Right of First Refusal vs. Right of First Offer in Alberta Land Transactions

Introduction

We often hear parties use the terms right of first refusal (ROFR) and right of first offer (ROFO) interchangeably.  While they do sound similar, they have vastly different implications when it comes to being able to register a caveat to protect that party's interest against the legal title to a property in Alberta. In this blog we'll review the applicable Alberta legislation and relevant case law to explain why parties who intend to provide notice (and therefore protect their interests better) by registering a caveat against the title to the property may wish to use a ROFR rather than a ROFO in their agreements.

Caveats

As a quick reminder, caveats are critical in protecting interests in real estate, as a registered caveat warns anyone searching the certificate of title that the caveator claims an interest in the land.However, not all interests are capable of being registered by a caveat. A mere claim, contractual right or expectation respecting land—including an interest like a ROFO—is not caveatable; however, there are certain rights, such as a ROFR, that may not on their own be interests in land but through legislation, such as the Law of Property Act, RSA 2000, c L-7 (the LPA), are recognized as equitable interests in land and so may support the registration of a caveat.

ROFOs vs. ROFRs

Although ROFOs and ROFRs are commonly conflated, they are functionally different. A ROFO is a contractual right under which a grantor must offer the ROFO holder the opportunity to purchase the property before offering it for sale to a third party.If an agreement is not reached between the grantor and the ROFO holder, the grantor may proceed to sell the property to a third party; however, the terms must be no more favourable to the third party than those negotiated with the ROFO holder.

A ROFR is triggered by a third-party offer to purchase the property. If the grantor is willing to sell, it must first negotiate with an arm's-length third-party purchaser and then offer the ROFR holder the opportunity to purchase the property on the same terms. If the ROFR holder is willing to purchase the property on the same terms, it has the contractual right to do so.

In Canada, the common law holds that a ROFR for real property is also a personal contractual right, not an interest in land. However, once the ROFR is triggered (typically when the grantor receives a third-party offer they are willing to accept), this contractual right converts into an option to purchase, which is recognized as an equitable interest in land. As such, without legislation deeming ROFRs to be equitable interests in land, as set out below, they would remain merely personal contractual rights until triggered.

What Makes an Interest Caveatable in Alberta?

In Alberta, the Torrens system of land registration and the ability to file instruments under it are entirely matters of statute. There is no common law right to register encumbrances at the Land Titles Office.Section 130 of the Land Titles Act (the LTA) authorizes the filing of caveats, but filing is premised on the claimant having an interest in the land.

The phrase "interest in land" is not defined in the LTA.However, the Alberta Court of Appeal in Morrison v Moe-Villa Investments Ltd. held that an interest in land means "a legally recognized proprietary interest in that land, not a mere claim, contractual right or expectation with respect to that land."

Since a ROFR to purchase land constitutes a personal contractual right, it does not, on its own, support the filing of a caveat. In response to this, the LPA was amended in 1985 to deem ROFRs to be equitable interests in land. Section 63(1) of the LPA thus provides that a ROFR to acquire an interest in land is an equitable interest in land. Furthermore, after registering a caveat under the LTA, that equitable interest will run with the land and take priority over any subsequent registered interests in accordance with section 14 of the LTA.

Contracting Parties Take Heed

Although section 63(1) of the LPA deems ROFRs to be equitable interests in land which can support a caveat, it does not extend the same treatment to ROFOs. As a result, a ROFO remains solely a personal contractual right, not an equitable interest in land.

While ROFOs have advantages for buyers such as the ability to directly negotiate with the seller without need for a prior third-party offer, they provide no registerable protection. Conversely, while ROFRs do not allow buyers to dictate the transaction terms, they do afford greater protection by allowing the buyer to register its interest against the title to the property. A savvy buyer can try to negotiate both a ROFO and a ROFR into their purchase agreement. However, if only one can be included, and the buyer's primary concern is securing its priority over other potential buyers, a ROFR is recommended.

Next Steps

If you would like to learn more about registering a caveat for a ROFR, or to discuss any upcoming transactions you may have where we can advise if you can or should be requesting a ROFO, a ROFR or both, be included in the agreement we invite you to contact the authors of this blog post or any other member of our Commercial Real Estate group.