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Selwyn Black, Esq. and Nathan Gately, Esq.
Carroll & O’Dea Lawyers
Sydney, Australia

In the recent case of Parramatta Commercial Holdings Pty Ltd (PCH) v Vision Medical and Health Pty Ltd (VMH) [2018] NSWSC 272, Justice Kunc in Equity was tasked with deciding whether or not an offer by PCH to sell land in the form of a call option engaged a right of first refusal to purchase the land held by one of the lessees, VMH, who submitted that this could only have been achieved by a traditional contract for sale and not by an option contract.

As Kunc J put it, this dispute turned on the proper construction of the right of first refusal and the option contract, to be found by using the approach set out by the High Court in Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7:
The meaning of the terms in a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean…. Appreciation of the commercial purpose or objects is facilitated by an understanding of the genesis of the transaction, the background, the context [and] the market in which the parties are operating.

Using that approach, Kunc J found that terms and conditions in the form of a call option, or a put and call option, or any other means of agreeing to sell property would be capable of engaging the right of first refusal, provided that those terms were not inconsistent with the terms of the right of first refusal.

Although VMH ‘lost the battle’ on that issue, it won the war. The terms of the right of first refusal also contained a Lazarus clause that re-enlivened VMH’s right in the event PCH failed to close the third party sale transaction within 120 days; ‘close’ in this sense was interpreted by Kunc J to mean complete the sale and not simply enter into the option contract itself.

As a result the terms of the option contract were inconsistent with, and so did not extinguish, the terms of the right of first refusal.