Option to Purchase v Right of First Refusal

South African Property Law enables the registered owner of an immovable property to conclude an option to purchase or grant the right of first refusal for the purchase of his property in favour of a third party. Although its’ consequences are considerably divergent, these respective rights are often misinterpreted. It is therefore unquestionably advisable to consult with a property law expert or conveyancing practitioner prior to the conclusion of either such agreement. 

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What is the difference between an Option to Purchase and the Right of First Refusal?

Option to Purchase:

An option to purchase immovable property constitutes a right in terms of which a property may be purchased by the holder of such option upon election of such person to exercise his right in terms thereof within a specified period of time and for a pre-determined purchase price which is required to be reduced to writing together with all material terms and conditions agreed to between the parties, in terms of Section 2(1) of the Alienation of Land Act No. 68 of 1981.

The Grantor of such an option (the Seller) is therefore obliged to sell his property to the holder thereof (the Purchaser) in the event that he elects to exercise the option to purchase, without recourse to the Grantor should he no longer wish to sell the property within the specified validity period. In circumstances where the holder of the option fails to explicitly exercise his right to purchase prior to the expiry of the time period specified in the option agreement, then such option shall automatically lapse and cannot be enforced against the registered property owner. In lieu of the property owner’s exclusivity, the Grantor may require and accept monetary compensation in exchange for the option granted in favour of the holder. Although the holder of the option assumes the risk in forfeiting such a non-refundable deposit should he fail to exercise his right within the specified time period, the option to purchase may be viewed as most beneficial to the holder (the Purchaser) as the Grantor is effectively prohibited from marketing the property for sale to the public or any third party during the option period.

Right of First Refusal:

A right of first refusal or pre-emptive right is a collateral agreement whereby a registered property owner (the grantee) grants preference to another person (the grantor) to purchase his property should he choose to sell during the existence of the right of first refusal. Unlike an option to purchase, this right therefore does not compel the grantor to sell his property at any time, but rather imposes the restrictive and enforceable obligation on the grantor to first afford the holder of the right to first refusal, the opportunity to elect to purchase or not to purchase the property, if and when the grantor indeed decides to sell, consequentially preventing the grantor from selling to any third party before first offering to the grantee. It is therefore implied that the holder of the right is generally only afforded the right to purchase the property for the desired purchase priced determined by the Seller and may not rely upon a pre-determined price as is the case with the right to an option to purchase. The registered owner or his representative is not precluded from marketing the property for sale to the public at large or any third party, provided that such a prospective third party sale shall be subject to the holder of the right to first refusal, first being invited to purchase the property. In terms of the Alienation of Land Act No. 68 of 1981 such a right to first refusal is required to be concluded in writing and validly signed by all parties thereto. 

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