Options have become a mainstream tool in the property lawyer’s toolbox. As their use has grown, so have the opportunities for adding ever greater convenience and flexibility to property transactions.
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This type of option allows the grantee to “call” for the property to be sold to him on agreed terms at a particular time in the future or on the occurrence of an event. They can also incorporate a “nomination” that entitles the grantee to specify at any point in the option exercise period, a third party as being the eventual buyer.
Stamp duty is payable upon the option fee which can be as little as $1. If the option fee is a substantial sum eg $2.5 million,stamp duty is assessed on that some and is payable at the time of the option. However a credit can be obtained for the stamp duty paid when the contractor transfer for the property to which the option relates is required to be stamped.
The option deed may provide that the option fee forms part of the sale price under the underlying acquisition, or that doesn’t.
Particular care needs to be taken in the drafting of the “nomination” provision so as not to create an additional duty of all transfer.
Options relating to land must be in writing and signed. They invariably annex the form of real estate contract that particular rises price etc which when signed by the grantee, accompanied by the specified deposit and delivered to the grantor, constitutes the valid exercise of the option.
Put & call options
There is another type of option – a “put” option – where a buyer grants the seller the right to compel the buyer to buy an asset at a specific price in the future.
It is rare for put options to exist in real estate transactions by themselves.
Put options and call options are however often combined in the one transaction, called a “put and call” option to achieve much the same effect as a conventional contract. This is because if the buyer doesn’t exercise its call option, the seller can compel the buyer to proceed under the put option.
The option fee for each option is usually nominal, say $10 this limiting the stamp duty payable before the contract comes into existence (ie after the exercise of either one or both options), to a trivial sum. This has an obvious attraction to buyers of development projects where the approval process extends to 12 months or more because the payment of substantial stamp duty on the actual purchase price is deferred.
Put and call options also allow greater flexibility to the buyer in that they can usually transfer their interest under the option far more efficiently (in terms of stamp duty and legal overheads) than if they had to sell the land or transfer the interest under a purchase contract. Most options of this type also contain provisions allowing the buyer to “nominate” a subsequent party to be the ultimate buyer.
Property marketers often take put and call options to gain the exclusive right to market lots for sale for a specific period of time.
Importantly, the buyer under a put and call option still has a caveatable interest in the property.
There are however some disadvantages to using a put and call option in place of a regular contract. They are more complex than a standard REIQ document and therefore involve greater time and legal expense in their preparation.
There will be some resistance from property owners who might regard this form of documentation as complex. Extra time is also often required to negotiate the terms of the option agreement.
It must be remembered that if an option to acquire land in Queensland is terminated or assigned, this is classified as a surrender of dutiable property and further stamp duty may be assessable.
It is normal for special conditions to be included in options including amongst others due diligence enquiries, development approvals (if applicable), FIRB and access arrangements.
Parties to a proposed transfer of property can accommodate additional terms of whatever nature in a “side agreement”. This might occur for example in the case of a long term lease in respect of which the less or sites to grant to the lessee an option to purchase the leased property or even where a put and call option for the property has been negotiated between them. “Side agreements” must of course disclose such an agreement to financiers.