Exercise your option to purchase before it's too late

Tenants who have an option to purchase their premises should take heed of a Supreme Court of Appeal judgement handed down this month (June), where Cape-based E & D Motors lost their option to buy by reason of a change in landlord.

According to a review of the judgment by Bridgett Majola of Shepstone & Wylie Attorneys the case turned on the enforceability of an option to purchase business premises situated at the Ottery Hypermarket Shopping Centre in Cape Town, which was granted to E & D Motors, as the tenant, by its previous landlord Quantum Leap Investments (Quantum).

E & D Motors signed the lease on 19 November 2002 and commenced building alterations to the premises to suit its trading specifications and took occupation in February 2003.  Both the offer to lease and the lease agreement granted E & D Motors an option to purchase the premises.

A few days after Quantum signed the lease agreement, it sold the entire shopping centre to Spearhead Property Holdings Ltd (Spearhead). In June or July 2003, E & D Motors sought to exercise its option to purchase the premises against Spearhead but Spearhead refused.  E & D Motors instituted proceedings against Spearhead on the basis that Spearhead substituted Quantum and was bound by the option, which was an integral part of the lease agreement.

The Cape High Court agreed with E & D Motors and ordered Spearhead to obtain the approval of the Cape Town City Council for the subdivision of the premises and effect transfer to E & D Motors. Spearhead was given leave to appeal.

After examining a number of cases on the exercise of options to purchase, the Supreme Court of Appeal overturned the lower court’s decision, on the basis that the obligations arising from an option to purchase the leased property, granted by the landlord, are not automatically transferred to the purchaser of the property.  Majola explains that it therefore follows that “a lessee (in this case E & D Motors), wanting to exercise an option must do so as against the grantor (Quantum) and not against the purchaser (Spearhead).”

The judge went on to say that “where, however, there has been a transfer of the property to a purchaser with notice of the option, the lessee, having thus exercised his option, will generally be able to claim transfer of the property from the purchaser.”

“Essentially, a tenant that has been granted an option to purchase leased property has to ensure that it exercises its option to purchase the premises against the original grantor of the option,” comments Majola “If they fail, such tenants will not be able to exercise their options against the purchaser.”

The key is, therefore, to exercise the option before the original landlord or grantor sells the premises or to ensure that the purchaser is given notice of and agrees to be bound by the option.