Put and Call Options
Put and Call Options for Property Sales and Purchases
Put and call options provide a way of allowing parties to sell or purchase property at a future date with minimal upfront commitment. While option agreements may provide benefits for each party (the buyer and the seller), they must also be drafted and reviewed carefully to avoid unintended stamp duty and tax implications.
Our experienced Sydney Property and Conveyancing Lawyers can assist you with understanding your legal rights and obligations regarding put and call options, and determine the best approach for your individual circumstances. Get in touch with us here.
What is an option?
An option is a contractual right granted under a written agreement to buy and/or sell a property at a future date.
There are three types of option agreements with respect to property transactions:
- A call option allows a potential purchaser the right to compel the vendor to sell the property at an agreed price.
- A put option allows the owner of the property the right to compel the proposed purchaser to buy the property at an agreed price.
- A put and call option allows either party the right to compel the other party to complete the sale and purchase of the property.
Option agreements are commonly negotiated between parties as a call option or a put and call option.
The option agreement will set out what is required to exercise the option, including the period in which the option is to be exercised. If the option is exercised during the option period, then the parties enter into a binding contract for the sale and purchase of the property. If the option is not exercised during the option period, then the option lapses.
Why enter into an option agreement?
Option agreements are most commonly used by property developers and owners of property who are selling to a property developer.
Developers of property may enter into an option agreement for a number of reasons, which include:
- Locking in a price irrespective of price fluctuations in the property market.
- Conducting due diligence on the property as a proposed development site.
- Obtaining the required approvals for their development application.
- Deferring payment of stamp duty until the option is exercised and a contract to purchase the property is entered into.
- Providing more time to obtain funds to complete the transaction.
A property owner selling to a property developer may also enter into an option agreement for the following reasons:
- Locking in a price often above current market value.
- Provides more time to find a property to purchase if they are selling the property they live in.
- Deferring their capital gains tax obligations.
Features of an option agreement
This is the non-refundable fee payable when granting the option. A call option fee is normally a percentage of the purchase price of the property, whereas a put option fee is usually a nominal amount.
If the option is exercised, then the option fee paid is credited towards the purchase price of the property. If the option is not exercised, then the option fee paid is forfeited.
This is the period of time within which the parties have to exercise the option. It can be for an agreed timeframe but can also be triggered by certain events taking place, such as development approval being obtained.
If the parties enter into a put and call option, the proposed purchaser can exercise the call option first and if not exercised, the vendor can then exercise the put option after the call option period expires. If neither party exercises their option, then the option comes to an end once the final option period expires.
The full contract for the property must be annexed to the option agreement. This is the contract that will be entered into between the parties following the exercise of the option. Stamp duty is payable by the purchaser once the option is exercised and contracts are exchanged.
Assignment or Nomination
An option agreement may include provisions for the proposed purchaser to assign its rights to a third party or appoint a third party as a nominee to exercise the option. An assignment allows the third party to proceed with the transaction under the option agreement as through they were the original purchaser. A nomination appoints a third party as a nominee to exercise the option on behalf of the proposed purchaser and the transaction will then be between the nominee and the vendor.