We use cookies to customise content for your subscription and for analytics.
If you continue to browse the International Law Office website, we will assume you are happy to receive all of our cookies. For further information please read our Cookie Policy.

Options and Rights of First Refusal: What Is the Difference? - International Law Office

International Law Office

Real Estate - South Africa

Options and Rights of First Refusal: What Is the Difference?

January 05 2007

Options
Rights of First Refusal
Comment


The terms 'option', 'right of first refusal' and 'pre-emptive right' are all familiar; however, is there really a distinction between these concepts?

Options

Simply put, an option consists of an offer by the grantor to sell a property to the grantee on specified terms and conditions, coupled with an undertaking not to withdraw such offer within a specified period. The offer by the grantor may:

  • be to buy the property (the 'put option');

  • relate to the letting and hiring of the property; or

  • relate to a variety of other contractual obligations regarding the property.

Upon the timely exercise of the option (ie, upon the timely acceptance of the offer), a valid and binding contract is constituted.

Therefore, an option must satisfy the legal requirements for a valid contract. These are, in the case of an option relating to the sale of land, that (i) 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 (68/1981), as amended, and (ii) the parties must be in agreement regarding the essential terms of the sale - that is, the identity of the parties, the price (which must be fixed or determinable) and the subject matter of the sale.

Rights of First Refusal

A right of first refusal or pre-emptive right is a composite right comprising a negative and a positive element. The negative element requires the 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 Hirschowitz v Moolman(1) 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 where (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;

  • The grant amounts to a promise by A to sell the land to B on the occurrence of certain events; and

  • The promise itself must comply with any formalities which are requisite to the validity of the proposed second contract.

In relation to the promise to sell, the judges held 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 judgment was followed by Justice Schwartzman in an unreported judgment of the High Court of South Africa (Witwatersrand Local Division) in Stephen Martin Levenberg v Sandton Square Portion 8 (Proprietary) Limited, in which the court considered whether a right of first refusal in respect of immovable property had to be in writing. Schwartzman stated that, "in passing, I believe that 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 similar to 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.

Comment

Although on the face of it there appear to be significant differences between an option and a right of first refusal, in fact they are very similar. At law there is very little difference between an option and a right of first refusal or pre-emptive right.


For further information on this topic please contact Frans van Hoogstraten at Bowman Gilfillan Inc by telephone (+27 11 669 9000) or by fax (+27 11 669 9001) or by email (f.vanhoogstraten@bowman.co.za).

Endnotes

(1) 1985 (3) 739(A).




Comment or question for author

ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.