The What, How and Why of Put and Call options
Put and call options are a useful way of allowing parties to enter into an agreement to sell or acquire land at a future point in time, requiring minimum upfront commitment. In the most simplistic of terms, rights granted under a put and call option are a future right to compel a seller to sell land (the “call option”), or a buyer to buy land (the “put option”).
This article will cover some of the basic and common features of put and call options.
What is a call option?
A call option is granted by a seller of land in favour of a buyer. It is an enforceable right that, when exercised by a buyer, requires the seller to sell the land the subject of the call option to the buyer.
A call option is beneficial to a buyer, with some of the main advantages being:
- subject to negotiation, it gives the buyer the opportunity to undertake due diligence on the land, lodge a DA and obtain approvals to develop the land and secure finance for the acquisition before the buyer exercises the call option;
- a call option gives rise to a caveatable interest in the land in favour of the buyer; and
- the price (which must be agreed before the call option deed is entered into) will not change, regardless of market fluctuations (which of course, if most suitable to a buyer if the market value of the land increases during the call option period (see below)).
What is a Put option?
A put option is the opposite of a call option, and is granted by a buyer in favour of a seller of land. The buyer grants an enforceable right to the seller, which allows the seller to require the buyer to buy the land the subject of the put option, at a future point in time.
How is a put and call option documented?
Put and call options are documents by way of deed.
The usual technical term for the parties to an option deed are:
- grantor being the seller; and
- grantee, being the buyer.
The option deed must have annexed to it a complete and valid contract for sale and purchase of land (in addition to other technical documents). This therefore requires all aspects of the transaction to be agreed before the option deed is entered into (eg, purchase price, deposit and settlement period).
Once the relevant option is exercised by a party, the contract for sale and purchase of land that is annexed to the option deed becomes binding on the parties and the transaction progresses as a typical conveyance.
Features of Put and call options
Notwithstanding the abovementioned differences between a put option and a call option, the features noted below are essentially the same between the two.
As the subject matter of an option deed is an interest in land, consideration is required to be paid when the option deed is entered into (ie, on exchange of option deeds).
Depending on the type of option that is being agreed, the consideration is either:
- a “call option fee”, paid by the buyer to the seller; or
- a “put option fee”, paid by the seller to the buyer.
If the agreement is for a put and call option, both forms of consideration are payable. The consideration can be nominal.
Option exercise period
A call option exercise period is a set period of time during which the buyer can exercise its call option. A put option exercise period is a set period of time during which the buyer can exercise its put option. This timeframe is agreed by the parties before the option deed is entered into.
Ordinarily, these two periods of time are sequential.
If, the call option period expires and the buyer has not exercised its call option requiring the seller to sell the land, the buyer becomes precluded from doing so. This means that the seller can exercise its put option during the put option exercise period and require the buyer to buy the land.
Neither party is compelled to exercise their option during the relevant option exercise period. If neither party exercises their option, the option comes to an end at the expiration of the final option period. This means that the buyer loses the exclusive right to buy the land and the seller loses its buyer (but is otherwise free to deal with the land).
A buyer who has entered into a call option deed, but has not yet exercised the call option, may be entitled to assign its rights under the call option deed to a third party. On completion of the assignment, the third party will step into the shoes of the buyer as if it were the original buyer under the call option deed. The third party and the seller then proceed with the transaction in accordance with the terms of the call option deed.
A buyer may also be entitled to appoint one or more third parties as a nominee to exercise the call option on behalf of the buyer.
The appointment of a nominee is different to an assignment (where the buyer assigns its rights under the call option deed). If a nominee does exercise the call option, the contract which comes into existence will be between the nominee and the seller, instead of between the buyer and the seller.
Stamp duty considerations
When a put option or a call option is exercised, stamp duty becomes payable by the buyer as it normally would for a standard conveyance (ie, on exchange of contracts).
Stamp duty implications also arise when assigning an option or appointing a nominee to exercise an option. The stamp duty liability can be significant and specialist stamp duty advice should be sought if an assignment or nomination is considered.
The above is a brief summary of some of the main matters an option deed should contain. However, there are many more considerations to take into account. It is important that an option deed is tailored to your role in the transaction and also the outcome that you want to achieve.
Swaab Attorneys’ property team have in depth knowledge and experience in acting for buyers, owners groups and sellers on put and call option transactions. We have recently acted for a number of clients who have utilised put and call options to acquire an interest in multi-titled sites (or market an interest in multi-titled sites) for development, DA approval and assignment.