Option & Right of First Refusal

OPTION

An option in respect of immovable property is nothing more than an offer by the owner (the “grantor”) to sell his/her/its property to a potential purchaser (the “grantee”) on certain specified terms and conditions, coupled with an undertaking by the grantor not to withdraw such offer within a specified period of time (the “option period”).

The legal requirements for a valid and enforceable option are:

• It has to be in writing and signed by the grantor on granting the option (making the offer) and by the grantee on exercising the option (accepting the offer), and
• It must contain the essential terms of the sale.

The essential terms are normally:

• the identity of the parties (grantor and grantee or their agents acting on their written authority), correctly described; and
• the subject matter of the sale (identity of the immovable property), once again, correctly described; and
• the price, which has to be fixed or at least be determinable.

In order to comply with the above the option can take on the form of a normal agreement of sale to which a clause is merely added to the effect that the seller’s (grantor’s) signature of the document constitutes an option to the purchaser (grantee), which has to be exercised within a specified period of time (option period) for a valid and binding agreement of sale to come into operation between parties.

RIGHT OF FIRST REFUSAL (ALSO REFERRED TO AS A PRE-EMPTIVE RIGHT)

A “right of first refusal” or a “pre-emptive right” relating to immovable property comprises an undertaking by the owner (the “grantor) not to sell his/her/its property to a third party unless he had first granted the grantee the opportunity to purchase the property at the price offered by such third party. In our law a right of first refusal has to comply with the requirements for validity (including the requirements as to form), applicable to agreements of sale pertaining to immovable property. This was confirmed by the Appeal Court in the matter of Hirschowitz v Moolman 1985 (3) SA 739 (A).

Consequently, the same “legal requirements” detailed above, relating to an option, will apply to a right of first refusal or pre-emptive right.

From the above it should also be clear that a “72-hour clause”, that is often inserted into an agreement of sale that is subject to fulfilment of one or more suspensive conditions, contains important elements of a right of first refusal.

(All aspects pertaining to the inclusion of a 72-hour clause in an agreement of sale had already been discussed in an earlier article in this series. The seller is entitled to continue marketing his/her/its property in anticipation of compliance by the purchaser of a suspensive condition. Should a third party make an offer on the property [the “new offer”] prior to fulfillment by the purchaser of the suspensive condition, the seller is compelled to first grant the original purchaser the opportunity to at least equal the new offer within a specified period of time, failing which the original transaction will lapse and the seller will be entitled to accept the new offer. In practice the new offer will normally be free of a suspensive condition or possibly for a higher price.)