The Right of First Refusal

23 Oct 2018

A right of first refusal is a mechanism in a contract that affords the holder of such right the preference to buy a particular property, should the owner ever choose to sell it. However, it is worth noting that the holder of the right to first refusal is under no obligation to purchase the property should it become available.

Lease agreements

This right will often be encountered in lease agreements. This affords the tenant the opportunity to buy the property should the landlord ever choose to sell it which is often beneficial to both the tenant (or buyer) and the landlord (or seller).

For a landlord, if the tenant chooses to exercise the right of first refusal and purchase the property, it means immediate access to a buyer and reduced costs typically involved in marketing and selling a property. In addition, many tenants become attached to the house they rent and have already put their own personality into it; being the first in line to purchase the property means that the tenant has certainty that they can continue to live in this home.

The selling price

The owner of the property is not bound by a specific price, but may not accept any offer from a third party unless the holder of the right has exercised such. Tenants should be aware that when exercising such right, if a competing offer from a third party is made which is more attractive, the landlord can accept this offer should the tenant be unable to match the offer.

Disputing the right to first refusal

In the case of Mokone v Tassos Properties CC and Another (2017) CC, a clause affording a right of first refusal was disputed. This simple, and some might say standard, term of the lease agreement lead to the parties being entrenched in litigious proceedings with the tenant disputing the transfer of the property by the landlord to a third party.

The main issue in the Mokone case was whether the right of first refusal was granted without the signature of both parties. The right was granted in the original lease, however the lease was later extended verbally and subsequently through written endorsement and the question then arose whether the right was renewed without expressly mentioning such. In terms of our common law, the rule is that essential terms of the agreement will be renewed while collateral terms will not unless the parties expressly agree that these should also be included in the renewal.

The Court’s finding

In the above matter, the Constitutional Court held that when lay person(s) are renewing a lease on the same terms and conditions that were originally agreed upon, such collateral terms will also be renewed.

The Court’s reasoning behind the Mokone matter was that it was the intention of the parties to include the right of first refusal. As such, the court wanted to give effect to such intention, and on this basis overruled the common law practice. The Court held that if the common law principle was to be followed, this would unduly favour the landlord and it is not common for the ordinary lay person to distinguish between essential and collateral terms. The effect is that the right of first refusal can be renewed without specifically including it in the renewal document.

Taking this into account, it is advisable to specifically discuss the terms of a lease prior to entering into or renewing such a contract whether this be for commercial or residential property. Such agreement should then be put into writing to avoid any points that could lead to a dispute at a later stage. Both landlords and tenants should make sure that their rights and obligations and the termination date of the lease is clearly set out.

Source Snymans Inc Attorneys