The right of first refusal is a contractual agreement giving one party the first opportunity to buy a property before the owner can sell it to someone else. This right is particularly significant in Quebec, where it’s embedded in various real estate transactions, including leases, shareholder agreements, and indivision agreements.

What is the Right of First Refusal in real estate?

In Quebec, a right of first refusal—known as droit de premier refus or pacte de préférence—is a preemptive right to purchase property under specific conditions. It requires the property owner to offer the property to the right of first refusal holder once they receive a legitimate offer from a third party. Right of first refusal holder will have 60 days  following the time when he learns that property has been sold to buy it back by reimbursing him for the price and the expenses paid. However, this right of redemption must be exercised within one year from the acquisition of the property by a third party. If the right of first refusal holder declines, only then can the property be sold to the third party.

Common Problems with Right of First Refusal

The existence of a right of first refusal can deter third-party offers, complicate transactions, and potentially reduce the property’s market attractiveness. Enforcement issues also arise if an owner disregards the right of first refusal, selling the property without offering it to the holder. Although the sale remains valid, the right of first refusal holder can seek damages for breach. Properly drafting the right of first refusal clause is crucial to prevent circumvention and ensure clarity in transactions.

How to Terminate or Get out of a Right of First Refusal

Legally ending a right of first refusal in Quebec can be challenging, especially if the agreement lacks specific termination clauses. Ways to terminate a right of first refusal include:

• Expiry by term or condition: Some rights of first refusal have built-in durations or specific conditions that, once met, automatically terminate the right.
• Mutual agreement: Both parties can agree to terminate the right of first refusal, usually documented by a formal release.
• Renunciation or lapse by inaction: If a right of first refusal holder fails to exercise their right under the terms specified, it may lead to the termination of the right, depending on the contract’s wording.
• Unilateral revocation: In rare cases, and typically requiring court intervention, a perpetual right of first refusal may be challenged if deemed unreasonable or inequitable.

Legal Framework and Key Cases

Quebec’s Civil Code and jurisprudence provide the legal backdrop for rights of first refusal, emphasizing their enforceability provided they are properly executed and respected. Key court decisions have underscored the necessity of honoring these agreements, unless a significant reason such as fraud or bad faith is evident.

Recent Developments

Recent legislative changes, particularly in Montreal, have introduced municipal rights of first refusal aimed at promoting social housing. These rights allow the city to match third-party offers on designated properties, introducing an additional layer of complexity to real estate transactions within affected areas.

Conclusion

The right of first refusal is a powerful tool in Quebec real estate but requires careful consideration and precise drafting to avoid future disputes and ensure enforceability. Whether you are a property owner, a potential right of first refusal holder, or a third-party buyer, understanding the nuances of this right is crucial.

Sources:

• Civil Code of Québec, Arts. 1022, 1397, 1712 – Establishes the legal foundation for rights of first refusal and their enforcement.
• Viel c. Entreprises immobilières du Terroir ltée, 2002 QCCA 13135 – Court of Appeal decision that clarifies the operation of rights of first refusal.
• U. Cayouette inc. c. Rouleau-Beaudoin, 2017 QCCS 3624 – Superior Court decision providing a clear definition of right of first refusal.
• Filles de la Charité… c. Ville de Sherbrooke, 2021 QCCS 214, aff’d 2022 QCCA 112 – Landmark case upholding the enforcement of a perpetual right of first refusal.
• Norton Rose Fulbright and Davies Ward Phillips & Vineberg – Discussions on Montreal’s municipal right of first refusal for social housing and its implications.
• OACIQ and Fasken – Analysis on cultural heritage rights of first refusal and challenges in drafting and enforcing right of first refusal clauses.

This overview aims to provide a comprehensive understanding of the right of first refusal within Quebec’s legal landscape, emphasizing both its potential and its pitfalls. For specific cases or advice, consulting with a legal expert in Quebec real estate law is recommended.