Buying and selling property under an option agreement
Buying and selling real estate utilising an option arrangement has gained popularity in recent times, particularly in a rising property development market.
Option deeds are predominantly used for the acquisition of sites for future development, and can be drafted to accommodate a wide variety of circumstances.
The flexibility an option agreement can provide is ideal for developers wishing to conduct due diligence before committing to a purchase or the entity to purchase, and assists in the management of cashflow by securing a price for a property now, with funding arrangements to be put in place.
An option deed can also provide a land owner with control over the timing of the sale of a property (e.g. in which financial year the sale will take place).
This article explores the concept of an option agreement, the key terms of the option deed and how the arrangement operates.
What is an option deed?
An option deed records an agreement to buy or sell a specified property within a certain time and on certain terms and conditions.
The deed may contain a ‘call option’, a ‘put option’ and / or a ‘put and call option’. Most such arrangements involve a call option alone, or combination of a put and call option.
A call option grants the right to the prospective purchaser (the grantee) to purchase the property (by requiring the owner to sell it) and the put option records the basis on which the property owner (the grantor) may require the grantee to purchase the property.
The parties will generally reach agreement through a course of negotiations (either directly or through their representatives) which are then documented in the deed.
The deed ,may include a range of matters, such as:
- the parties’ details (including company or trust details and addresses for service);
- a full description of the property being purchased;
- the purchase price;
- the option period [being the timeframe in which a party may exercise the option];
- the expiry date, after which the option may no longer be exercised;
- the option fee payable;
- whether any option fee forms part of the deposit on the purchase of the property if the option is exercised, and whether the fee is forfeited if the option is not exercised;
- the formal requirements for exercising the option;
- the completion date;
- assignment or novation rights and whether the grantee can nominate another party to exercise the option.
Special conditions are often included in the deed which allow a developer / purchaser to access the land during the option period to carry out investigations and to lodge a development application with relevant authorities.
Usually a contract for sale and purchase of land is attached to the deed and contains all relevant information and disclosure documentation for the property.
Exercising an option
Parties are generally required to exercise an option in writing, strictly in accordance with the deed.
Once the option is validly exercised a contract immediately comes into effect. Stamp duty is payable on the contract and the buyer will be required to complete the purchase in accordance with its terms. The seller must be ready to complete the sale and provide vacant possession of the property at the time the contract requires.
Because an option deed provides for a prospective transaction at a future date, the parties must consider a range of contingencies that could arise between signing the deed and completion of the sale / purchase of the property.
The option period may range from one or 2 months to several years, so good planning is essential. Key considerations include:
- If the deed contains a call option only, the prospective purchaser is not required to exercise the option and purchase the property. This is not ideal if the land owner requires certainty of a sale, in which case a put and call option would be more appropriate.
- A land owner entering into a deed with a call option only, may wish to require that the option fee is forfeited if the option is not ultimately exercised.
- The land owner should consider the legal costs involved and whether these should be payable by a prospective purchaser, particularly if it is possible that a sale will not eventuate.
- The land owner should consider the likely state of the property market when agreeing on the purchase price. If the option period is lengthy there could potentially be a substantial increase in the value of the property between signing the option deed and exercise of the option. Developers will sometimes offer premium prices for sought-after properties taking market increases into consideration.
- An option deed for residential property must comply with the disclosure requirements under relevant legislation and regulations.
- Stamp duty based on the value of the property may not be payable on the option deed itself but becomes payable by the purchaser once the option is exercised and contracts are exchanged. Stamp duty may also be payable on the assignment of an option to a third party. Prospective purchasers should obtain appropriate legal advice in this regard.
- An option deed creates a caveatable interest in the property and prospective purchasers should consider lodging a caveat over the title of the property to protect that interest.
Unlike most contracts for the sale and purchase of residential property, there will usually be no cooling-off rights available to the purchaser once the option is exercised and the contract becomes immediately binding.
An option deed secures the right to buy and / or sell property at a future date and is an excellent way to provide flexibility in property transactions.
They are however technical, complex arrangements and often involve large amounts of money. Parties entering into an option agreement require sound legal advice and the deed should be carefully drafted to ensure the terms are appropriate for each parties’ requirements.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email firstname.lastname@example.org.
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