Options are a popular way for property developers to minimise risk by allowing them to confidently invest time and money in a potential development before acquisition.
What are they?
An option grants a right for a party to buy or sell property at an agreed price within a specified period. Options can take the form of:
- a Call Option – an agreement that gives a buyer the option to purchase specified property at an agreed price during a certain period;
- a Put Option – an agreement that gives the seller the right to require a buyer to buy specified property at an agreed price during a certain period; or
- a Put and Call Option – an agreement which gives the seller the right to require the buyer to buy to specified property at an agreed price during a certain period. If the seller does not exercise such right within the time permitted, the buyer can still elect to buy the specified property at the agreed price, during a specified period.
The benefits of an option can include:
- securing the right to purchase a potential development site and get it off the market while due diligence is carried out and development consent obtained;
- potential tax benefits:
- for buyers, deferring the payment of stamp duty; and
- for sellers, deferring capital gains; and
- the right to nominate another buyer to step in and purchase the property.
Requirements for a valid option agreement
Strict requirements for a valid option agreement for the sale of residential property in NSW apply. Failure to meet the following requirements may void the option agreement and enable the other party to rescind:
- valuable consideration must be given to create a valid and binding option agreement. This is usually an agreed percentage of the purchase price called an ‘option fee’ which is deducted from the deposit payable under the contract when the option is exercised. For call options, the buyer will pay the option fee on the date of the option agreement. For a put and call option, the buyer pays an option fee and the seller also pays an option fee, usually a nominal fee of $1.00;
- a full copy contract for the sale of land including all prescribed documents must be attached to the option agreement;
- the call option must not be exercisable within 42 days of the date of the option agreement;
- the parties must execute and exchange separate duplicate option agreements;
- section 66ZH of the Conveyancing Act 1919 (NSW) requires that any option agreement for the sale or purchase of residential property must contain a statement in the form prescribed by the Conveyancing (Sale of Land) Regulation 2017 (NSW) regarding the cooling off period. The statement must be clearly legible and prominently located. In summary, a 5 day cooling off period will apply to the option unless:
- the buyer’s solicitor gives a certificate under section 66ZF of the Conveyancing Act 1919 (NSW) waiving the cooling off period; or
- the call option was granted on the same day that the property was passed in at auction.
Exercising a call option
The option agreement will specify the relevant option periods and methods for exercising the option. It is critical that the procedures for exercising an option are strictly followed to ensure the option agreement is validly exercised. Exercising an option typically involves the simultaneous service of a notice on the seller exercising the option, provision of a contract for sale of land in the form attached to the option agreement executed by the buyer and payment of the balance deposit. Additional requirements specified in the option agreement may also need to be satisfied when exercising the option. At such point, a binding contract arises between the parties for the sale and purchase of the specified property.
If a right to sell or buy is not exercised within the time provided in the relevant option, the option lapses and the parties are no longer legally bound. In that case, the Seller usually keeps the option fee as a form of compensation.
On your side
Options are an effective tool for developers to secure the right to acquire a potential development site and buy time to undertake due diligence before committing to the acquisition. However, they do require careful drafting and procedural execution. Typically, developers require access to a potential development site to undertake due diligence enquiries during the option period, and this is just one of many variables that may need to be built into the terms of an option agreement.
Keystone regularly acts for developers on property acquisitions end to end, from advising on and preparing valid and binding option agreements for residential and commercial property, guiding and assisting developers through the process of validly exercising the option, to acting on the final acquisition.