Plattekloof RMS Boerdery (Pty) Ltd v Dahlia Investment Holdings (Pty) Ltd

The high court decided that, assuming that the applicant was not in breach at the time of any of its obligations under the lease, the right of first refusal conferred in terms of clause 10 of the lease was triggered when Swellendam Plase made an offer to purchase the entire farm on terms and conditions that were acceptable to the owner and that there was no merit in the contention that the sale of the whole farm did not entail the sale of the pre-emption properties for the purposes of clause 10 of the lease.

Essence

In considering the granting of a right of first refusal the high court discussed 4 different USA approaches discussed by Professor Tjakie Naudé in a journal article in the SALJ.

Decision

(7836/2020) [2021] ZAWCHC 1 (4 January 2021)

Order:

Refused application.

Judges

A G Binns-Ward J

Heard: 6 October 2020
Delivered: 4 January 2021

Related books

CG van der Merwe  Sectional Titles, Share Blocks and Time-sharing (LexisNexis service issue 26 – November 2019) at

Reasons

‘[37] Upon the triggering of the right, the first respondent became obliged, according to the tenor of clause 10 of the lease, to give the applicant written notice specifying the terms and conditions of the offer it had received from Swellendam Plase and the applicant would thereafter have 14 days in which to indicate by written notice to the first respondent whether or not it intended to acquire the property on same terms and conditions. In other words, in exercising the right to acquire the two erven on the same terms and conditions as the third party was prepared to do, the applicant would, in the circumstances of the offer made by Swellendam Plase, have to purchase the whole farm for R17 million. It would have to take the whole package because the package deal reflected the terms and conditions upon which Swellendam Plase would acquire the pre-emption property. That would be to give effect to the plain meaning of the language of clause 10. The character of the constituent portions of the farm was such that the property did not lend itself to a pro rata allocation between the parts of the whole. The parties to the pre-emption agreement must have appreciated that when they concluded the agreement of lease including the right of first refusal.”

Quotations from judgment

Note: Footnotes omitted and emphasis added

[1] The first respondent company owns a farm near Riversdale called Plattekloof. It consists of eight separately registered portions of land. The applicant rents two of them, namely Remainder of the Farm Hottentots Bosch, Farm 80 Riversdale, in extent 424,76 ha, and Portion 5 of Farm 90 Riversdale, in extent 443,1839 ha. The lease runs for a five-year period, terminating on 1 April 2023.

[2] Clause 10 of the lease agreement affords the applicant a right of pre-emption. It provides:

10. Right of First Refusal
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 Lessor (sic) 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, subject to the Lessor (sic) commitments under this agreement, to dispose of the property to any third party on the terms originally offered for a period of 60 (Sixty) days, failing which this right of first refusal shall revive.

[3] On 7 April 2020, the first respondent entered into a deed of sale in terms of which it sold the entire farm (i.e. all eight portions) to Swellendam Plase (Pty) Ltd for R17 million. The agreement was a globular transaction; it did not ascribe a price to each of the constituent portions of the farm individually. It is therefore not possible to discern a transactional value for the two portions of the farm that are the subject of the right of pre-emption.

. . . . 

[25] It is important to note that the terms of the right of first refusal clause in Sher v Allan were materially different from those involved in the current matter. 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. I consider that it was the different wording of the clause in issue in that case that informed the court’s decision that the lessor could not sell the pre-emption property as part of a package because that would defeat the preference he had granted in terms of clause 5 of the lease agreement.

The distinction between the effect of the pre-emption clause in the current case, which might be said to have imposed a negative obligation on the lessor, viz. an obligation not to conclude an agreement of sale with a third party offeror without first offering the property to the lessee on the same terms and conditions as had been offered to it, and that involved in the matter of Sher v Allan, which imposed what might be called a positive obligation on the lessor, viz. an obligation, if he wished to sell the pre-emption property, to first offer it to the lessee on the terms he proposed to dispose of it, is confirmed, I think, by the analogy that McGregor AJP considered fell to be drawn between the latter case and the nature of the ‘first refusal’ analysed by Vaughan Williams LJ in Manchester Ship Canal Co v Manchester Race Course Co [1901] 2 Ch. 37 (CA).

In other words, the clause in Sher v Allan required the grantor to go to the holder if he wanted to sell the pre-emption property and say I have decided to sell the property for such and such amount and therefore, as required by our agreement, I hereby give you the opportunity to exercise your right of first refusal. The wording of clause 10 of the lease in the current matter does not have that import.

[26] The difference in the character of grantor’s obligations under the contrasted preference clauses affects the type of remedy that would be indicated if the grantor were to act in breach of them. In the example in Sher’s case, the obviously appropriate remedy (before the conveyance of the property to a bona fide third party had occurred) would be a prohibitory interdict. In the current case, ignoring for the moment the complicating effect of the package deal sale to Swellendam Plase, the indicated remedy would be a claim for specific performance – in effect, the implementation of the ‘Oryx mechanism’.

[27] Mr Potgieter, recognising the novelty in the applicant’s claim in the context of the sale of the pre-emption property as part of a package deal including adjoining property that was not subject to the preference agreement, sought support for it in the approach favoured by Professor Tjakie Naudé in an article published in the South African Law Journal, ‘Which transactions trigger a right of first refusal or preferential right to contract?’.

Naudé framed the following questions for the purpose of the discussion:

  • ‘What is the effect of the sale of the pre-emption property as part of a larger package of properties (the so called ‘package deal’ situation)?
  • Does such a sale trigger or breach the right of pre-emption?
  • If so, must the holder be prepared to buy the entire package in order to exercise her right of pre-emption, because she must step into the shoes of the third party?
  • Does she in any event have a right to buy the entire package, or only the pre-emption property, and if the latter, how is the price calculated?
  • Or would a proposed package deal merely entitle the holder to an interdict prohibiting the grantor from selling until he receives a third party offer for the pre-emption property alone, which the holder can match?’

[28] Professor Naudé acknowledges that South African case law gives no clear answers to these questions. It is apparent from his review of cases in the United States, which appears to have the richest jurisprudence on the topic, that they can be, and have been, addressed in a variety of ways. Naudé states that there are four conflicting views in the US case law on the effect of the package deal on the holder of the pre-emption right’s position. It is crucial, of course, when considering any of these various approaches, to remember that each one of them departs from or is founded upon a construction of the peculiar terms of the pre-emption agreement in issue in the given case.

As the English Court of Appeal aptly emphasised in Bircham & Co, Nominees (2) Ltd & Anor v Worrell Holdings Ltd [2001] EWCA Civ 775 (22 May 2001) in para 22, ‘the effect of a pre-emption clause depends upon its own particular terms’. The various approaches described in Naudé’s article do nevertheless afford a useful basis for a critical analysis of the conceptual considerations involved in determining the applicant’s claim.

[29] The first approach, favoured by the Supreme Court of Nevada, is that the package deal does not trigger the right of pre-emption because it entails the sale of something completely different. It is an approach that was contended for by the defendant in Sher v Allan, and would appear to have been propounded by the first respondent in the current matter because it also took the line that the sale of the whole farm did not trigger the right of pre-emption pertaining to only two portions thereof.

I have to agree with McGregor AJP’s rejection of the approach as contrived, or as the learned judge put it, one that, on the facts of a case like the current matter, might ‘bring one into a somewhat metaphysical sphere’. A sale of the whole of a farm comprised of a number of sections or portions must, in and of itself, entail the sale of each and every one of those portions. The Nevada approach therefore does not commend itself.

[30] The second approach in the United States identified by Naudé holds that the package deal does not trigger the holder’s right of pre-emption, but it does entitle him to interdictory relief prohibiting the grantor from selling the pre-emption property as part of the package. It is not necessary to determine the question because the applicant has not sought interdictory relief other than on a pendente lite basis, but in my view it is not an approach that commends itself on principle. Interdictory relief is, after all, predicated on the infringement (actual or threatened) of a right.

That begs the question then, if interdictory relief is available, as to the character of the right that is said to be infringed. If one is not to be taken into ‘a somewhat metaphysical sphere’, one must surely accept, as the court did in Sher v Allan, that the sale of something that includes the subject matter of the pre-emptory right necessarily also entails the sale of the matter that is the subject of the right, and therefore acts as a trigger for the exercise of the right. It is a right to buy if the grantor wants to sell; not a right (unless the terms of the conferring contract provide otherwise) to prohibit the sale if the grantor is selling the property in terms of a package deal contract. (Being a restraint of alienation, a pre-emption clause must be narrowly construed in favour of the preservation of the grantor’s liberty to alienate his or her property; cf. Robinson v Randfontein Estate Gold Mining Co. Ltd 1921 AD 168 at 188 and Owsianick v African Consolidated Theatres (Pty) Ltd 1967 (3) SA 310 (A) at 321E.)

I consider that the holder would be entitled to a prohibitory interdict in such circumstances only if he or she could show that the package deal was a male fide manoeuvre to avoid honouring the right of pre-emption. It would be different, of course, if the terms of the contract bound the grantor to hold the pre-emption property available to be sold only on its own and not as part of a package with some of the grantor’s other property. I am unaware of any authority that holds such a rider falls to be implied in the grant of a right of first refusal. Whether a tacit term to that effect might be imputed would depend on the peculiar facts of the given case.

[31] I accept though that this reasoning does not answer the questions whether the holder whose right has been triggered by the sale of the pre-emption property as part of a larger package is then required to buy the whole package or only the component that is subject of the right of first refusal, and if the latter, how the price of the component is to be determined. I shall come to those questions presently.

[32] The third approach by the US courts discussed in Naudé’s article is that the holder’s right to exercise his right of pre-emption embraces the whole package. My own view is that that would depend on the terms in which the right of pre-emption was conferred, and also, perhaps, the nature of the things being sold. As to the latter consideration, it seems to me in principle that if the nature of the things being sold readily permits of a pro rata allocation between the parts of the whole, particularly as to quantity and price, there is much to be said for the idea that the holder’s right can be exercised in respect of the part of the package to which it relates without it being necessary for the holder to buy the whole of it.

The imputation of a tacit term to that effect could quite readily suggest itself in those circumstances, but again the answer would depend on the peculiar facts of the given case. In the current matter the wording of clause 10 of the lease implies that if the pre-emption properties were the subject of a package deal offer by a third party, the applicant would be entitled to purchase them on the same terms and conditions as the package deal.

[33] Professor Naudé, citing Daskal, says however, that ‘requiring the holder to buy the entire package to exercise his right may prejudice the holder unfairly. It has also been said that the risk taken by the holder in respect of unconventional terms relates to the counter-performance undertaken by the third party and the method of payment, not to a collateral agreement with respect to other properties which has nothing to do with the pre-emption property’. ‘Fairness’ is the wrong criterion in my view.

The issue is rather what the effect of the terms of the contract under consideration is. If the contract is unfair or prejudicial to one of the parties, that party has made a bad bargain. It is only when the unfairness is so unconscionable that it would be against public policy to enforce or uphold the term or contract that a court will relieve the affected party of it. And it does so by holding the contract, or the provision concerned if it is severable, unenforceable, not by crafting a new and fairer contract for the parties.

Furthermore, I consider that it would not be an accurate characterisation to describe the sale of the farm as a package to Swellendam Plase as entailing the sale of the pre-emption property in one transaction and the sale of the other portions in terms of a ‘collateral agreement’.

[34] As to the fourth approach, which Naudé says is ‘preferred by the writers’ including himself [sic], and is also the one contended for by counsel for the applicant: It gives the holder the right to purchase the pre-emption property alone upon the conclusion by the grantor of a package deal with a third party. The approach raises the obvious difficulty as to how the price of the pre-emption property is to be determined. Its supporters have argued that by entertaining a package deal the grantor has caused the impossibility of ascertaining the price he would have accepted for the pre-emption property alone, ‘so that the grantor should not be able to complain about losing control over the price when the court fixes it at a reasonable amount’.

[35] The difficulty I have with that argument is that it entails 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 did not vest the holder with a right to buy it at a reasonable price, but rather at a price determined by a third party offer that the grantor would be willing to accept.

The approach also seems necessarily to imply that the sale of the pre-emption property as part of a package was a breach of the pre-emption provision. If it is a breach which, as already mentioned, would depend on the terms of the actual contract in issue, then the remedy must surely be in damages or by way of a prohibitory interdict, not by way of some form of fair alternative performance that is not specific performance.

[36] Reverting then to the relief sought by the applicant. For the reason given above, and assuming that the applicant was not in breach at the time of any of its obligations under the lease, I consider that the right of first refusal conferred in terms of clause 10 of the lease was triggered when Swellendam Plase made an offer to purchase the entire farm on terms and conditions that were acceptable to the first respondent.

I have explained why there was no merit in the first respondent’s contention that the sale of the whole farm did not entail the sale of the pre-emption properties for the purposes of clause 10 of the lease. The respondent’s allegation that the applicant had waived its rights under clause 10 is not supported by the evidence.

[37] Upon the triggering of the right, the first respondent became obliged, according to the tenor of clause 10 of the lease, to give the applicant written notice specifying the terms and conditions of the offer it had received from Swellendam Plase and the applicant would thereafter have 14 days in which to indicate by written notice to the first respondent whether or not it intended to acquire the property on same terms and conditions.

In other words, in exercising the right to acquire the two erven on the same terms and conditions as the third party was prepared to do, the applicant would, in the circumstances of the offer made by Swellendam Plase, have to purchase the whole farm for R17 million. It would have to take the whole package because the package deal reflected the terms and conditions upon which Swellendam Plase would acquire the pre-emption property.

That would be to give effect to the plain meaning of the language of clause 10. The character of the constituent portions of the farm was such that the property did not lend itself to a pro rata allocation between the parts of the whole. The parties to the pre-emption agreement must have appreciated that when they concluded the agreement of lease including the right of first refusal.

[38] The relief sought by the applicant is inconsistent with the remedy to which I think it became entitled when the first respondent received what it considered to be an acceptable offer from Swellendam Plase, again assuming that the applicant was not in breach of the lease at the time. I do not consider that the applicant, on any approach, became entitled to acquire the pre-emption properties for R4 million.

Its contention that the R17 million purchase price for the whole farm was constituted by the R13 million that Swellendam Plase had initially indicated it might be willing to pay for the six portions and the premium on that figure that it offered for all eight was not supported by the evidence. Applying the rule in Plascon-Evans, as I have to in the context of the final relief sought by the applicant, I am bound to proceed on the basis of accepting the evidence that by the time that agreement was clinched between the first respondent and Swellendam Plase, the latter had come to the view that the six portions were not worth R13 million and that the pre-emption properties were worth more than the R5 million that its representative (Van Eeden) believed the applicant was willing to pay for them.

[39] It is also clear that even if the court were to have adopted the approach favoured by some of the commentators, described above as typified by the fourth of the differing approaches by the US courts to the problem of package deals including components subject to rights of pre-emption, the price of R4 million for which the applicant seeks by these proceedings to be able to obtain the pre-emption properties would not be a fair one.

On the contrary, the indications are that the two portions of the farm leased by the applicant are probably worth between six and seven million rand. I think it may also be reasonably be inferred, although I acknowledge that this is speculative, that if the first respondent and Swellendam Plase were required to restructure their contract to give a separate price for the two erven leased by the applicant, the price that would be given would probably be in the R6 to 7 million range, and that the applicant would find it well-nigh impossible to establish that a determination of the price for the pre-emption properties at that level was not bona fide.

[40] For all these reasons the relief sought by the applicant cannot be granted and the application must be dismissed. It is therefore strictly unnecessary in the circumstances to consider the various preliminary points taken by the first respondent, but I shall do so briefly for completeness and in case the litigation is taken further. I did not deal with any of them at the outset of this judgment as their preliminary nature might ordinarily have warranted because I do not consider that any of them had any merit.

. . . .

Court summary