A put and call option agreement is an agreement between a potential Buyer and potential Seller. Also known as an ‘option contract’ or ‘option agreement,’ it is not a contract for the sale of property, but an agreement to buy or sell property on a future date or when a specific event occurs.
An option agreement is distinct from a contract of sale in that where there is a contract of sale, the Buyer and Seller have present and future obligations to each other in respect to the transfer of property, whereas option agreements are better understood as ‘if’ contracts; ‘if’ the party who has the right to exercise the put or call option does not do so, no binding agreement to sell the property has come into existence. It is only on the exercise of either the put or call option that a contract for the sale of the property is formed.
What Is An Option?
An option is a right under an option agreement to buy or sell property at a future date.
In an option agreement, the person granting the option (the “grantor”) grants the exclusive right to purchase their property at an agreed price to the grantee or beneficiary (the person who can exercise the option and buy the property).
There are three types of options;
1. Call Option
A call option is where the buyer is given the option to require the seller to ‘call’ or make the grantor sell the property to them.
A call option fee is payable when the option is granted. It is normally a percentage of the purchase price of the property.
2. Put Option
A put option is where the Seller is given the option to ‘put’ or require the buyer to buy the property from them.
A put option fee is normally payable, and is usually a nominal amount.
3. Put and Call Option
A put and call option is an option agreement that involves both a put and a call option, so that if the call option lapses, the grantor may either exercise the put option (require the other party to buy) or back out of the option agreement entirely.
What Is An Option Period?
Put or call options must be exercised by the relevant party during a defined period called the option period. Once the option period has expired, the option can no longer be exercised.
If an option is not exercised during the relevant option period, then the option will lapse and, usually, any option fee that has been paid will be forfeited.
Why Use Put And Call Options Over Property?
Put and call option agreements are most commonly found in commercial property sales, but are also sometimes used in residential property sales, including by property developers.
Because they delay the formation of a contract of sale, put and call option agreements can be useful for a number of reasons. For example, they can;
delay the obligation to pay transfer duty on the contract;
delay capital gains tax obligations;
allow the buyer to find another person or entity to enter into the resulting contract of sale without entering into a binding contract to buy the property themselves;
allow the buyer time to obtain development approval or to do due diligence on the property
What Is Included In The Option Agreement?
An option agreement will usually have the following conditions at a minimum;
Option Commencement Date
This is usually the date the option is signed.
Option Expiry Date
This is the date the option will expire; the option can no longer be exercised after this date.
Due Diligence Period
Put and call option agreement will normally provide for a period in which the Buyer can conduct due diligence on the property.
The option fee payable by either party will be set out in the option agreement.
This is the price the Buyer will pay under the contract of sale if the option is exercised.
Nomination or Assignment
It is common for an option agreement to include a nomination or assignment clause as these enable the buyer to either sell the option or nominate a third party buyer who can exercise the rights of the original buyer under the Option Agreement.
The terms of the contract that will be entered into as a result of the option being exercised under the option agreement are usually set out in a form of contract that is annexed to the option agreement.
Seek Legal Advice
It is strongly recommended that you have a lawyer review and provide advice on any put and call option agreement prior to signing, and that you have a full understanding of your rights and obligations under the proposed agreement.
If you have more questions about put and call options in property or any other aspect of property law, give one of our friendly, expert solicitors a call today, or head over to our quote page for an obligation-free quote.
The above is not legal advice and is general information only.
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