Violation of a first refusal agreement: broker’s role and the assessment of damages

This article is a modified version of a comment originally published by Éditions Yvon Blais in April 2020 (EYB2020REP2935).

The duty to act in the client’s best interests remains at the heart of a real estate brokerage contract, even in the most delicate situations. This principle was upheld by the decision in Ferme Robert Séguin & Fils 2005 Inc. v. Hobé.¹

In this decision, the Superior Court dismissed the claim for damages brought against a real estate brokerage agency as part of a joint and several suit against it and the sellers whom it represented. The Court concluded that the sellers were liable for violating a first refusal agreement made for the benefit of the plaintiff, but did not hold the broker liable for this fault.

The plaintiff had rented a lot belonging to its neighbours, the vendors, for the purpose of farming activity. The lease included a first refusal agreement for the benefit of the plaintiff. When the property was listed for sale, the plaintiff indicated that it was not interested in paying the asking price.

The sellers then accepted a purchase offer from third-party buyers. While making arrangements for the passing of title, the broker learned of the existence of the first refusal agreement. In light of the considerable drop in the offer price relative to the list price, the plaintiff reconsidered the idea of purchasing the property and told the broker of its intention to match the purchase offer.

Denying the validity of the first refusal agreement, the sellers declined to consider a sale to the plaintiff. Instead, they pressed ahead with signing the deed of sale to the third-party buyers. The broker contacted the plaintiff, informing them that she represents the sellers and suggesting that they hire their own real estate broker. She did so without disclosing that the property was to be sold to third-party buyers that same day. Although the broker was in an extremely delicate position then, the Court was of the opinion that her conduct did not deviate from the standard of a prudent and diligent broker.

The plaintiff claimed compensation for the damages caused by the violation of the first refusal agreement, specifically the difference between the market value and the sale price of the property. In this context, the Court ruled that the sale price granted to the third-party buyers had to be considered in determining the market value of the property.

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Comments: While the Court recognized the illegality of the sellers’ breach of the first refusal agreement, it approved of the broker’s decision not to disclose the sellers’ strategy for proceeding with the sale.

In this case, the judge prioritized the broker’s duties to protect the interests of the party she represents and preserve the confidentiality of the information she collects over her obligation to advise and objectively inform all parties to a transaction of any factor that could negatively impact the parties or the object of the transaction.²

Case law has established that obligations of objectivity and transparency must prevail in the disclosure of information regarding a property’s condition, known defects and known or foreseeable expenses. However, the situation is much less clear with respect to the strategic information that a party wishes to put forward in its negotiations with a co-contracting party.

The fact remains that real estate brokers must regularly deal with conflicting ethical responsibilities, particularly when they receive confidential information from their clients³ or act as sole broker for a potential buyer whose interests are usually opposed to those of the seller. Therefore, we do not believe that a real estate broker can be called upon to respond or act in such a way as to resolve conflict situations such as the one in this case. Such situations call for the services of a legal advisor.

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In assessing the damages caused by a violation of a first refusal agreement, the courts will be called upon to assess a property’s market value at the time of the sale.

Citing the Standards of Professional Practice of the Ordre des évaluateurs agréés du Québec,⁴ the Court indicated that the sale price granted to a third-party buyer in contravention of a first refusal agreement must be considered in the calculation of the market value of the property since it is part of the sale prices recently obtained for the property within a relatively short period of time after the failure to contract.

In our opinion, similar reasoning could apply to the acceptance of multiple offers on the same property or to the refusal to follow through on an unconditional purchase offer.

 

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