An Option Agreement is an agreement between two parties where one party provides the other party with a right to buy or sell something at an agreed price, within a certain period of time.
In a property context, it is predominately used by developers who want to secure the right to acquire the land (usually a development site) for a proposed development in future, but prior to completely committing to the purchase, would like to undertake some due diligence or submit approvals to Council for Development Applications etc.
What types of Option Agreements are there?
There are generally three types of Options:
1. Call Option – this is where the buyer has a right, but no obligation, to buy the land from the seller.
2. Put Option – this is where the seller has a right, but no obligation, to sell the land to the buyer.
3. Put & Call Option – this is a combination of both Put and Call Options where the buyer has the right to ‘call’ for the option to be entered into by the buyer, or the seller can ‘put’ the Contract to the buyer.
What are common features in Option Agreements?
Option Fee
This is a fee payable for the granting of the Option. This generally represents a percentage of the purchase price, or a figure that has already been agreed between the parties. Generally, if the Option is exercised and the property purchased, then the Option Fee is credited towards the purchase price.
Option Period
This is a specific period of time within the Option Agreement in which the parties have to exercise the Option. This is normally for 12 – 24 months, but can vary depending on what the parties agree. Generally, after the Option Period has expired the Option is lapsed and the Option Fee will be forfeited.
Contract of Sale
A complete Contract of Sale for the particular property should be annexed to the Option Agreement. This is the Contract that will be entered into between the buyer and the seller once the Option is exercised.
Purchase Price
This is the purchase price of the property, the subject of the Option, that will be paid by the buyer when exercising the Option.
Caveats
The buyer of the land normally has the right to lodge a Caveat over the land to secure their interest in land under the Option. The Caveat can be permissive, allowing later registrations on the title, or absolute, forbidding all later registrations.
Assignment or Novation
The buyer would normally want the right to assign the benefit of the Option to a third party. This can assist in the event that they do not want to proceed to develop the land, but have a substitute purchaser, or if they want to setup a company later on for the purpose of the development and want to assign the right to that new company.
Stamp Duty
The Option Agreement is normally subject to Stamp Duty, and the amount of Stamp Duty depends on the Option Fee payable, and Stamp Duty on the market value of the land when the Option is exercised.
If you would like more information on Option Agreements, get in touch with the experienced Property & Conveyancing team at Rockliffs Lawyers in Sydney.