Put and Call Options: Are They Useful?
What is a Put and Call Option?
A put-and-call option is a useful mechanism for property developers and owners of property who are selling to a property developer.
An option is a contractual right granted under a written agreement that provides a way of allowing parties to buy or sell properties at a future date.
The option agreement is entered into between the seller of the property (usually known as the grantor) and the buyer of the property (usually known as the grantee). The grantee has a call option that would compel the grantor to sell the property at an agreed price if the call option is exercised. If the call option is not exercised, then the grantor has a put option that would compel the grantee to buy the property at the agreed price.
The call option is exercisable first by the grantee during an agreed timeframe. That timeframe is usually set out in the written agreement. If the call option is not exercised by the grantee, then the grantor can exercise the put option within an agreed timeframe. If neither party exercises their option, then the agreement comes to an end.
If either the call or put option is exercised, then a binding contract will be entered into between the parties. A copy of the sale contract must be annexed to the option agreement as this will be the contract required to be entered into on exercise of either option.
A call option fee and a put option fee are both payable. An option fee is a payment by both the grantee and the grantor for the grant of the option. Both option fees are usually only a nominal amount (i.e. $1.00).
It is also common for an option agreement to require the grantee to pay a non-refundable security deposit to the grantor. The simple reason for this is that the seller is taking their property off-the-market for a considerable length of time. The amount of the security deposit is negotiable between the parties and will usually reflect the period of time over which the option extends.
However, if either the call option or the put option is exercised, the security deposit paid by the grantee will become the deposit payable under the contract (which is formed on exercise of the option).
An option agreement will generally provide for both a put and call option. However, it is not uncommon for the parties to enter into a call option agreement only. If this is the case, then there is no put option and the seller will have no certainty that the grantee will be exercising the call option and purchasing their property. A seller will need to consider whether they would be prepared to enter into just a call option agreement with a buyer.
Why are they useful in property transactions?
A put and call option ultimately delays the formation of the final sale contract. There are a number of reasons this could be attractive to either party.
For a property developer, an option agreement:
- Has the ability to lock in a fixed purchase price irrespective of property market fluctuations and settle on the purchase at some point in the future.
- Allows for longer developer style conditions (e.g. gives time to enter into agreements to purchase of any adjoining properties, a longer due diligence period and obtain development approval).
- Delays the obligation to pay transfer duty on the sale price.
- Allows more time for structuring of the ultimate purchasing entity.
- Can include a nomination provision which enables another buyer to be nominated to buy the property.
- Allows more time for fund raising.
- Can contemplate the ability to be able to on-sell the property for a profit.
For a seller, an option agreement will:
- Lock in a sale price which may be over the current market value.
- Defer capital gains tax obligations.
- Compel the buyer to settle on the purchase of the property at the agreed sale price.
Thinking of structuring your property purchase or sale through the use of options?
An option agreement can provide both a buyer and seller of property with flexibility over a property transaction.
Both the buyer and the seller must consider a range of issues (such as stamp duty and/or tax implications) that could arise between entering into the agreement and settling the transaction.
There is no standard form of option agreement and each agreement needs to be carefully drafted to ensure the terms are appropriate for each party’s requirements.
Contact Us
If you are thinking of structuring your next purchase or sale through the use of an option agreement, please contact the property law team at ABKJ Lawyers who will be able to help you.
Call us on (07) 5532 3199 if you have any questions, or visit our Property Law FAQs.
Frequently Asked Questions
What is a put-and-call option and when is it used in property transactions?
A put-and-call option is a legal arrangement that gives parties the right to require a property transaction to occur at a later time. It is commonly used where parties want to secure a future sale while allowing time for matters such as due diligence, approvals, financing, or structuring the transaction.
Who are the “grantor” and “grantee” in an option agreement?
The grantor is the party who grants the option and is bound to comply if the option is exercised.
The grantee is the party who receives the option and has the right to decide whether to exercise it.
What’s the difference between a call option and a put option, and what happens when either is exercised?
A call option allows the grantee to require the grantor to sell the property.
A put option allows the grantee to require the grantor to purchase the property.
When an option is exercised, the parties are bound to proceed with the transaction in accordance with the pre-agreed contract of sale.
Why must a sale contract be annexed to the option agreement?
The contract of sale is annexed to ensure that all essential terms of the transaction are agreed at the outset. This avoids uncertainty and ensures that, upon exercise of the option, there is a binding and enforceable agreement in place.
What are call option fees and put option fees, and why are they often nominal (e.g., $1)?
Option fees are paid in exchange for the grant of the option. They are often nominal because their primary purpose is to create a legally binding agreement, rather than to reflect the value of the underlying transaction.
Why do option agreements often include a non-refundable security deposit?
A non-refundable deposit is often included to secure the arrangement and demonstrate the grantee’s commitment. It also compensates the grantor for taking the property off the market or being bound by the option for a period of time.
How can put-and-call options help with due diligence, approvals, fundraising, or structuring the buying entity?
Put-and-call options provide flexibility by allowing time to:
- Complete due diligence investigations
- Obtain planning or development approvals
- Arrange finance or funding
- Finalise the structure of the purchasing entity
This can be particularly useful in more complex or staged transactions.
What stamp duty and tax issues should both parties consider between signing the option and settlement?
Stamp duty and other tax consequences can arise at different stages of the arrangement, including when the option is granted, exercised, or completed. The structure and timing of the option can affect the duty payable and overall tax outcome, so both parties should carefully consider these issues before agreeing.
