Using Call and Put options, parties may negotiate the sale and purchase of property at a later date, requiring a minimal upfront commitment. An option is essentially a right granted by a seller to compel a buyer to purchase the property (the “call option”) or to force a seller to sell the property (the “put option”).
Call and put options allow parties to sell and buy the property later with minimal upfront commitment. The option agreement may benefit both parties (the buyer and seller), but one should draft and review it with care to avoid unintended tax and stamp duty consequences.
This article discusses the various features of Call and Put Option Agreements on Sale while Buying a Property in NSW Australia.
HOW DO CALL OPTIONS WORK?
A seller of property grants a call option in the buyer’s favour. An enforceable right requires the seller to sell the property subject to a call option to a buyer when exercised by the buyer.
An option to call is beneficial for the buyer for several reasons, including:
- Before exercising the call option, the buyer can perform due diligence on the property, submit a DA, and secure approvals for the development of the property as well as financing.
- Call options leave the buyer with a caveatable interest in the property; and
- In a call option deed, the agreed price will not change regardless of fluctuations in market value (which, in the case of an increase in the property’s market value, is most advantageous to the buyer (see below)).
PUT OPTIONS: WHAT ARE THEY?
A buyer grants a put option against a seller, which is not the same as a call option. In exchange for the right to enforce the put option, the buyer grants the seller the right to require the buyer to purchase the property at a future date.
What Are Put And Call Option Documents?
A put and call option is a document based on a deed.
A party to an option deed is commonly known as:
- The seller is the grantor; and
- The buyer is the grantee.
In addition to other technical documents, a complete and valid contract for the sale and purchase of land should accompany the option deed. Therefore, the option deed must cover all relevant aspects of a transaction (e.g. purchase price, settlement, deposit period).
Once a party exercises an option, the obligation to sell the land annexed to the option deed becomes legal, and the transaction proceeds as a typical conveyance.
Sale and Purchase of Property OPTIONS – FEATURES
However, the following features are essentially the same despite the differences noted above.
Option fee
As an option deed relates to an interest in land, consideration is due at the time of its execution (i.e. on an exchange of the option deed).
According to the type of option agreed upon, consideration is either:
- The buyer is paying the seller a “call option fee”;
- The seller pays the buyer a “put option fee.”.
Both forms of consideration are payable if the agreement is for a put and call option. Nominal consideration is considered acceptable.
Option exercise period
An exercise period for call options is a period during which a buyer can exercise it. An exercise period for a put option specifies a timeframe within which a buyer can exercise a put option. After this timeframe has passed, the parties agree to the terms of an option deed. These two periods of time are generally sequential.
In the event that the call option period expires without the buyer exercising the call option, which would require the seller to dispose of the land, the buyer will be unable to exercise the call option. In other words, the seller can exercise its put option during the exercise period of the put option and require the buyer to acquire the land.
Either party doesn’t need to exercise their option during the exercise period. Following the last day of the option period, if neither party exercises their option, the option comes to an end. This means that both buyers and sellers lose their exclusive rights to the land (though the seller remains free to deal with it otherwise).
Assignment
Buyers who have entered into a call option deed, but have not yet exercised the option, may assign their rights under the deed to a third party. After completing the assignment, the third party will act as the original buyer under the call option deed. Having complied with the call option agreement, the third party and seller proceed with the transaction.
Nominations
A buyer may also designate a third party to exercise the call option on their behalf as a nominee.
There is a difference between an appointment of a nominee and an assignment (through which the buyer transfers his rights under the call option deed). In the event that a nominee exercises the call option, the contract that arises is between the nominee and the seller rather than between the buyer and seller.
CONSIDERATIONS FOR STAMP DUTY for Sale and Purchase of Property
Upon exercising a put option or call option, the buyer is responsible for paying stamp duty as they would for a standard conveyance (i.e., at the point of exchange of contracts).
In addition, assigning options or appointing nominees to exercise options can also result in stamp duty implications. An assignment or nomination can result in significant stamp duty liability, and it is advisable to obtain expert stamp duty advice.
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