March 2013

The buy-sell agreement, a preventative measure to consider

By Marie-Sophie Marceau Lawyer

The buy-sell agreement (commonly known as a "shotgun clause") is a contract by which one party pledges to another not to conclude a covenant with a third party without having first offered the other the same deed under the same conditions or according to the conditions stipulated in the provision. It is therefore a right of preference, should, for example, an individual decide to sell a property.

More often than not, the buy-sell agreement is a deed of sale provision and constitutes a very useful tool for a seller who agrees to offer an asset based on a buyer's personal qualities. This is the case, for example, of an individual who sells a piece of land to a friend or family member or someone who sells a unit in a duplex he/she happens to live in by attaching particular importance to the characteristics of his/her future neighbours.

In the aforementioned example, the buy-sell provision included in the deed of sale will allow the initial vendor to buy back the asset and maintain control of the neighbourhood should the buyer choose to leave. It is important to note that the buy-sell provision may be stipulated in the seller's own name or in the name of any other individual chosen by the seller, such as his/her children, for example, in order to favour the continuance of the asset in the family patrimony.

The provision's wording is very important and will determine the parties' conduct. First, the provision must clearly identify the beneficiary of the buy-sell agreement. There maybe several concurrent or sequential beneficiaries who may each exercise their right of preference and acquire the asset, regardless of their co-beneficiaries' decisions. In the case of a provision calling for concurrent beneficiaries, it is possible for several individuals to exercise their right of preference and so become co-owners of the asset in question. Besides the beneficiaries' identities, it is possible and desirable to include in the buy-sell provision the price to be paid by the beneficiaries, be it a fixed amount or a mathematical equation, taking into consideration, for example, any enhanced value brought to the property. Of course, the negotiation of the provision could impact the initial sale, since imposing a resale price could greatly reduce the buyer's business opportunities. Lastly, the provision's wording also determines how the right of preference comes into existence. For example, the provision may stipulate that simply deciding to sell the building will lead to the beneficiary's right of preference or even be more restrictive and simply state the obligation to make an formal offer before concluding the contract with a third party.

It is important to note that any owner who enters into an agreement that is in violation of the buy-sell agreement may be sued for damages by the agreement's beneficiary. However, any contract concluded with a third party cannot be nullified if it has been finalized.