Put and call options are used so parties can enter into an agreement to sell or purchase real property in the future for a particular price. The agreement provides the buyer with the option to purchase the property and the seller with the option to sell the property.
Put And Call Options: Understanding Options Over Property
Put and call options have a wide range of uses, including for property and succession planning. The focus of this article will be on their use for real property. In essence, put and call options are an extremely useful method over property transaction.
Having put and call options allows parties to enter into agreements to sell or purchase property:
- at a future point in time; or
- on the occurrence of an event.
Whilst requiring very minimal commitment upfront.
Simply put, rights afforded under a put and call option are a future right to oblige:
- a seller to sell land (known as the ‘call option’) or
- a buyer to buy land (known as ‘put option’).
‘Put and call option’ jointly provides both parties the right to oblige the other party to buy or sell the property.
What Is A Call Option When Buying/Selling Property ?
A call option is granted in favor of a buyer by a seller. As this is an enforceable right, when the right is exercised by a buyer, it compels the seller to sell the land forming the subject of the call option to the buyer.
A call option has a plethora of benefits to the buyer. For example, subject to negotiations, it provides the buyer the opportunity to
- conduct appropriate due diligence in relation to the land,
- lodge a Development Approval,
- obtain approvals for land development and/or
- finance for the property acquisition before the buyer may elect to exercise their call option.
A call option also generates a caveatable interest in the property in the buyer’s favor.
Furthermore, the purchase price of the property, which is agreed prior to the creation of call option deed, will not vary irrespective of any fluctuations within the market. This, of course, would be highly advantageous to buyers where the market value of the land rises during the call option period.
What Is A Put Option When Buying/Selling Property?
A put option is granted in favor of a seller of land by a buyer. In essence, this is the opposite of a call option. An enforceable right is granted to the seller by the buyer which permits the seller to compel the buyer, at a future point in time or on the occurrence of an event, to purchase the property which forms the subject of the put option.
How Is A Put And Call Option Documented?
Generally, a deed is utilized to document put and call options. The technical terms which are often utilized for the parties to an option deed are grantor and grantee.
Usually are:
- grantor being the seller; and
- grantee, being the buyer.
Note: A valid contract for sale and purchase of land, in addition to all relevant technical documents (if any) are required before the option deed can be formulated.
The option deed must then be annexed to that contract. As such, this process requires all vital aspects of the transaction to be agreed upon and executed before the option deed can be entered into by the parties (for example, the purchase price and deposits).
Option agreement
Option agreements may include set time periods during which a party can exercise its option or the option periods may be triggered due to the occurrence of certain events. An example is when the buyer successfully obtaining a development approval. As soon as the relevant option is exercised by a party, the contract for sale annexed to the option deed becomes binding upon the parties and the transaction proceeds as an ordinary conveyance.
Transfer duty considerations
A put and call option is a dutiable transaction as it is the acquisition of a new right. However, a put option is not seen as an acquisition of a right and so a put option agreement is not a dutiable transaction.
The duty payable on a call option or a put and call option will be the higher of:
- The call option fee; and
- The market value of the right granted under the option.
Note: If the call option is enacted then a credit for the transfer duty already paid may be possible. It will not be possible though if the purchase price on the contract is reduced to take into account the option fee already paid.
Why Do We Use Put And Call Options Over Property
There are so many benefits to choosing a put and call option agreement.
These include:
- Practical benefits –
- for developers, in some circumstances they may want to lock in the option to buy a property at a set price but subject to its right to obtain development approvals for the land and determine a final buying entity; or
- for the buyer, before exercising who has entered into a call option, they are entitled to assign their rights to a third party and the third party may proceed with the transaction with the seller.
- Tax benefits –
- for the buyer, transfer duty may not be payable on the option agreement and only on the contract of sale; or
- for the seller, capital gains tax on the sale price will not be payable until the contract of sale is settled.
Please note though that capital gains tax may be payable on the option fee paid.
The above is a brief summary of put and call option when buying/selling property. Realistically many more considerations shall be taken into account and an option deed is tailored to your role to meet your expectation.
My Property Protect has in depth knowledge and experience in acting for buyers, owners groups and sellers on put and call option transactions.
Contact us for a tailored option to utilize put and call options to achieve the best outcome.
Written by
Kayleigh Swift, Associate
admin@mypropertyprotect.com.au
(07) 3506 0002
About the author
Kayleigh Swift has a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations. Kayleigh provides practical advice to ensure smooth business transactions.
