Does A Tenant’s Right Of First Refusal On The Property Fall Away When The Lease Is Renewed?
“I have been renting a house for a few years, and because I would like to eventually buy the place should the owner decide to sell, I asked that we include a right of first refusal in my favour in the lease agreement to buy the house. The lease has been renewed a few times over the years. Now the owner has decided to sell to his brother-in-law saying that my right fell away when the lease was renewed and no longer exists. Can he do this?”
A right of first refusal (also called a right of pre-emption) affords the holder of the right a preference to buy a property should the owner ever wish to sell it. Importantly, the owner does not have to sell the property, but should the owner decide to sell then the owner must grant the holder of the right the first opportunity to buy the property. One often encounters such a right of first refusal being included in lease agreements for the same reason you have such a right, namely to enable the lessee to be able to have the first opportunity to buy the property should it come onto the market.
The Constitutional Court recently had to consider the question of whether such a right of first refusal lapses when a lease agreement is renewed or whether it is also renewed when the lease agreement is extended. In terms of our common law, the rule is that only essential terms to the lease relationship, such as the time period and rental etc. will be renewed as these are considered essential. Non-essential or collateral terms will not automatically be renewed unless the parties clearly indicated that these terms should also renew. The Court disregarded this common law principle and in considering the matter, stated that this position unduly favours the lessor and that it is inconceivable that the ordinary lay person would be able to distinguish between what would be essential and collateral to their relationship. Accordingly the Court held that unless expressly or tacitly agreed otherwise, rights of first refusal are automatically renewed when the lease is renewed.
For interest, it may also be noted that a right of first refusal can even be registered at the Deeds Office against the title deed of a property by way of a notarial deed, ensuring that the owner will not be able to transfer the property to a third party without upholding the right of first refusal.
In the situation and question asked above, unless renewal is specifically excluded, it does appear that the tenant’s right of first refusal will have renewed with his or her lease renewals and that the owner cannot sell the property without first offering it to the tenant.
It is recommended that the tenant in this case should ask his or her attorney to review the wording of the lease agreement and assist him or her in explaining the continued existence of the tenant’s right of first refusal to the owner.