Recent development in our law highlighted the implication of the verbal extension of preferential rights embodied in a written agreement. This article briefly discusses the legal principles surrounding pre-emptive rights, the new legal developments in this regard and the dangers associated with extending same.

A contract may grant a preferential right to conclude a subsequent contract on the occurrence of a certain future event. A pacta de contrahendo, consists of a preliminary agreement with the aim of entering into a subsequent contract should one of the parties elect to do so. Common examples of such contracts are agreements whereby the tenant is given a right of pre-emption, or otherwise known as a “right of first refusal”, in the event that the lessor elects to sell the property.

Rights of pre–emption are contained in written contracts in the form of collateral terms. Collateral terms are those terms that are not incidental to the primary agreement and therefore not automatically assumed to form part of a termination date of the primary agreement. It is thus an important requirement that where parties to such agreements did not intend for the collateral terms to form part thereof, such intention needs to be expressly agreed to by the parties.   Courts are reluctant to enforce collateral terms and conditions in oral agreements in order to give effect to substantive agreements unless there is a clear indication of the intention of the parties that such a term should form part of the original agreement.

Parties to such contracts are often left in the dark as to whether the extension of a substantive contract leads to the automatic extension of the preferential right that is encumbered in the substantive contract.

Our Courts have adopted the view espoused by English law, as the correct approach in dealing with this subject matter. English Courts deal with options by arguing that a right of pre-emption is considered to be collateral in nature and shall continue during a period of extension only if it was what the parties to the agreement intended. The Constitutional Court ruled that such rights may be enforced against an owner of property in the circumstances where the right was granted verbally by the owner to the tenant.

What this entails is not necessarily an express verbal extension of the underlying terms and conditions, but a mere verbal extension of the original written agreement would suffice for the provisions to be binding. Therefore, whenever a contract is extended verbally by the lessor and/or tenant, all the rights of pre-emption, unless it appears otherwise from the face of the contract, is subsequently extended.

In the recent Constitutional Court case of Mokone v Tassos Properties CC, a tenant and a lessor orally extended a written lease agreement on the same terms and conditions with a manuscript endorsement on the front page of a document containing the original written lease, signed by all the parties. Mokone and Tassos Properties agreed to an extension of the lease until 31 May 2014, the endorsement read “Extended till 31/5/2014 monthly rent R 5 500”. The Court had to determine the following legal questions:

  • whether collateral terms in lease agreements, such as rights of pre-emption, automatically extend when the lease agreement is extended by the parties; and
  • whether a pacta de contrahendo must comply with the formalities contained in section 2(1) of the Alienation of Land Act No. 68 of 1981 (the “Act”).

The Court referred to the general rule which has was affirmed by the Supreme Court of Appeal, that a holdover tenancy continues on the same terms and conditions to the covenant as those contained in the original agreement concluded between the parties. Where parties continue in a relationship of tenant and lessor, they intended no change in the terms and conditions of the relationship. The Court made specific reference to the fact that the manuscript endorsement was made on a document embodying the original lease with the intention that it would constitute an extension of all the terms and conditions subject to the lease, including the right of pre-emption. If this was not the case then such an endorsement would have been made on any other piece of paper.

In determining whether the right of pre-emption had to comply with statutory formalities, the Court examined the use of the wording “alienate” and ruled that alienation, in relation to land, means to sell, exchange or donate and that simply affording one such a right, by means of a pre–emption does not amount to alienation as envisaged by the legislature.

The provisions of section 2(1) of the Act stipulate:

“that no alienation of land shall be of any force or effect unless it is contained in a deed of title and signed by the parties thereto or by their agents acting with their written authority. “

The Constitutional Court overturned the long-standing position set out by the Appellate Division’s ruling in Hirschowitz v Moolman with regards to the formalities of pre-emptive rights. In the case of Tassos Properties, the Court ruled that pre-emptive rights, granted verbally, are enforceable and such rights don’t have to be reduced to writing.

Lessors should be wary when orally extending a lease agreement, primarily where such an agreement contains a pre-emptive right. The Court overruled the common law and ruled that where a lease agreement is extended verbally or in writing, all collateral terms and conditions subject to such an agreement is consequently extended.

Collateral terms included in an agreement shall be binding on the lessor in instances where the original agreement has been extended by way of verbal representations. The Court ruled it to be a valid extension of collateral terms where the extension consist of verbal representation made by either contracting party and that an extension of a preferential right does not have to be reduced to writing in order to be binding on the parties to the agreement.

The parties should adopt an approach of reducing any preferential agreements to writing and any variation or amendment thereof should further also be reduced to writing and signed by both parties in order to ensure the enforceability of such preferential terms.