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Assignability of rights of first refusal granted under a lease

A right of first refusal under a lease is a contractual right that gives the tenant the right to match any third party offer if the landlord chooses to sell the property.  A right of first refusal is different from an option to purchase: while an option to purchase immediately creates an interest in land, a right of first refusal is merely a contractual right that becomes an interest in land only when the right is triggered (Canadian Long Island Petroleums Ltd. et al. v. Irving Industries Ltd., 1974 CanLII 190 (S.C.C.); Harris v. McNeely (2000), 47 O.R. (3d) 161 (Ont. C.A.)).  Even though a right of first refusal is granted in a lease document, it is seen as an independent agreement separate from the lease legally valid without any additional consideration (Budget Car Rentals Toronto Ltd. v. Petro Canada Inc. (1989), 69 O.R. (2d) 289 (C.A)).

 

While a right of first refusal is a independent contact, and, generally, under contract law a benefit of a contract could be assigned (unless the contract itself restricts such assignment), case law has established that, in Ontario, a right of first refusal granted in a lease is a personal right of the contracting parties and, therefore, not capable of being assigned without the landlord’s specific consent (Zouvgais v. Chang (1986), 39 R.P.R. 221 (Ont. H.C.)).

 

Despite the “specific consent” requirement, practitioners should keep in mind that the landlord’s consent could be inferred based on the language of the lease or the intent of the parties:

 

In Zouvgias v. Chang (1986), 39 R.P.R. 221 (Ont. H.C.), the tenant assigned his lease to another with the landlord’s consent but there was no explicit consent to assign the right of first refusal.  The court found that the consent to assign the lease and “all benefits under the lease” included consent to assign the right of first refusal since the lease described the right of first refusal as forming “an integral part of this Indenture".

In Law-Woman Management Corporation v. Peel (Regional Municipality et al.(1991), 17 R.P.R. (2d) 62, the court held that the lease containing a definition of “lessee” as including “assigns” evidenced the intent of the parties that a general assignment of the lease included an assignment of the right of first refusal.

In summary, when contemplating an assignment of a right of first refusal either together with or independently from the tenancy interest under the lease, remember that even if the lease document is silent on the point, the landlord’s specific consent is likely required before the right of first refusal could be validly assigned. This would be in addition to the consent to the assignment of the tenancy interest (which is likely required under the terms of the lease). Also, if the intent of the lease is to make it assignable in certain circumstances without consent (such as to corporate affiliates) care should be taken in the drafting to ensure that applies to the assignment of a right of first refusal as well.

Anna Sosis