Rights of First Refusal – Does “a floor” Mean the same as “any floor”? A Case on Drafting and Interpreting Documents
A Right of First Refusal (“ROFR”) is a right given to some tenants to match a third-party offer to lease space (and, on occasion, to purchase property containing the premises leased).
It is trite to state that ROFR clauses require very careful drafting. Unfortunately, even with good legal counsel, drafting issues often arise when the tenant claims the ROFR has been triggered and the landlord disputes that view.
In a June 2012 Alberta court of appeal decision, E. leased three floors in an office building. The balance of the building was leased to SNC. The SNC lease provided it with a right to give back single floors at six-month intervals. The E. lease provided E with a ROFR over “any floor” if the landlord received an offer to lease it and wanted to accept for “said floor.” If E exercised its ROFR, it also had to be on the same terms and conditions as the third-party offer.
In November 2011, a third-party offer was received for all of SNC’s premises plus some additional premises and included roof-top signage rights and 50 parking spaces. The landlord did not think E’s ROFR was triggered but notified E as the third-party required E’s waiver of its ROFR. Following notice, E took the position its ROFR was triggered and it did not have to match the third-party offer for all the SNC floors but could match it for “any floor” which it said it was doing.
In the application by E to determine whether the ROFR was triggered, the judge dealt with two issues:
1. Did E’s ROFR apply to offers to lease multiple floors?; and
2. If it did apply to such offers, was E obligated to match the offer for all floors?
The judge held that the answer to 1. was “yes”, and the answer to 2. was “no”, meaning E’s ROFR was triggered for multiple floor offers and was capable of applying to one floor – not all floors. The judge agreed with the landlord that if E could take only 1 floor, and since floor pricing varies in a building, the rent could vary depending on the floor chosen by E (as opposed to being fixed like in the third-party offer) and held that “commercially reasonable” terms must apply to the ROFR rent for that floor.
The landlord appealed claiming that the wording “any” and “said” indicated the ROFR was meant to apply to an offer for one floor, not for multiple floors nor a choice of any one floor from an offer for multiple floors.
E cross-appealed that it should not be required to negotiate rent for that floor “on commercially reasonable terms,” as the price per floor had been set in the third-party offer.
On appeal, the majority of the court found in favour of the landlord and based the decision on a review of the ROFR clause: “The qualifying phrase “the said floor” used throughout the entire clause supports the interpretation that “any” was intended to mean a single floor. Moreover, [SNC] had the right to surrender individual floors at intervals. In our view the word “any” in the context of the right of first refusal merely signifies that the right would not be limited to a particular floor (i.e., the eighth floor). Rather, the right would attach to “any floor”……… The interpretation advanced by [E] effectively requires that the offer be divided into a series of six or possibly eight individual offers, enabling [E] to choose only one of those offers. But this interpretation is inconsistent with the offer.
As a result, the landlord was successful and the ROFR was not triggered by the third-party offer. However, the decision was not unanimous and interestingly, the dissenting judge found that:
1. He agreed with the trial judge’s finding that: “any” did “not mean a single floor; it means one or more, or some. For each floor where there is an offer from a third party, then [E] has the right to make an offer. “Any” in this clause does not mean one”……”
He went on to say: “The majority decision concludes that the repeated use of the phrase “the said floor” in the right of first refusal supports the interpretation that “any” was intended to mean a single floor. However, on closer analysis, I conclude that the phrase “the said floor” applies only after floors have been identified by [the landlord’s] receipt of “a bona fide offer to lease any floor of the premises in the building” (emphasis added). According to the rules of English grammar, the phrase “the said floor” refers back to the earlier phrase “any floor” that being the “nearest sensible antecedent.”
As a result, he said the balance of the lease must be looked to in order to ascertain what the parties intended for the triggering of the ROFR. He noted sections of the lease which used “a floor” in place of “any floor” and said: “The presumption of consistent expression, which means that the same words in a contract are presumed to have the same meaning, and different words to have different meanings suggests that, if the parties had intended the right of first refusal to apply only when an offer to lease a single floor was received from a third party, the words “a floor” would have been used to describe the event triggering the right as it was in Article 3, rather than the words which were used, “any floor”.[underlining added].
2. The doctrine of “contra proferentem” applied “which states that any ambiguity or uncertainty should be construed against the interest of the party who drafted it:” and since the landlord drafted the clause, any ambiguity must be construed against it even if the clause was requested by the other party.
3. As the ROFR was triggered, E could exercise it for one or more of the floors that were subject to the third-party offer even though the third-party offer included 50 parking spaces and signage rights, not otherwise available to a single floor tenant. This judge said it was the fault of the landlord for accepting an offer it knew could trigger the ROFR. To hold otherwise would mean a landlord could structure deals to avoid triggering a ROFR.
4. He agreed with the majority view that the court does not have authority to change the terms of the ROFR by requiring the price to be on “commercially reasonable terms” as opposed to matching what was in a third-party offer. As a result, even though different floors may have different rental value, since the third-party offer was the same for each floor, E need only match the rent for that floor and not negotiate a new rent for it.
The Lessons: 1. A clause should never be read in isolation, as what comes before and after will be used to shed light on the intent in the event of ambiguity, and the result may be what neither party bargained for. 2. When drafting a document, consider adding a clause that counters the “contra proferentem” doctrine by providing it does not apply as both parties shared in the drafting and negotiation of the document; 3. Be consistent in your use of terminology in a document – that can be difficult in a lease that runs 30, 40 or 50 pages or more. 4. Turn your mind to situations where you don’t want the ROFR to apply and draft accordingly (or, you could yourself with a judge who shares the dissenting judge’s views in this case).
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at email@example.com with your suggestion. Not all requests can be accommodated.]