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Right of First Refusal to Lease – Get it Right, or Else!

If a tenant in a commercial building holds a right of first refusal (RFR) to lease any other floor in that building, and the landlord subsequently receives an offer to lease multiple floors, is the tenant’s RFR triggered? In the recent judgment of the Alberta Court of Appeal in Equinox Engineering v. Lavalin L.P. Investment Corp. (Equinox), the somewhat surprising answer to this question is "no."

In Equinox, the tenant leased three floors in an office building. The tenant’s lease included an RFR that would be triggered if the landlord received a bona fide offer to lease "any floor of the premises in the Building," in which case the tenant would have the first right to lease "the said floor" on the same terms and conditions as set out in the offer. The landlord subsequently received an offer to lease six floors and part of two additional floors. Although the tenant was not in a position to lease all the floors included in the offer, the tenant nonetheless took the position that the offer triggered its RFR to lease a single floor. The landlord disagreed, and the tenant brought an application for a declaration interpreting its rights. At first instance, the chambers judge agreed with the tenant but, on appeal, a majority of the court reversed the chambers judge’s decision. In reaching its decision, the majority was swayed by what it described as the "plain meaning of the words in the [RFR]," which indicated the tenant had only bargained for an RFR when a single floor became available.

Equinox has not been considered in British Columbia, and it appears our courts have yet to interpret an RFR to lease in circumstances similar to those that faced the court in Equinox. However, two earlier decisions relating to RFRs to purchase suggest that Equinox might have been decided differently had it been litigated in British Columbia. In Associated Graphic Supplies Ltd. v. B. & L. Properties Development Ltd. (Associated Graphic), a tenant held an RFR to purchase certain lands it had leased. The landlord received an offer for those lands as well as additional lands. The landlord communicated the offer to the tenant, but refused to allocate a price to the lands charged by the tenant’s RFR. The court found that, as a result of the RFR, the landlord was obliged not to accept an offer for a package of properties, including the lands charged by the RFR. The tenant was awarded damages. Similarly, in ADESA Auctions of Canada Corporation v. Southern Railway (ADESA), the Supreme Court found that a landlord who received an offer to purchase a package of lots, including a lot subject to an RFR in favour of a tenant, was required to make an offer to the tenant allocating a portion of the total purchase price to the lot charged by the RFR.

Given Associated Graphic and ADESA, the law in British Columbia is that an RFR to purchase in respect of a specific property is triggered by a third party offer for a package of properties that includes the specific property. Upon receiving such an offer, the owner/landlord must either give notice to the holder of the RFR and make an offer for the specific property on the same terms and at a proportionate price, or obtain a waiver of the RFR. Arguably, the same principles should apply to an RFR to lease, and it will be interesting to see whether British Columbia courts will adopt the Equinox decision and effect what would be a significant change in the approach taken by them to date. If nothing else, although it is not binding on our courts, Equinox represents a competing line of judicial thinking on this issue. It is high authority and, until the law in British Columbia is confirmed in the context of RFRs to lease (if not in regard to RFRs to purchase as well), it will be important to ensure that the applicable language clearly sets out what the contracting parties intend to occur should the landlord receive an offer to lease for more than just the premises that are expressly subject to the RFR.