Rights of withdrawal and first refusal

In undivided co-ownership, the rights of withdrawal and of first refusal may disrupt the course of a real estate transaction. It is important to know that other co-owners may take precedence over a potential purchaser.  The title of the latter could be precarious for some time: a buyer who acquires rights in an  undivided co-ownership  without first receiving the approval of all the undivided co-owners is therefore liable to have his share redeemed and thus be excluded from the indivision.

 

 

 Right of withdrawal

Article 1022 of the Civil Code of Québec grants a right of withdrawal to co-owners in an undivided co-ownership. Under this article, another co-owner may redeem the undivided share of an immovable a co-owner has sold to a third party (an outsider to the indivision). In such cases, the undivided co-owners have sixty (60) days from their knowledge of the transaction (usually a sale) to proceed to the redemption of such share, by reimbursing to the third party acquirer the acquisition price and the associated transaction costs (real estate broker, notary, etc.). However, this right can only be exercised within one year from the date of the transaction. The buyer cannot oppose it, which can of course have disastrous consequences!  However, in practice this is a rare occurrence, as notaries have the duty, in the transaction, to carry out the necessary appropriate verifications.

Right of first refusal

When an indivision agreement is published on an immovable, it will most likely include a clause of waiver to the right of withdrawal and provide that this right is replaced by a right of first refusal . This right requires an undivided co-owner who wishes to sell his share to first offer it to the other undivided co-owners, save in exceptional cases (such as when an undivided co-owner sells his share or a portion thereof to his spouse ).

In any event, when subject to a right of first refusal, an undivided co-owner must send to the other co-owners a notice indicating the price and conditions under which he proposes to sell his share. These price and conditions must be the same as those offered or that would have been offered by a bona fide purchaser. Thereafter, the other co-owners have a time limit (which may vary according to the wording of the clause) to take a decision. If all the undivided co-owners waive their right of first refusal or if the deed of sale is not signed within the prescribed period, the undivided co-owner who wishes to sell his share can then do so, but for a price and conditions at least equal to those offered to other undivided co-owners.

The law provides that the right of withdrawal and of first refusal cannot coexist. Indeed, the presence of a right of first refusal automatically entails a tacit renunciation of the right of withdrawal. Some indivision agreements may also contain a right to purchase upon the death of an undivided co-owner. In the presence of such a clause, a professional should be consulted in order to understand the rights and obligations arising therefrom.

What about divided co-ownership into all of this?

Insofar as divided co-ownership is concerned, nothing in the Civil Code of Québec creates a right of withdrawal in favor of co-owners. Some declarations of co-ownership include a clause creating a right of first refusal, despite article 1056 of the Civil Code of Québec enacting that the declaration of co-ownership may not impose any restriction on the rights of the co-owners except those that are justified by the destination of the immovable, its characteristics and its location. Yet, among the rights of a co-owner, there is the right to dispose of his property freely. Consequently, a clause in the declaration of co-ownership granting a right of first refusal may contravene this provision and be invalidated by a court.

However, it is not uncommon to find such a clause in small co-ownerships, in which case it could be justified by the destination of such an immovable. Co-owners' co-operation is then often essential to the proper operation of the syndicate and the goal of preserving a convivial atmosphere could thus justify restrictions on the right to freely dispose of a fraction, such as a right of first refusal.

What to do when one wants to sell?

For co-owners who wish to sell their undivided co-ownership unit (or divided co-ownership unit in a small co-ownership) you must verify the presence of clauses relating to the right of withdrawal and of first refusal. In most cases, indivision agreements include a waiver of the right of withdrawal. If not, it is recommended to have the other co-owners sign a waiver of this right and, after consulting a notary, even go so far as to amend the indivision agreement itself.

As for the right of first refusal, the clause should be read carefully, with the help of a professional, as needed, in order to fully understand it and to send the required documents to the other undivided co-owners. They shall acknowledge receipt and documentary evidence should be obtained in the event they have decided not to avail themselves of their right to acquire.

If the notary notices such a clause, he does not have to give an opinion upon its appropriateness, but must raise its existence and explain the consequences, since non- compliance with the clause may result in a claim for damages from injured parties. It is important for the vendor to verify everything, in order to avoid for the notary to communicate directly with all the undivided co-owners in order to obtain and cause to be signed any document required, which may entail additional delays to closing the transaction.


WHAT YOU SHOULD KNOW !  In an undivided co-ownership. an offer to purchase should always be conditional on the seller providing the buyer with a copy of a waiver from the other co-owners to exercise the right of withdrawal or pre-emption.


WHAT TO KEEP IN MIND :​ The  Civil Code of Quebec has a minimal framework for the rights and obligations of undivided co-owners. To ensure the protection of the public, the Quebec Real Estate Brokerage Organization (OACIQ) has created forms for these situations, and that brokers must use: the  Exclusive Brokerage Agreement - Undivided Co-ownership  and the Promise to Purchase - Undivided Co-ownership..

 

WARNING !  Indivision agreements generally stipulate that a co-owner must offer his share of the building to the other co-owners before offering it to a third party. Some even allow other co-owners to match the offer that the third party could make to acquire this quota, according to the terms of the agreement. This is called the "right of pre-emption"

 

 

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