What is an Option Agreement?
A Call Option gives the buyer the right to force the seller to sell a property to the buyer at an agreed price, within an agreed time frame called the Call Option Period.
A Put Option gives the seller the right (if the buyer does not force the sale) to force the buyer to buy the same property from the seller at the same agreed price, within an agreed time period called the Put Option Period.
Why use an Option Agreement?
There are several reasons for using an option agreement for example a buyer may want to lock in the purchase of the property, but only wants to enter into a contract in the next financial year, or the buyer may want to delay the purchase to register a new company or trust that will become the buyer. It is not unusual for an option agreement to contain a clause allowing the buyer to nominate an alternative party as the buyer when the contract is entered. This type of clause will allow the buyer to either exercise the option in their own name or in the alternate buyer’s name.
When an option is exercised, a formal sale contract will be entered into and signed by the appointed party and that party will become the owner of the property on settlement and be liable to pay stamp duty on the contract.
What are the advantages of using an Option?
– Fixing the purchase price now and settling in the future;
– Purchaser can be changed, allowing risk in the purchase to be shifted to another buying entity;
– Allowing for lengthy property investigations for example development approvals;
– Shifting the purchase to a new financial year;
– GST, taxation or stamp duty reasons.
What are the disadvantages of using an Option?
– Increase in conveyancing/legal costs;
– The average buyer/seller may not understand the process and may not be willing to transact;
– The sale/settlement of the property will be delayed which may inconvenience.
The parties will need to ensure that they comply with the precise legal requirements when the option is exercised. Further, there are certain stamp duty implications with respect to option agreements and buyer and sellers should not enter into such agreements unless they have obtained detailed legal and taxation advice from a solicitor and accountant. If you have any queries on option agreements or any other property related matter, please contact Smith & Stanton for advice.