Put & Call Options – In simple terms
An option allows one party the enforceable right to purchase an asset at a future date at the same price as when the option was entered into.
There are two types of options:
- A Call Option allows a Buyer to purchase an asset at a future date at the same price as when the Option Agreement was entered into; and
- A Put Option is where a Buyer grants the Seller the right to compel the Buyer to purchase the asset at a set price in the future. It is rare for a put option to exist alone in real estate transactions.
Put Options and Call Options are normally combined to achieve the same effect as a conventional contract, as if the Buyer does not exercise the Call Option, the Seller can exercise the Put Option compelling the Buyer to complete the purchase.
The ‘consideration’ (option fee) can be nominal ie $10.00, which means that stamp duty can be deferred and does not become payable until the option is exercised and the contract comes into existence. This is popular with buyers of development projects where the approval process can be extended 12 months or more.
Put and Call Options also allow the Buyer greater flexibility as interest can usually be transferred more easily, in respect to stamp duty and legal overheads, than if the land was sold or interest transferred under a standard purchase contract. Many options of this kind also contain provisions allowing the Buyer to nominate an ultimate buyer of the property.
It is important to note that the Buyer still has a caveatable interest in the property under the Put and Call Option.
However there are also some disadvantages in entering into a Put and Call Option rather than a standard contract. There are property owners who may not be agreeable to entering in a Put and Call Option, as the documentation can be complex and extra time will be required in negotiating the terms of the Option Agreement.
Whether you are a Seller or a Buyer, if you are considering entering in a Put and Call Option it is important that specialised legal advice is retained to ensure that the terms negotiated adequately protect you.