A put and call options agreement is essentially an agreement in writing that gives one party the right to enter into a further contract, usually for the sale or purchase of something, at a later date on agreed terms. If you need help for put and call options agreement, our property lawyers at HTW Legal Group can help.
Use of Put & Call Options in Property Transactions
Put and call options agreements are commonly used in property transactions to provide flexibility, manage risk and structure exit strategies for property developers. As a property buyer, the primary benefits of inserting a call option beyond a normal contract of sale are the potential tax implications involved.
In property transactions, a put and call options agreement therefore constitute a contractual arrangement between a prospective buyer and seller, providing future rights to transact on a property without an immediate obligation.
Generally, an option agreement will provide for both a put and call option, but it is possible for the parties to enter into a call option agreement only.
Where a call option agreement is used on its own, sellers will generally require a higher security deposit for a call option agreement than they would for a put and call option agreement where they can force you to buy the property. It is also common practice for the security deposit to be non-refundable and released to the seller once the condition of due diligence has been satisfied when using a call option agreement.
Call Options
A call option grants the buyer of the property (usually known as the grantee) the right, but not the obligation to purchase the property described in the agreement at a pre-agreed price and on specified terms, such as within a specific timeframe.
Put Options
A put option grants the seller of the property (usually known as the grantor) the right to require the grantee to purchase the same property on similar terms if the call option is not exercised.
Exercising Options
If neither the grantee nor grantor exercise the options, then the agreement comes to an end.
If either the call or put option is exercised, then a binding contract will be entered into between the parties.
It is critical to note that options must be exercised in line with the procedure and the timeframe specified. Any failure to adhere to the exercise procedure or act within the timeframe, will result in a lapse of the options with the rights voided.
Legal Considerations Structuring Your Options Agreement
Put and call option agreements are fundamentally contractual in nature. Their enforceability relies heavily on the clarity, precision and completeness of the legal terms agreed upon by the parties.
For an option agreement to be valid under Australian law, it must satisfy the basic principles of contract formation, including intention to create legal relations, a clear offer and acceptance, valid consideration, and certainty of terms. In addition to the contractual elements and for the agreement to be legally enforceable, the deed must be executed in accordance with formalities such as those under section 127 of the Corporations Act 2001 (Cth).
To ensure a consistent agreement, the prepared deed (being the formal agreement document) must clearly list key elements such as the pricing mechanism, payment term, pricing mechanisms, trigger events, nomination and assignment rights, exercise procedures and the rights and obligations of the parties upon exercise.
- Pricing Mechanisms
The pricing of the underlying property or asset is typically agreed in advance, with the accompany contract of sales, to avoid future disputes.
- Payment Terms
The deed should clearly address how and when payments are to be made upon option exercise. This includes the payment of deposits, timing of settlement and treatment of any option fees.
- Trigger Events
Where the exercise of an option is conditional on events such as due diligence, development approval or financing, these conditions precedent must be clearly stated, with further considerations on satisfying deadlines or waiving these conditions.
Standard property development timeframes include 30 – 60 days for due diligence, 6 – 12 months for development approval, and 30 days for settlement post-exercise.
- Nomination and Assignment Rights
Nomination clauses are critical for developers intending to on-sell without taking title. These clauses must be carefully drafted to ensure the nominee does not gain any right under the option deed itself, as this could result in double transfer duty.
Nomination clauses are equally important for buyers investing in an off the plan property, where circumstances may change from the time they sign the contract of sales to the property settlement date. This allows buyers to nominate another buyer to the property if they are unable to complete the property purchase.
Assignment provisions should clearly specify whether seller consent is required, and that such consent must not be unreasonably withheld or delayed.
- Exercise Procedures
The deed must also clearly state the procedural requirements to exercise the option. These usually involve formal written notice and the delivery of signed contractual documents within the option period, and with the advancement of technology, through electronic transmission. Essentially, the option period must be carefully sequenced to avoid premature lapse or unintentional exercise.
- Rights and Obligations of the Parties Upon Exercise
Clearly defining what happens upon exercise of either option, such as who signs, who pays and how deposits are treated is essential. For instance, where a developer nominates a third-party buyer, the deed should allow the developer to elect whether the original deposit paid is transferable to the third party’s contract. This protects the developer from inadvertently subsiding a transaction they no longer control.
Risks & Pitfalls of Option Deeds
The foundation of any effective option deed lies in its clarity and precision, both of which are essential in managing risk and providing additional legal protection. A well-drafted option deeds would include considerations for supplementary clauses such as provisions for force majeure events, granting access rights to the property, rights to caveat lodgement, and rights regarding necessary approvals for the use of the property.
Option deed is often intertwined with complex regulatory regimes, such as tax implications, foreign investment restrictions or corporate governance rules. Inadequate attention to transfer duty, GST treatment and FIRB compliance may result in financial penalties or transaction invalidity. In Queensland, an incorrectly structured nomination or assignment can run the risk of triggering double transfer duty for the property purchaser. Whereas a property developer seeking to on-sell the property without settling must ensure that the legal structure supports such flexibility, including the use of uplift mechanisms and fallback rights if the nominee defaults.
When contemplating the use of an option deed in a property transaction, it is imperative that legal and tax advice be obtained in each case, particularly where uplift or profit is involved. The exercise of an option may give rise to financial liabilities such as capital gains tax and transfer duty payable.
Still Unclear About Inserting an Option Agreement in Your Next Property Transaction?
At HTW Legal Group, we understand the complexities of property law and the importance of safeguarding your legal interest in a contract. Our experienced team of property lawyers specialises in providing practical legal guidance to assist you on your next property transaction.
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