Call Options, Put Options – What are Option Agreements?

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If you're a buyer looking to redevelop a property, you may need time to conduct due diligence or obtain development approval. You don't want to lock yourself in, but you also don't want to let other buyers swoop in and snaffle the property while you're still making inquiries. If you're a seller, and expect to make a large capital gain on the sale, you may wish to lock in a buyer now but defer your capital gain to a future date.

A call option gives a potential buyer called the " grantee" the right to compel a property owner called the " grantor" to sell the property to the grantee at an agreed price. In the meantime, the grantor must not sell the property to any other person. A put option is the inverse of a call option - it gives put and call options property property owner the right to compel another person to buy the property at an agreed price.

Options are created by written agreements. Commonly, only a call option will be granted. Sometimes, a put option will also be created by the same agreement, so that either party can compel the other to complete the sale and purchase of the property. Typically, the grantee of a call option will pay the grantor a non-refundable "option fee" at the time that the call option is granted.

The agreement will specify an "option period" which is the period of time during which the party with the option in its favour put and call options property exercise their option.

The agreement will also set out the procedure which that party must follow in order to exercise the option. When and if the option is exercised, a binding contract for the sale and purchase of the property is deemed to have been entered into. Nevertheless, the parties usually exchange formal contracts for the sale and purchase of land at the agreed price, as they would with an ordinary conveyance.

If the option is not exercised during the option period, the option lapses and the parties are freed from their obligations. In New South Wales, strict requirements apply to option agreements in relation to the put and call options property and purchase of residential property. Failure to take heed of these requirements can cause an option agreement to be void or able to be rescinded by the other party.

In addition, the option agreement must be drafted carefully to avoid unintended tax consequences. Depending on how it is drafted, for the purchaser, no stamp duty is payable on the option agreement, but duty is payable on the contract. For the vendor, capital gains tax on the purchase price is not triggered until contracts for the put and call options property and purchase of land are exchanged, although there may be capital gains tax payable on the initial option fee.

Hence, if drafted correctly, options can be an advantageous way to commit to a property transaction without incurring immediate tax liabilities.

If you're looking to buy and develop residential property, or to sell your property to a developer, an option agreement may suit your circumstances. You should engage a solicitor to correctly draw up the option agreement and guide you through the process of creating and exercising the option.

Brown Wright Stein has an experienced property team which is able to assist you with all matters involving options over residential and commercial property, as well as conveyancing, leasing and property development matters. Snezana Put and call options property heads up the commercial dispute resolution team at Brown Wright Stein.

Will there be put and call options property early election? Keep your options open: Deborah Kent, Ryan Miu Date: When buying or selling residential property, sometimes you also need to buy more time. In these situations, you might consider using an option agreement to protect your position. What is an option? Options come in two forms.

It is not sufficient for both parties to sign the one document; if an option agreement creates both a put and a call option, both options must be given for consideration.

It would be prudent for the parties to hand over cheques in respect of each option fee, even if the fee is only a nominal amount, to evidence the giving of consideration; and unless the grantee's solicitor gives the grantor a certificate under section 66ZF of the Conveyancing Act NSWor the call option was granted on the same day that the property was passed in at auction, the grantee of a call option will have a cooling-off period of 5 business days.

Deborah Kent Special Counsel P: Receive notifications of new and upcoming course workshops and general events. Put and call options property to do when someone breaches a contract Brown Wright Stein Lawyers.

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They have a wide variety of uses, including for real property, businesses or business assets and as tools for succession planning. This article focuses on their use for real property i. An Option Agreement can contain what is known as a put option, or call option, or both. This is the most common method of exercising options concerning real property, however other mechanisms available depending on specific circumstances or type of agreement.

The purposes and type of Option Agreement will determine what is a reasonable basis for requiring option fees or deposits to be paid. For example, an Option Agreement may provide that:. There can be adverse tax consequences of utilising a large non-refundable option fee, so it is imperative that consideration is given to the capital gains tax and GST treatment of option fees before the Option Agreement is entered into. There can also be the risk that the arrangement constitutes an instalment contract read more about those here if it is not properly prepared.

Where an Option Agreement is intended to be more mutually beneficial or grants both parties the right to compel the other to buy or sell respectively , it is more common for the Option Fee to be a nominal amount i. This may avoid some adverse tax and duty consequences. Option Agreements may have set time frames during which a party may exercise its option, or otherwise the option periods can be triggered by certain events for example, the Buyer obtaining a development approval.

Option Agreements can also allow for the asset to be sold to another party on exercise of the option. This can be useful where the buyer has not yet determined or established the legal entity that is to acquire the asset. In summary, Option Agreements have a wide range of uses and may offer benefits over a sale contract alone, however there are a number of significant legal and tax issues that will need to be considered.

Sale contracts and option agreements each have their limitations and you should always seek advice before entering into an arrangement concerning real property. We have extensive experience in this area. Skip to content Property Development. What are the Different Options? Put Option — this is where the seller has the right to compel a buyer to buy the Property.

Call Option — this is where the buyer has the right to compel a seller to sell the Property. Put and Call Option — this may grant both parties the right to compel the other to buy or sell the Property. Usually these options would run consecutively — the call option first, and then the put option kicks in after the first option has expired. How does it work? An Option Agreement usually contains two main parts: The body of the Option Agreement, which outlines the terms on which the parties may exercise their option; and The sale contract as an annexure to the Option Agreement.

The Contract will often have all details and terms finalised, including the Purchase Price and length of contract. On exercising an option, both parties will need to sign the agreed sale contract.

Option Fees and Deposits The purposes and type of Option Agreement will determine what is a reasonable basis for requiring option fees or deposits to be paid. For example, an Option Agreement may provide that: The commercial basis for having a Call Option Fee is that the Seller is taking the property off the market for 6 months, without being guaranteed a sale. Triggers for Options Option Agreements may have set time frames during which a party may exercise its option, or otherwise the option periods can be triggered by certain events for example, the Buyer obtaining a development approval.

Nominees Option Agreements can also allow for the asset to be sold to another party on exercise of the option. Why use Option Agreements? There are many reasons why Option Agreements can be beneficial or necessary. Practical reasons — for example, where a property developer wishes 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 Tax reasons for long sales — using an Option Agreement can defer tax or duty liabilities until a period more convenient for one of the parties, such as the next financial year for CGT purposes, or closer to the anticipated settlement date.

A Option can be attractive compared with using a long term unconditional sale contract. Paying Your Deposit under a Land Contract — when, where, who, what, how? Sellers — make sure you disclose all easements in the contract!