The Ins and Outs of a Put and Call Option
What is a put and call option?
A put and call option (“Option”) grants rights to each party which if exercised, compel the sale of the property which is the subject of the Option.
Why enter into a put and call option?
As the Option grants the parties the mere option to enter into a binding contract to buy and sell the property at a later date, until that time, the parties are allowed greater flexibility than if entering into a standard contract of sale. This type of arrangement is attractive to buyers wishing to develop the property at a later date as they are only required to pay a nominal amount as consideration under the Option at the time of signing, often being only $1.00 and by doing so, they often defer their obligations to to make payments of costs generally associated with a contract of sale for property until the rights under the Option are exercised and a binding contract is entered into which could be some 12 to 18 months after the original Option is signed. .
For Sellers, this type of arrangement may also be suitable if they wish to delay Capital Gains Tax liabilities until the following financial year or if they are not quite ready to hand over the property at the time the Option contract is signed. Taking advice from your accountant is crucial when planning.
How does it work?
Due to the complex nature of the Option, it is usually prepared by a solicitor for one of the parties.
Once the Option is signed a nominal call option fee is paid by the Buyer. In addition, a security deposit is paid (or sometimes paid in stages) which is held by a stakeholder.
The rights each party to the Option have to compel the other in regards to the sale or purchase of the property are referred to as the Call Option Period and Put Option Period. It is during these specified timeframes that either party may exercise its right to then compel the other party to either sell or purchase the property and therefore trigger the requirement to enter into a binding contract. Where there is a prospect of developing the land upon which the property is located, the Option will often to be subject to the buyer obtaining a satisfactory Development Approval from the Council and subsequent finance to finance the development. Once the parties have exercised their right to compel the sale of the property, a standard contract of sale is entered into and from that point on, the matter is quite often a general residential conveyancing process.
If you are looking to invest in property for the purposes of development or alternatively you own property and have been approached by a developer to possibly sell your property for the purposes of development, an Option may be the appropriate documentation for either party. In this regard, McLaughlins Lawyers can provide you with pre-contractual advice in relation to whether an Option is appropriate for you and the consequences of entry into same.
Author: Anna Doughan
Director: Ian Kennedy