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SOME FUNDAMENTAL TIPS AND TRAPS…
From time to time we are approached to act for a party wishing to purchase real estate usually for a development purchase. The put and call option agreement is one way to secure a potential parcel of land for a defined period with certain stamp duty and tax advantages. But there are also certain traps for the unwary that need to be taken into account.
So what is a put and call option agreement?
Essentially it is an agreement usually in writing whereby the owner of the land [the grantor] agrees for a defined period and for a fee with a proposed purchaser [the grantee] to sell the land to the grantee for a fixed price provided the grantee gives notice of exercise of the option to the grantor [the call option] or, if the grantee does not do so, the grantor can give notice to the grantee compelling the grantee to purchase the land for that fixed price [the put option].
What are the advantages of this arrangement?
There are a number.
Firstly it freezes the opportunity of the owner to sell the land to any person during the option period.
Secondly it allows the proposed purchaser time to consider whether to proceed with the purchase or not particularly if the proposed purchaser is yet to consider all of the ramifications.
Thirdly it may allow the proposed purchaser an opportunity to “on sell” either the option or the property under a separate agreement to another party but this can be a trap for the unwary as we describe below.
If the option is exercised the option fee normally forms part of the deposit.
Finally, subject to the comments we make below, it can effectively defer stamp duty and other tax consequences for both parties for a time.
But what about the traps you say?
There are some indeed.
Firstly if you pay a fee it is normally not refundable if the proposed purchaser does not proceed with the call or put option.
Secondly if the proposed purchaser is thinking about assigning its rights or nomination to an alternative purchaser then it will trigger adverse stamp duty consequences and a revaluation of the property if the assignment goes ahead which may mean the whole deal will not be advantageous commercially.
Thirdly if the notice to exercise the option and all of the steps in the process of doing so are not followed slavishly then the exercise of option may be set aside with other adverse consequences [see for example Comdex No 24 Pty Ltd v Robins (2009) NSWSC 367].
So the moral of the story is to seek specialist advice rather than rely on a conveyancer in this very complex field of endeavor. At PBL we have a wealth of experience in these matters and can guide you through all the pitfalls.
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