Options and rights of first refusal in respect of immovable property.

What’s the difference?

We are all familiar with the terms "option", "right of first refusal" and "pre –emptive right", but is there really a distinction between these concepts?

Simply put, an option comprises of an offer by the grantor to sell the property concerned to the grantee on specified terms and conditions, coupled with an undertaking not to withdraw such offer wthin a specified period. The offer by the grantor may be one to buy the property (the so-called "put option"), may relate to the letting and hiring of the property or, for that matter, may relate to a variety of other contractual obligations regarding the property. Upon the timeous exercise of the option (ie upon the timeous acceptance of the "offer") a valid and binding contract is constituted.

It follows therefore that an option must satisfy the legal requirements for a valid contract. These are, in the case of a option relating to the sale of land, that the agreement must be in writing and signed by the parties or their agents acting on their written authority (as required by Section 2 of the Alienation of Land Act 68 of 1981 as amended) and that the parties must be in agreement regarding the essential terms of the sale, being the identity of the parties, the price (which must be fixed or determinable), and the subject matter of the sale.

A right of first refusal or pre-emptive right, on the other hand, is a composite right comprising a negative element and a positive element. The negative element involves an undertaking not to sell the property to a third person without giving the grantee the right of first refusal. The positive element obliges the grantor to give the grantee the right to purchase the property at a price offered by the third party. In the matter of Hirschowitz v Moolman 1985 (3) 739(A) the court accepted the submissions that –

• a grant of a right of pre-emption is a contract whereby "A" undertakes and is obliged to sell the land to "B" if (i) the contingency bringing the right of pre-emption into operation has supervened; and (ii) B has exercised the right of pre-emption in writing; and
• that the grant amounts to a promise by "A" to sell the land to "B" upon the happening of certain events; and
• that that promise must itself comply with any formalities which are requisite to the validity of the proposed second contract.

In this judgement the judges held, in relation to the promise to sell, that it "is required to comply with the requisites for validity, including the requirements as to form, applicable to the second or main contract to which the parties have bound themselves".

The Hirschowitz judgement was followed by Schwartzman J in his unreported judgement in the High Court of South Africa (Witwatersrand Local Division) in the matter between Stephen Martin Levenberg and Another and Sandton Square Portion 8 (Proprietary) Limited and Others (in which the issue whether or not a right of first refusal in respect of immovable property had to be in writing, was considered) where Schwartzman J states "In passing, I believe it can be said that a pre-emptive right to buy can also be described as an option to purchase at a price fixed by a third party".

The legal requirements for a valid and binding pre-emptive right or right of first refusal are much the same as those for a valid and binding option. The contract must be in writing and the parties must be in agreement regarding the essential terms of the sale.

One can thus see that whilst on the face of it there appear to be significant differences between an option and a right of first refusal, in reality they are very similar. At law there is very little difference between an option and a right of first refusal or pre-emptive right.

Courtesy: Frans van Hoogstraten from Bowman Gilfillan