Right of first refusal is limited

Ex-QDMS

Dr Sayed Iqbal Mohamed

There are instances where at the conclusion of a lease or prior to it, there is mention of a possible sale of the dwelling at some stage.

The tenant is convinced that the sale of the dwelling will be offered to her or him. This would be true if there was a written clause in the lease or a separate agreement between the tenant and landlord to that effect. The specific clause is pivotal in establishing what right the tenant has in the event the dwelling is sold.

There are tenants who believe that they have the right of first refusal when their landlords decide to sell the dwellings they occupy. In the instance of a first refusal clause, the landlord is obliged to offer the sale to the tenant first, at the price determined by the landlord or offered by a potential buyer. The tenant therefore has the first chance to buy.

Some tenants and owners are confused about the requirement of “the offer to purchase” and its incorporation into an agreement to lease.

There are tenants who believe they were “cheated” by their landlords, who ignored their rights by selling or offering to sell the leased property to a third party.

Some tenants claim they were given the option to buy the leased property when they entered into a lease agreement.

There are those who assume that their long period of occupancy entitles them to ownership, or at least, to the right to purchase the leased property, to the exclusion of others.

There are a few instances when tenants refused to vacate the property on termination of a lease by becoming “imaginative” about an offer to buy.

Landlord and tenant can agree that the tenant be given (i) the option to purchase the dwelling to be leased, or (ii), a preferential right to do so.

This becomes binding once it is written into the lease contract, and upon parties having concluded such an agreement.

The option to purchase is an offer by the landlord/seller and must therefore have the essential elements of a contract of sale that includes the purchase price and the agreement of the (leased) dwelling or property.

Accordingly, a landlord who gives the tenant a written option to buy the dwelling cannot sell it to a third party unless it was offered to the tenant and the latter declined, or was unable to pay the purchase price.

In the absence of the written lease contract containing the period within which the tenant is required to exercise the option, this has to be done before the lease comes to an end. Once the tenant exercises the option by accepting to purchase, the seller cannot refuse or change it; the option to buy is irrevocable.

If the parties concluded a lease contract that contained a preferential right or a right to pre-emption, this means the tenant has the right of first refusal if a condition in the lease contract is fulfilled.

“A right of first refusal is well known in our law. In the context of sale it is usually called a right of pre-emption. The grantor of such a right cannot be compelled to sell the property concerned. But if he does sell, he is obliged to give the grantee preference of purchasing, and consequently is prevented from selling to a third person without giving the first refusal.” (In Soteriou v Retco Poyntons (Pty) Ltd 1985 (2) SA 922 (A).)

This preferential right given to the tenant does not mean the landlord must sell the leased property, but that when he/she decides to sell or proposes to do so, the tenant has the right of first refusal.

The condition is usually that when the landlord/lady decides to sell, it must be offered to the tenant first. This right may be for a period stipulated in the lease contract or a period that is reasonable.

It would appear the price need not be specified because the landlord may or may not decide to sell the leased property. So the preferential right is not an offer to sell at the conclusion of a lease contract, but a right granted to the tenant that becomes operative if the landlord decides to sell.

Where parties have agreed to the tenant having the first option to purchase, the tenant is the only party who can buy the dwelling if it is to be sold during the currency of the lease.

“An option to purchase immovable property (and a simple contract for sale of immovable property) is not invalid merely because it does not set out the method of and time for payment. In the absence of express agreement, the law implies these terms.” (In Exdev (Pty) Ltd v Yeoman Properties 1007 (Pty) Ltd & others (2007) JOL 20644 (SCA).)

*Dr Sayed Iqbal Mohamed is the chairman, Organisation of Civic Rights.

For advice, telephone Pretty Gumede or Loshni Naidoo at 031 304 6451.