In Brief - A recent New South Wales Supreme Court decision highlights the potential issues involved in exercising a first right of refusal

It is a well-established principle that an offer which is open for acceptance will be brought to an end - if it is rejected by the offeree. It is also clear that a counter-offer made by the offeree will serve as a rejection of the initial offer.

In NWA Realty v Christou [2019] NSWSC 1364 the Court reiterated that an offeree's words must be analysed in the context and the circumstances in which they are written or spoken, in order to determine whether the words amount to an acceptance or rejection of the offer, including by means of a counter-offer. 

To determine what the offeror ought to have understood the words to mean, the Court will apply the reasonable person test.

In NWA Realty v Christou, the plaintiff lessee was granted the first right of refusal to purchase a property which it occupied pursuant to the terms of its lease from the defendant lessors. 

The lessors offered to sell the property to the lessee for the sum of $3,000,000 which, per the terms of the lease, was open for acceptance for 14 days, expiring on 23 August 2019 at 3:00pm.

Within the 14 day period, the lessee indicated it "would offer" to purchase the property on different terms. On 23 August 2019, the lessee then attempted to accept the lessor's initial offer, prior to 3:00pm.

Did the lessee make a counter-offer amounting to a rejection of the initial offer?

In order to determine if the lessee effectively rejected the lessor's initial offer, the Court looked to an email from one of its directors, Mr Dowling, on 19 August to the lessor's agent stating that the lessee "would offer" to purchase the property for $2,650,000 with a longer settlement period than what was stipulated in the lessor's original offer.

The lessors argued that their initial offer was not open for the lessee to accept on 23 August because the lessee had earlier rejected the offer by way of:

(a) Mr Dowling's 19 August email; and/or
(b) Mr Dowling verbally stating on 19 August that the lessee "would not be paying $3 million".

How is the reasonable person test applied?

The Court did not accept that Mr Dowling said the lessee would not be paying $3 million. 

It considered that a reasonable person in the position of the lessors would not consider the email sent on 19 August as either a rejection or a counter-offer to the lessors' initial offer, on the basis that:

(c) the email was a provision of the lessee's 'best position' as requested by the lessor's agent with a view to negotiate the terms of a sale;
(d) the lessor's agent himself did not consider the email as a rejection of the offer; and
(e) negotiations were not necessarily inconsistent with the continued existence of the initial offer which was yet to expire.

The Court made an order for specific performance, requiring the lessors to enter into a contract for the sale of the property on the terms of the lessor's initial offer.

Construction of wording when accepting or rejecting a first right of refusal

Despite the seemingly strict interpretation that an offer is rejected where a counter-offer is made, to determine whether this has occurred, the Court will consider the context and circumstances in which the offeree's words are written or spoken and apply the reasonable person test. 

A lessor who attempts to reject a lessee's offer to purchase under the belief that their initial offer has already been rejected, must consider what a reasonable person in their position would consider the lessee's words to mean in the given circumstances and context. 

Conversely, a lessee who intends to accept a first right of refusal may find themselves inadvertently rejecting the lessor's offer in the process of negotiation, if the context warrants the Court construing the meaning of their words to have such effect.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.

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