Options are useful legal tools when one party, or both parties are keen to purchase or sell property but the time to do so is not right. Agreement has generally been made as to price and the transaction generally but either (or both) parties want to legally bind the other party to ensure the transaction takes place. This benefit’s the purchaser in particular as it allows for the deferral of the usual 10% deposit and stamp duty being paid until such time as the option is exercised. A nominal option fee usually seals the deal.
Options are not limited to property and can be extended to use in the purchase and sale of shares, goods, plant & machinery etc. However they are used most commonly in property transactions.
A call option allows a purchaser to enforce their right to buy an asset from a vendor at a future time, usually at a pre-determined price, by a particular date. In other words, a call option enforces a purchaser’s ‘call’ to buy.
A call option benefits the purchaser, as the purchaser has a right to exercise the option and force the vendor to sell.
A put option allows a vendor to secure a right to compel a purchaser to buy an asset, at an agreed price, by a particular date. In other words, a put option enforces a vendor’s ‘put’ or right to sell.
A put option benefits the vendor as the vendor has the right to exercise the option to force the purchaser to buy.
Each of these put and call options benefit only one party. Often, both options are combined into a “put and call” option. Under this type of arrangement, if the potential purchaser doesn’t exercise the call option, the vendor can compel them to under the put option.
A legally enforceable option must include:
• A concluded agreement on the essential terms of the agreement including whether put and/or call;
• Consideration to support the option (a nominal option fee is sufficient for a “put and call” option but for a stand-alone option a larger option fee is common to compensate the other party if the option is not exercised);
• An option to purchase an interest in land needs to be in writing (s.54 Conveyancing Act 1919);
Additional requirements for options for the purchase of residential property are referred to in Part 4 Division 9 of the Conveyancing Act 1919.
Extreme care must be taken when an option is exercised to ensure that it is done strictly in accordance with the time frame and manner contained in the agreement.
Beware of GST liability if there is a taxable supply. The grant of an option to purchase constitutes a supply, being the grant of an interest or the creation of a right over land (s.9-10(2)(d) and (e) Goods and Services Tax Act 1999).
Option agreements can be complex and potentially risky and need to be prepared with care.
This article is general information only and should not be relied on without obtaining further specific information.
Author: Linda Alexander