Property Law and Sectional Title

 

 

Yes, they are frequently included in lease agreements, giving tenants the first opportunity to buy the property they are renting if the landlord decides to sell.

The Constitutional Court (Mokone case) suggested that if a lease is renewed on the "same terms and conditions," ancillary terms like a pre-emptive right are likely renewed too, even if not explicitly mentioned in the renewal. However, to avoid any doubt, it is best practice to explicitly state in any lease extension whether the pre-emptive right continues to apply.
 

While the Constitutional Court (Mokone v Tassos Properties) indicated that the creation of the right itself might not always need the strict written formalities required for a sale agreement under the Alienation of Land Act, it is highly advisable to have it clearly documented in writing and signed. Relying on verbal agreements invites uncertainty and potential disputes. A written clause provides essential clarity and proof of intention. Note that if the right is exercised, the resulting sale agreement must be in writing and signed.

A pre-emptive right can terminate in several ways:

  • The holder formally waives the right.
  • The holder declines to exercise the right when offered the property.
  • The parties mutually agree to cancel it (which may require a notarial deed if it's a registered real right).   
  • Merger occurs when the holder buys the property.
  • Death of the holder or grantor (if it's a personal right).
  • Compulsory sale of the property (e.g., insolvency, execution - usually only if it's a personal right).
  • Expiry of a time limit specified in the agreement.

The key difference lies in who initiates the sale.
Pre-emptive Right: Only becomes active when the owner decides to sell. The holder then gets the first chance to match the offer the owner is willing to accept from a third party. The holder cannot force the owner to sell.
Option to Purchase: This is a binding offer from the owner to sell to the holder at agreed terms within a specific period. The holder can choose to exercise the option and force the owner to sell, whether the owner still wants to or not.

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Understanding Pre-emptive Rights in South African Property Law

Navigating property transactions often involves complex legal concepts. One such concept frequently encountered, especially in lease agreements, is the pre-emptive right, also commonly known as a right of first refusal. At Aucamp Attorneys, we believe in empowering our clients with clear knowledge. This page provides an overview of pre-emptive rights concerning immovable property in South Africa.

In South African property law, a pre-emptive right (also sometimes referred to as a right of first refusal, although there can be subtle distinctions) is a contractual right granted by the owner of a property (the grantor) to another party (the grantee), obligating the grantor to offer the property for sale to the grantee first, should the grantor decide to sell it to a third party on certain terms and conditions.

Key Features of Pre-Emptive Rights

  • Triggered by Intention to Sell The right only becomes active when the property owner forms a genuine intention to sell the property. It does not compel the owner to sell if they do not wish to.
  • Specified Terms The agreement creating the right usually outlines, or implies, the terms and conditions under which the offer must be made to the holder. Often, these terms are required to mirror those of a legitimate offer received from a third party.
  • No Obligation to Purchase Receiving the offer does not obligate the holder to buy the property. They retain the choice to accept the offer or decline it, allowing the owner to then proceed with selling to a third party (usually on terms no more favourable than those offered to the holder).

The Crucial Importance of a Clearly Drafted Agreement

The specific terms, triggers, timeframes for acceptance, and consequences of non-compliance are all dictated by the contract establishing the pre-emptive right. Therefore, precision and clarity in drafting this agreement are paramount to avoid future disputes.

Particular attention is required when agreements involve multiple properties, such as in some lease agreements. It must be explicitly clear whether the pre-emptive right applies to each property individually or only to the properties as a collective unit. If an owner intends the right to apply only to specific properties within a larger portfolio, this must be unambiguously stated.

Case law confirms that if a pre-emptive right covers several distinct properties or parcels of land, the sale of even one portion or parcel can trigger the right for that specific portion, unless the agreement clearly indicates a contrary intention. A well-drafted agreement anticipating such scenarios significantly limits the potential for contentious issues later on.

Pros and Cons of Pre-emptive Rights

For the Holder (Grantee)

  • Pros Provides an opportunity to acquire a specific, desired property; offers security (especially for tenants who have invested in the property); prevents the property from being sold to an undesirable third party without the holder getting a chance first.
  • Cons No guarantee the owner will ever decide to sell; the holder must usually match the terms of a third-party offer, which might be financially challenging; complexities arise if the property is part of a larger "package deal".

For the Owner (Grantor)

  • Pros Can provide a readily available buyer (e.g., an existing tenant); may simplify the sale process and potentially reduce marketing costs and time.
  • Cons Restricts the owner's freedom to sell the property on the open market immediately; the process can cause delays while waiting for the holder to decide; may deter some third-party buyers who perceive the right as a complication.

To ensure a pre-emptive right is effective and minimises potential disputes, follow these best practices

  • DO Put it in Writing While the Constitutional Court (in Mokone v Tassos Properties) found that the pre-emptive right itself might not always need to meet the strict formalities of the Alienation of Land Act to be valid, relying on verbal agreements is risky. A clear, written clause in a lease agreement or a standalone contract is crucial for clarity and enforceability.
  • DO Be Specific Clearly identify the exact immovable property subject to the right.
  • DO Define the Trigger Event: State precisely what activates the right – is it the owner's decision to sell, the receipt of any offer, or the receipt of an acceptable bona fide offer from a third party?
  • DO Clarify the Offer Process Specify how the offer must be made to the holder (e.g., written notice), the timeframe the holder has to accept or reject, and confirm that the offer terms must typically mirror the third-party offer the owner is prepared to accept (the "Oryx mechanism" principle).
  • DO Address "Package Deals" If the property forms part of a larger potential sale, the clause must specify whether the holder must match the offer for the entire package or only for the specific property under the right. If the latter, include a mechanism (like independent valuation) to determine the price for that specific portion. Lack of clarity here often leads to litigation (as seen in the Plattekloof case).
  • DO Consider Successors Decide if the right is purely personal (lapses on death/insolvency of parties) or intended to bind future owners (successors-in-title). Binding successors typically requires specific wording creating a real right and registration against the property's title deed.

Legal Don'ts - Common Pitfalls to Avoid

  • DON'T Rely on Vague Terms Ambiguity is the enemy of enforceability. Avoid unclear language regarding the property, trigger, price, or process.
  • DON'T Confuse with Options Understand the fundamental difference between a pre-emptive right and an option. Granting an option when you only intend a right of first refusal can force an unwanted sale.
  • DON'T Assume Automatic Renewal While the Mokone judgment suggested pre-emptive rights might carry over in lease renewals based on party intention, it's always safer to explicitly state whether the right is renewed along with the lease.
  • DON'T Ignore Sale Formalities Even if the pre-emptive right itself didn't need full ALA formality, the actual sale agreement resulting from exercising the right must comply with the Alienation of Land Act (i.e., be in writing and signed by both buyer and seller or their authorised agents).
  • DON'T (as Grantor) Try to Circumvent the Right Structuring a transaction (like a very long lease) purely to avoid triggering a pre-emptive right can be legally challenged if it's seen as simulating a sale.

Conclusion

Pre-emptive rights can be valuable tools in property dealings but require careful consideration and precise drafting. Ambiguities or misunderstandings about their nature, scope, and requirements often lead to costly disputes.

Whether you are considering granting or receiving a pre-emptive right, professional legal advice is essential. Contact Aucamp Attorneys today to ensure your rights and interests are properly protected.