Buying and selling real estate using an option arrangement is popular in the current property market.
Call options provide a buyer with a right to purchase the property in the future, but not the obligation to buy.
Accordingly, an option offers flexibility, making them ideal for developers who seek to conduct due diligence before committing to a purchase or choosing the purchasing entity. Additionally, options help manage cashflow by securing a property price in the present, with funding arrangements and settlement to be made later.
Put options can provide a landowner with control over the timing of the sale of a property (e.g., in which financial year the sale will take place).
This article explores the concept of an option, the key terms of the option and how the arrangement operates.
What is an option?
An option deed is a legally binding document that records an agreement to buy or sell a specific property within a defined period and under certain terms and conditions.
It may include a “call option,” a “put option,” or a combination of both known as a “put and call option.”
Typically, call options are used, granting the prospective purchaser (the grantee) the right to purchase the property, while put options allow the property owner (the grantor) to require the grantee to buy the property.
Common terms and conditions of an option include:
- the parties’ details (including company or trust details and addresses for service);
- a full description of the property being purchased;
- the purchase price;
- the option period [being the timeframe in which a party may exercise the option];
- the expiry date, after which the option may no longer be exercised;
- the option fee payable;
- whether any option fee forms part of the deposit on the purchase of the property if the option is exercised, and whether the fee is forfeited if the option is not exercised;
- the formal requirements for exercising the option;
- the completion/settlement date;
- assignment or novation rights and whether the grantee can nominate another party to exercise the option.
Special conditions are often included in the deed which allow a developer / purchaser to access the land during the option period to carry out investigations and to lodge a development application with relevant authorities.
Usually, a contract for sale and purchase of land is attached to the deed and contains all relevant information and disclosure documentation for the property.
Exercising an option
Parties are generally required to exercise an option in writing, strictly in accordance with the deed.
Once the option is validly exercised a contract immediately comes into effect.
Stamp duty is payable on the contract and the buyer will be required to complete the purchase in accordance with its terms. The seller must be ready to complete the sale and provide vacant possession of the property at the time the contract requires.
As an option deed facilitates a future transaction, both parties must consider potential contingencies that may arise between signing the deed and completing the sale or purchase of the property.
The option period may range from one or 2 months to several years, so good planning is essential.
Some key considerations include:
- If the deed contains a call option only, the prospective purchaser is not required to exercise the option and purchase the property. This is not ideal if the landowner requires certainty of a sale, in which case a put and call option would be more appropriate.
- A landowner entering into a deed with a call option only, may wish to require that the option fee is forfeited if the option is not ultimately exercised.
- The landowner should consider the legal costs involved and whether these should be payable by a prospective purchaser, particularly if it is possible that a sale will not eventuate.
- The landowner should consider the likely state of the property market when agreeing on the purchase price. If the option period is lengthy there could potentially be a substantial increase in the value of the property between signing the option deed and exercise of the option. Developers will sometimes offer premium prices for sought-after properties taking market increases into consideration.
- An option deed for residential property must comply with the disclosure requirements under relevant legislation and regulations.
- Stamp duty based on the value of the property may not be payable on the option deed itself but becomes payable by the purchaser once the option is exercised and contracts are exchanged. Stamp duty may also be payable on the assignment of an option to a third party. Prospective purchasers should obtain appropriate legal advice in this regard.
- An option deed creates a caveatable interest in the property and prospective purchasers should consider lodging a caveat over the title of the property to protect that interest.
Unlike most contracts for the sale and purchase of residential property, there will usually be no cooling-off rights available to the purchaser once the option is exercised and the contract becomes immediately binding.
An option deed secures the right to buy and / or sell property at a future date and is an excellent way to provide flexibility in property transactions.
Option deeds offer a flexible approach to buying and selling property at a future date, making them an excellent choice for property transactions. However, these arrangements are complex and involve significant financial implications. Parties entering into an option agreement should seek sound legal advice, and the deed should be carefully drafted to ensure that the terms align with their respective requirements.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4744 or email email@example.com.