Options and rights of first refusal


The terms "option" and "right of pre-emption" (more commonly known as a "right of first refusal"), are often confused by persons involved in property transactions. There is a significant difference between granting or receiving an option to buy or sell property and granting or receiving a right of first refusal.

An option is an offer to buy or sell property accompanied by an undertaking not to revoke the offer for a certain period. For example,
A gives B an option to purchase his (A's) property, and agrees not to revoke this offer for a period of three months from the granting of
the option. If B exercises the option within the three month period, A will be forced to sell his property to B.

A right of first refusal on the other hand, is nothing more than an agreement between the owner of a property and another person
(the prospective purchaser) that the owner will give that person the first opportunity to purchase the property should the owner
decide to sell it. A person who has been granted a right of first refusal can never force the owner to sell the property to him.
Certain formalities have to be complied with when granting and accepting options and rights of first refusal and the drafting
of these documents are probably best left to attorneys.

Although strictly speaking, not all aspects of an option need tobe in writing, it is, in my opinion, preferable to reduce all
aspects of the option to writing. In my opinion, the best way to deal with options is to draw up an "option agreement" between the
parties and to attach a Deed of Sale to the option agreement which sets out all the terms and conditions upon which the parties agree
to sell or purchase the property should the option be exercised. Both parties then sign the option agreement. If the person who has
been granted the option exercises the option, then both parties sign the Deed of Sale.

Agreements conferring rights of first refusal must be in writing and signed by both parties in order to be valid. It seems that
there is some uncertainty in our law regarding exactly what terms and conditions have to be incorporated in such agreements. This
is one of the reasons why I stated that care must be taken when drafting such agreements.

I have come across a number of cases in practice where people have labored under misconceptions regarding whether they granted or
received an option or a right of first refusal. The consequences of such a misunderstanding can be serious. An owner who grants
an option under the mistaken belief that he is granting nothing more than a right of first refusal could be forced to sell his
property against his will.

Similarly, a buyer who thinks that he has an option to buy when in fact he has only a right of first refusal will be disappointed
when he tries to exercise his "option".