollary to the point above, exercise caution when amending the PSA after a ROFR waiver is obtained. Certain ROFR agreements prohibit material amendments, such as changes to purchase price, closing dates, or conditions, without triggering a renewed offer obligation. Re-issuing ROFR notice may create delays as the ROFR holder will have a specified time period to accept the offer (depending on the terms of the ROFR). Ideally, vendors should avoid changing terms in the PSA following ROFR notice waiver.
Conclusion
ROFRs can materially affect the execution of portfolio transactions. Vendors and purchasers must balance contractual compliance with deal certainty through careful planning and structuring. By understanding ROFR obligations and planning proactively, vendors and purchasers can navigate portfolio sales confidently, preserving both compliance and commercial outcomes.
To discuss how Bennett Jones can help your organization navigate portfolio sales involving ROFRs, please contact one of the authors or a member of the firm's Commercial Real Estate group.
