RIGHT OF PREFERENCE

What is the difference between a ROP and an Option?

What exactly is a right of preference?

• This is not an option.
• It creates a right of preference, not an obligation to sell or buy.
• There is no main offer attached to it at the time of the agreement.
• Instead, the grantor (the owner) agrees that if and when they decide to sell (or conclude
another contract), the grantee will have the first chance or “preference” before they can
sell to someone else.
• The preference contract is a separate ancillary agreement, not the main sale or lease
contract itself.
• In other words, it’s a pactum de contrahendo (an agreement to potentially contract in
the future), but not a current offer or sale.

What is a pre-emptive right?

• A pre-emptive right is a type of preference right, often connected with sales.

• If I own a farm and I give you a pre-emptive right, I agree that if I ever sell the farm, I
must first offer it to you before selling to anyone else
• You get the first refusal or preference to buy, but you are not obliged to buy.
• This right protects the holder by giving them the chance to step into the transaction first.
Distinguish a right of first refusal from a pre-emptive right

a) Right of Pre-emption (preference in sale):

• Example clause: “If I decide to sell this farm, I will approach you first.”
• This is a right of pre-emption — a preference in the context of a possible sale.
• The holder can buy first if they want; otherwise, the owner can sell to others.

b) Rights of First Refusal (other rights of preference):

• These are preferences in contracts other than sale — for example, in leases.
• Example: If you have a lease, a right of first refusal may give you the preference to sign
a new lease when the current lease expires.
• This gives you the right to be offered the lease renewal before the landlord offers it to
someone else.

They are interchangeable!!! No legal difference unless the contract says otherwise!!

What is the content of a pre-emption agreement/

• There is NO OFFER (unlike an option)

o Remember, in a option contract, the grantor makes a firm offer up front. All the
grantee has to do is accept and the sale is final.
o In a pre-emption right, there is NO OFFER YET.
▪ It is just a promise to give the holder of the pre-emption right a chance
if the sale is ever considered!
• SO?
o No binding offer exists
o It is just a promise: “If I ever want to sell, I’ll offer it to you first.”
• The grantor has no obligation!!
o His obligation only starts when he decided to sell – this is called a trigger event.
o The only way the grantor is binding himself at this stage is by promising to give
the grantee preference.
Explain any limitations on the Grantor’s Freedom to sell

• The pre-emption right restricts the grantor – they cannot sell to someone else unless
they have first offered the property to the holder of the right.
• BUT – the grantor IS NOT FORCED to sell – they are just bound to follow the rules if
they choose to sell.

Explain the duty of the grantor?

• The grantor has a negative duty NOT TO SELL/PROMISE TO SELL the merx to
anyone else before first offering it to the holder of the right of pre-emption.
• Grantee can use an interdict to prevent them from entering into a contract with someone
else before offering it to the grantee.

Is there a positive duty on the grantor/

• It depends on the type of ROP/

• Depends on the intention of the parties and can be determined in the contract.
• Debated in the Owsianick case:
o Botha JA – no positive duty, grantor cannot be compelled to sell – no specific
performance possible
o Ogilive Thompson JA – Yes there is a positive duty; once the TRIGGER
EVENT occurs, the grantor must make an offer to the grantee and CAN BE
COMPELLED by the court e.g. through specific performance.
• Hartsrivier case:
o Holder of ROP must make the offer
o Critique – grantor can abuse this e.g. by ignoring the offer and selling to
someone else
• Owsianick case:
o Preferred in our courts – grantor must make the offer once the tigger event
occurs.
o Ensures that the preference is honoured.
What is a trigger event? Why is it relevant?

• The trigger event activates the grantee’s RIGHT TO BUY.

• This happens when the grantor shows a real intention to sell:
o The grantor gets and wants to accept an offer from a 3rd party
o The grantor gives an option to a third party (shows their intention to sell)
o The grantor says, “I’ve decided to sell.”
• Exact trigger depends on the wording in the contract.

What are the competing views on what counts as a trigger event – esp where no defined
clearly in the contract

• Bhana:
o Broad view
o Says YES – any manifestation of a desire to sell is enough
o So even actions like getting a valuation of the property show the grantors
intention to sell
• Naude`:
o Narrow view
o Says NO – not all manifestations should qualify
o Only the actual offer or clear act intending to sell should trigger the right.
o Pre-emption should not be activated so easily.
What are remedies for a breach of a ROP agreement?

• When is it breached?
o When the grantor sells to a third party without first offering it to the holder
o This “triggers” the right and the holder can take action
• Step 1: Check the Contract
o Does the contract clearly describe how the pre-emption right works?
o If not – the courts assume that the grantor MUST MAKE AN OFFER to the
holder before selling to someone else
o There must also be a real intention to sell!1
• What can holder do?
o (i) Cancel the agreement and claim damages
o (ii) Enforce the right to get what they promised

How can the holder enforce the right? (as a remedy for breach)

They can:

• (i) Compel the grantor to make an offer

o If the Grantor (G) sold to the third party (T) without offering it first to the holder
(H), then H can obtain an order compelling G to make an offer to them.
o Owsianick case
• (ii) Compel the grantor to accept the Holder’s offer
o H makes an offer and obtains an order compelling G to accept their offer
o H can say “I am making an offer, you (G) must accept it.”
o So, if G refuses the court can order a court official to accept the offer on G’s
behalf.
o Mokone v Tassos’s case – court supports this remedy.
What about the ORYX mechanism?

• This is a special legal remedy developed by the courts

• How it works:
o G and H have a pre-emption agreement
o G ignores H’s right and sells to a third party – T
o H can then STEP INTO THE SHOES OF T (without going to court) by making
a unilateral declaration.
▪ H says: “I am now the buyer on the same terms as T.”
▪ This creates a new contract between G and H
• So the holder is CREATING a 2nd contract so that they have a relationship with the
grantor
•
• NOTE:
o This new contract DOES NOT CANCEL the sale between G and T, but now
TWO CONTRACTS exist.
▪ The Holder and 3rd party have competing personal rights!!
o Because of the first in time, first in law principle – H takes priority!!
o So:
▪ If the property has not yet been transferred to T, then H can demand
transfer
▪ This is because the Holder has a stronger right and will be entitled to the
transfer
▪ What about T?
• T can claim damages from G for breach of contract.
• What is T already got transfer?
o We ask was T bona fide or mala fide? (Did T know about the agreement between
G and H or not?)
o T bona fide:
▪ H will not be entitled to the transfer and can only then get damages
▪ This is because T has a REAL RIGHT to the property and H only has a
personal right
▪ Remember; real right trumps a personal right!!
▪ So here the doctrine of notice will not apply
 o T mala fide:
▪ This is when T knew about H’s ROP
▪ The doctrine of notice applies here
▪ T can then be compelled to transfer the property to the holder in this
case.
▪ So, then H can possibly recover the property ect.

What are some of the critiques of the Oryx mechanism?

• Could amount to self-help

• Court left open 3 questions:

Practical implications:

• (1) If only an offer to C is made, B may not yet be able to act. If a contract is concluded,
then B definitely can.
• (2) If only an offer to C is made, B may not yet be able to act. If a contract is concluded,
then B definitely can.
• If only an offer to C is made, B may not yet be able to act. If a contract is concluded,
then B definitely can.
Discuss the formal requirements for ROP

• Mokone v Tassos case NB here

Mokone case:

Core facts:

• Mokone (the tenant) entered into a written lease agreement with Tassos Properties (the
landlord), which included a right of pre-emption — meaning if the landlord decided to
sell the property, Mokone would have the first right to buy it.
• The lease was for one year and expired, but the lease was extended orally. Later, a
handwritten note was made on the original lease:

"3/5/06 extended till 31/5/2014 monthly rent R5500"

• In 2010, Tassos sold the property to Blue Crane (a third party) without giving Mokone
the opportunity to buy it.
• In 2012, Mokone tried to exercise her pre-emption right by matching the price paid by
Blue Crane and notified Tassos in writing.
• Tassos argued that the right of pre-emption had not been extended with the lease, so it
no longer existed.
• Mokone then took legal action to:
o Undo the sale to Blue Crane,
o Force a sale to her under the pre-emption,
o Or alternatively, claim damages.

Legal issues raised:

A. Did the Right of Pre-emption still apply after the lease was extended?

• Tassos argued that the pre-emption clause had not been renewed, because the
endorsement only mentioned rent and time, not the right of pre-emption.
• The Constitutional Court (CC) had to decide whether the right of pre-emption was
implicitly extended along with the lease.
B. Did the failure to comply with the Alienation of Land Act make the pre-emption
invalid?

• Tassos and Blue Crane argued that:

o The pre-emption (or its extension) was not in writing and not signed by both
parties,
o Therefore, under Section 2(1) of the Alienation of Land Act, it was invalid.

Findings:

A. Right of Pre-emption ≠ Sale

• Section 2(1) of the Alienation of Land Act requires sales of land to be in writing and
signed by both parties.
• But the Court emphasized that a right of pre-emption is NOT a sale. It is a right to be
offered a sale if the owner decides to sell.
• This means the grant of the right of pre-emption itself does not require the same
formality as a sale.
• Justice Madlanga:
o Just because a sale must be in writing, doesn’t mean the preference must be.
o A holder of a pre-emption right can still comply with the law by exercising the
right in writing and creating a valid written sale.

B. Remedies for Breach of Pre-emption

• If the seller breaches the right of pre-emption by selling to a third party, Oryx (a
previous case) allows the holder to:
o “Step into the shoes” of the third party, effectively creating a valid contract with
the seller.
• Court confirmed this is legally acceptable even if the original sale went quite far (e.g.,
transfer not yet registered).
• The court can enforce the right and require the seller to honour their obligation to the
holder.
 C. Extension of Lease and Pre-emption

• The CC held that the handwritten endorsement did extend the pre-emption right.
• Why? Because it was understood as a continuation of the original agreement — not just
rent, but also the tenant’s protections and rights.
• Even though the endorsement didn’t explicitly say "the right of pre-emption is
extended", the intention of the parties (and the context) supported it.

What were the 2 judicial perspectives in the Mokone case?

• Majority Judgment: Madlanga J:

o Strongly rejected the idea (from Hirshowitz v Moolman) that all pre-emption
rights must be in writing.
o Emphasized a more pragmatic and fair approach that aligns with constitutional
values (fairness, access to courts, honoring agreements).
o Said courts can and should enforce pre-emption rights even when they weren’t
recorded with full formalities, as long as their exercise can comply with the law.
o Supported the “Oryx mechanism” — where the pre-emption holder can enforce
the right against a third-party buyer by stepping in.
• Minority Judgment: Froneman J
o Agreed in result, but warned about overruling Moolman completely.
o Believed that Moolman still applies narrowly, especially where the Oryx
mechanism is used — because stepping into someone else’s shoes still requires
a valid written offer to step into.
o Emphasized that the pre-emption in this case was a “right of first refusal”, not
exactly a “stepping in” case.
o Stressed the importance of interpreting contracts fairly, but also carefully, in
light of formal requirements.