7 April 2021 by , and Real Estate Alert

Traversing uncharted territory: Does the conclusion of a ‘package deal’ trigger pre-emptive rights?

The genealogy of pre-emptive rights can be traced back as far as the Digest of Justinian – where D 18 1 75 and D 19 1 21 5, albeit scantly, dealt with the sale of land subject to the condition that the buyer would not sell to anyone other than the seller. Since then, the nature, content and scope of pre-emptive rights have undergone considerable development – ranging from the early Roman Law pactum protimeseos to the Germanic Law näherrecht – and so, too, have the remedies afforded to the grantee upon breach thereof by the grantor.

Given this rich history, one might reasonably assume that there was nothing novel left to be said about pre-emptive rights. Quite the contrary – in the recent case of Plattekloof RMS Boerdery (Pty) Ltd v Dahlia Investment Holdings (Pty) Ltd and Another (7836/2020) [2021] ZAWCHC the court traversed uncharted territory, when it was called to determine whether the conclusion of a so-called ‘package deal’, with a third-party purchaser, triggered pre-emptive rights in respect of land leased by the grantee – an issue for which there was, at the time, no binding authority.

Genesis of the dispute

Dahlia Investments Holdings (Pty) Ltd (Dahlia), the owner of certain farmland consisting of eight separate portions, leased two portions thereof to Plattekloof RMS Boerdery (Pty) Ltd (Applicant). Clause 10 of the lease agreement granted the Applicant a right of pre-emption in respect of the two portions of the farmland so leased (pre-emption property). The relevant provisions of clause 10 read as follows –

“10.1 Provided that the Lessee has complied with all of its obligations under this agreement, the lessee shall have the right of first refusal to purchase the Premises on terms and conditions the same as nor (sic) no less favourable than those offered by a bona fide third party to the Lessor and the Lessor shall deliver written notice to the Lessee specifying the terms and conditions of such offer, and the Lessee shall have 14 (fourteen) days thereafter in which to accept or reject the offer by written notice, failing which the Lessor shall be entitled… to dispose of the property…”

On 7 April 2020, Dahlia entered into a deed of sale (Sale Agreement), pursuant to which it sold all eight portions of the farm (including the pre-emption property) to Swellendam Plase (Pty) Ltd (Swellendam) for a purchase consideration of R17,000,000.

It is worth noting that the Sale Agreement did not specify what price had been allocated to the respective portions of the land, which, in turn, made ascribing a specific value to the corresponding portions all the more onerous. Moreover, the respective portions of the farmland were by no means homogenous, as the portions leased by the Applicant contained a proportionately greater share of arable land compared to its counterparts. This notwithstanding, had the entirety of the farm been indiscriminately valued on a per hectare basis, in accordance with the purchase consideration paid by Swellendam, the combined value of the pre-emption property would have amounted to approximately R6,600,000.

For the subsistence of the lease period, the Applicant was aware that Dahlia had intended to sell the farmland in its entirety, as it had itself been an active participant in several ‘half-baked’ sales, as it were, which had previously fallen through. Nonetheless, upon becoming aware of the sale, the Applicant sought to enforce its pre-emptive rights.

It laboured under the erroneous assumption that Dahlia would accept R4,000,000 for the pre-emption property and that Swellendam would be content with the remaining six portions for an amount of R13,000,000. These figures were, in part, predicated on previous discussions between the relevant parties during the respective ‘half-baked’ sales that subsequently fell through.

When it became apparent that the Applicant’s assumption was in fact false, it sought to vindicate its pre-emptive rights by approaching the court. The Applicant moved for an order directing Dahlia to comply with its contractual obligations, by proffering a written notice offering the pre-emption property for a purchase consideration of R4,000,000, on identical terms and conditions to that of the Sale Agreement.

The reasoning of the High Court

The court intimated that the central issue for determination was the position of the Applicant in terms of clause 10 of the lease, when the ‘premises’ in respect of which it enjoyed a right of pre-emption, became the subject of a contract of sale which formed part of a larger ‘package deal’. A factual matrix of this nature had no precedent in our law because the Sale Agreement did not only pertain to the pre-emption property, but rather, was a globular transaction for the entire farm, of which the pre-emption property was just a component part.

The court considered the case of Sher v Allan 1929 OPD 137 (Sher v Allan) where the lessee, too, had been, granted the “first option to purchase the leased property” in the event that the lessor desired to sell it during the currency of the lease. In that instance the leased property was but a portion of a much larger registered erf.

Notwithstanding the lessee’s pre-emptive right, the lessor in that instance sold the entirety of the erf to a third-party without regard for the lessee’s pre-emptive right. The court, in that instance, held that the lessor was not at liberty to –

“derogate from his own concession, or defeat its operation by his own act. If he wished to sell the whole, he could do so – provided, as to half of what he was willing to sell, he had to respect his undertaking to the [lessee]; and his conduct would have to be regulated accordingly.”

In considering the import of the dicta from Sher v Allan, the court noted that it lent support to the notion that Dahlia may have incurred liability for damages, had it disposed of the leased property to Swellendam without first offering it to the Applicant. Moreover, and perhaps by implication, the judgment also lent support to the conclusion that, the Applicant could interdict the transfer of the pre-emption property to Swellendam, if it could illustrate that the Sale Agreement so concluded failed to cater for its pre-emptive rights.

The court did, however, note that Sher v Allan did not provide support for the relief sought by the Applicant, that being, the sale of the pre-emption property at a price gleaned from the circumstances that surrounded the conclusion of the sale. More importantly, the court noted that the terms of the pre-emptive right in Sher v Allan differed materially to those of clause 10 in the present instance.

In this regard the court remarked that –

“In Sher v Allan the clause required the lessor to offer the pre-emption property to the lessee should he desire to sell it during the continuance of the lease. It was for the lessor, and not a third party offeror to determine the terms upon which he wished to sell his property.”

In the court’s estimation, the clause in Sher v Allan imposed a positive obligation on the lessor whereas the clause in the present instance did not have the same import. The court intimated that the content of the grantor’s obligations under the contrasted pre-emptive clauses, had a direct bearing on the types of remedies available to the grantee upon breach thereof by the grantor.

Given the novelty of the relief sought, and the paucity of authority on the issue at hand, the Applicant sought support from the approach endorsed by Professor Naude.

In her seminal article titled “Which transactions trigger a right of first refusal or preferential right to contract” Professor Naude acknowledges the dearth of authority in our law on the matter at hand. She does, however, note that in the United States – whose jurisprudence on the topic is, in her estimation, informative – four conflicting approaches exist, the fourth of which the Applicant relied on. In terms of this approach upon the conclusion of the package deal by the grantor with the third party, the grantee may purchase the pre-emption property alone. Given the attendant difficulty of determining the price payable for the pre-emption property, Professor Naude posits that the court ought to fix the price at a reasonable amount.

The court was unpersuaded by this line of reasoning, as it felt that this would, in effect, result in the court making a contract for the parties for the sale of the pre-emption property, at a reasonable price when the right of pre-emption itself, did not vest the holder thereof with a right to buy it at a reasonable price. That said, having considered the contentions put forward by both parties, the court held that the pre-emptive rights contained in clause 10 of the lease were, in fact, triggered by the Sale Agreement. Moreover, upon the triggering thereof, Dahlia became obliged to give the Applicant written notice specifying the terms and conditions of the Sale Agreement, to which the Applicant would then elect whether or not it intended to acquire the pre-emption property.

The court did not, however, agree that the Applicant became entitled to purchase the pre-emption property for R4,000,000. Applying the Plascon-Evans rule, the court proceeded on the basis that at the conclusion of the Sale Agreement, the pre-emption property was worth more than R5,000,000. Therefore, according to the court the relief sought by the Applicant – namely, that the pre-emption property be sold for R4,000,000 – could not be granted. Accordingly, the court dismissed the application.

Conclusion

It remains to be seen whether the approach espoused by the court in this instance will be followed in future ‘package deal’ cases. Nevertheless, until then, the court must be applauded for giving primacy to the terms of the clause in which the pre-emptive right was sourced, as it is the wording employed therein that determines the obligation assumed by the grantor, and by corollary, the remedies available to the grantee. It is thus clear that there is still, in fact, more to be said about pre-emptive rights and, perhaps, more uncharted territory to traverse in future.

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