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Contracting for the future: Options vs Rights of First Refusal

Sep 24, 2025

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Generally, most property transactions are concluded by way of a sale agreement with immediate obligations to pay and to take transfer of the property. However, occasionally there are instances where parties wish to contract for the future. In this article we explore the two most common legal mechanisms used for this purpose, an Option to Purchase and a Right of First Refusal.

What is an Option to Purchase?

An option to purchase gives the holder (the purchaser) the right to purchase a property on agreed terms within a specified period. The sale will only come into being if the purchaser gives written notice exercising the option within the agreed period. Should the option not be exercised, the right will simply terminate.

Example:

A purchaser is interested in buying a property to substantially renovate but needs time to conduct inspections and obtain quotes to determine whether it is a worthwhile opportunity. The seller grants the purchaser a 6-month option to purchase the property for R 2,000,000 in exchange for payment of R 30,000.

Important points to note:

  • The seller is bound by the option for the period for which it was granted and cannot sell the property to any third parties during this time.
  • The purchaser has the choice of whether to exercise the option before the expiry of the period.
  • If the purchaser exercises the option within the agreed time, the seller is bound to sell on those pre-agreed terms even if the market value of the property has increased.
  • Upon the expiry of the option and in the absence of purchaser having exercised his right, the seller is free to sell the property to anyone.

What is a right of first refusal?

A right of first refusal (also known as a pre-emptive right) gives the holder (the purchaser) the first opportunity to purchase the property if/when the owner decides to sell. 

Example:

A landlord grants a tenant a right of first refusal. If the landlord decides to sell the property, they must give the tenant the chance to purchase it before offering it to the open market.

Important points to note:

  • The owner is under no obligation to sell, however if they do elect to do so they must offer it to the holder of the right on the same terms that they are willing to sell to another purchaser.
  • If the holder declines to purchase or submits an offer which is too low for the seller, then the seller can sell it to any third party provided the terms are no less favourable than those offered to the holder.

Key differences:

Option Right of first refusal
The purchaser has a firm right to buy on the pre-agreed terms. The purchaser only has a conditional right – which is triggered once the seller elects to sell.
Seller is bound to sell if the option is exercised. Seller is never obliged to sell.
Terms of the offer are agreed upfront.  Terms are only negotiated once the seller elects to sell.
Creates certainty for the purchaser and limits the seller’s freedom. Creates flexibility for the seller and less certainty for the purchaser.


Formalities in concluding options and rights of first refusal

While it is not strictly required for options and rights of first refusal to be in writing, in terms of the Alienation of Land Act the eventual sale agreement to be concluded is required to be in writing and signed by both parties. It is therefore always advisable for options and rights of first refusal to be recorded in writing and signed by both parties to ensure sufficient protection and for the avoidance of any disputes. 

It is important to note that should a sale agreement be concluded because of the exercise of an option or right of first refusal, any consideration paid for that right will be taken into account for the purposes of determining the amount of transfer duty that is payable. Should the granting of the right not however result in a sale, then no transfer duty is payable on the consideration received by the grantor (seller). 

Conclusion

In a property market where stock is flying off the shelves, legal instruments like options and rights of first refusal can be effective mechanisms to secure your bid while creating some flexibility for the future. Due to the complex nature of these rights, it is always advisable to reach out to a legal expert to tailor it to suit your needs.

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Yours in Conveyancing

Daniel Hodgeson

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