Why should I use a Put and Call Option Agreement?

A Put and Call Option Agreement is a beneficial opportunity for an individual or a property developer to sell or purchase land at a future point in time, with limited upfront commitment required by either party.

At the outset, there are certain rights granted under a Put and Call Option Agreement to compel a Seller to sell the land (known as the call option) or to compel a Buyer to purchase the land (known as the put option). There are circumstances where you can simply have a Put Option Agreement, Call Option Agreement or a Put and Call Option Agreement.

For your consideration, we provide a brief overview of the common features of a Put and Call Option, and the benefits of a Put and Call Option Agreement for you.

What is a Call Option?

A call option is granted by a Seller of land in favour of a buyer. It is an enforceable right that may be exercised by the Buyer, and this right requires the Seller to sell the land subject to the call option being exercised by the Buyer.

The Buyer often will make payment of a non-refundable ‘Call Option Fee’ in exchange for a call option period over the land or property. The benefit to the Buyer in this circumstance is that the property is effectively ‘off-market’ for a certain period of time. Alternatively, there is a risk to the Seller in that the property is removed from market without guarantee of a sale of property in this time.

Generally, on exercise of the call option, the Buyer will then sign the contract of sale and pay the initial deposit required under the contract.

What is a Put Option?

A put option is granted by a Buyer in favour of a Seller. It is the opposite of a call option, it allows the Buyer to grant an enforceable right to the Seller, which requires the Buyer to purchase the land subject to the put option at a future point in time.

There is usually a nominal fee attached with providing a put option under the agreement, and this is generally in an amount such as $1.00.

A put option may be structured so that it can be exercisable at any time. Alternatively, it may be structured so that it can only be exercised upon certain conditions being completed.

What are the timeframes under a Put and Call Option Agreement?

Timeframes can vary depending on the parties’ objectives, and their financial budget for the project. By way of a general guide, a timeframe for an Option Agreement may be:

  1. Due Diligence period – Thirty to sixty days;
  2. Development Approval period – Between six and twelve months following completion of the due diligence period; and
  3. Settlement – Thirty days after exercise of the option.

What is assignment?

Often there is a Buyer who has entered into an Option Agreement, and has not yet exercised the call option. In these circumstances, there may be an opportunity under the Agreement for the Buyer to assign its rights to a third party. Once the assignment has been completed, the third party will then take on the Buyer’s obligations as if it were the original Buyer under the Agreement. The third party and the Seller will then continue to perform the agreement until completion.

What are the benefits of a Put and Call Option Agreement?

There are certain tax benefits that are applicable to Put and Call Option Agreements including the delay in payment of transfer duty, and the ability to change the period in which the property is sold for tax purposes, which can impact on the tax obligations imposed on the Seller. While we are unable to provide financial advice of this kind, we strongly recommend that you seek professional financial advice with this transaction from an accountant.

There are other benefits of a call option to a potential Buyer, and these include:

  1. Additional time to undertake due diligence enquiries, lodge any development applications requiring approval from the relevant local government authority, and secure adequate finance before the call option exercise date;
  2. May give rise to a caveatable interest in the land in favour of the Buyer; and
  3. The price will not change, regardless of market fluctuations, as it was agreed between the parties at the time of signing the agreement.

Summary

There are a wide range of benefits as to why Put and Call Option Agreements can be beneficial, and necessary in some circumstances. Should a property developer be interested in a property, but is yet to establish the legal entity purchasing the property or undertake due diligence enquiries, a Put and Call Option Agreement is a beneficial option for them.

As earlier discussed, there are certain tax benefits to using a Put and Call Option Agreement, and there is an ability to defer tax or duty liabilities to a period that is more convenient for that party to make payment.

Should you wish to discuss an existing Put and Call Option Agreement, or would like to prepare a Put and Call Option Agreement for your next project, please contact the DSS Law Property and Commercial team on (07) 3210 2373 for an initial consultation.

05/08/2020

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on 1300 DSS LAW or epost@dsslaw.com.au.