Buying and selling real estate via an ‘option deed’ has gained popularity over the past, particularly in a growing property development market.
Option deeds are predominantly used for the acquisition of a site for future development and can be drafted to accommodate various circumstances.
The flexibility of an option agreement is ideal for developers wishing to conduct due diligence before committing to a purchase and assists in the management of cashflow by securing a price for a property now, which can be funded at a later stage.
An option deed can provide a land owner control over the timing of selling a property and for certainty, the owner may negotiate provisions that require the prospective buyer to go through with the purchase.
This article explains the concept of an option agreement, the key terms of the option deed and how the arrangement operates.
What is an option deed?
An option deed is an agreement to buy or sell a specified property within a certain time and on certain terms and conditions.
The deed will contain a ‘call option’, a ‘put option’ and / or a ‘put and call option’. Most arrangements will constitute a call option alone, or combination of a put and call option.
A call option is the right for the prospective purchaser (grantee) to purchase the property (by requiring the owner to sell it) and the put option is the right for the land owner (grantor) to require the grantee to purchase the property.
The parties will generally reach agreement through a course of negotiations (either directly or through their representatives) which are then documented in the deed. A range of matters are included, such as:
- the parties’ details including company or trust details and addresses for service;
- a full description of the property being purchased;
- the purchase price;
- the option period being the timeframe in which a party may exercise the option;
- the expiry date, after which the option may no longer be exercised;
- the option fee payable;
- whether the option fee forms part of the deposit on the purchase of the property if the option is exercised, or the fee is forfeited if the option is not exercised;
- the formal requirements for exercising the option;
- the completion date;
- assignment or novation rights.
Often, special conditions are included in the deed which allow a developer / purchaser to access the land during the option period to carry out investigations and to lodge a development application with the relevant authority.
The contract for sale and purchase of land is attached to the deed and contains all relevant information and disclosure documentation for the property.
Exercising an option
Parties are generally required to exercise an option in writing and strictly in accordance with the deed.
Once the option is validly exercised a contract immediately comes into effect. Stamp duty is payable on the contract and the buyer will be required to finance and complete the purchase in accordance with its terms. The seller must be ready to complete the sale and provide vacant possession of the property if the contract requires.
Because an option deed provides for a prospective transaction at a future date, the parties must consider a range of contingencies that could arise between signing the deed and completion of the sale / purchase of the property.
The option period may range from three months to three years so good planning is essential. Key considerations include:
- If the deed contains a call option only, the prospective purchaser is not required to exercise the option and purchase the property. This is not ideal if the land owner requires certainty of a sale, in which case a put and call option would be more appropriate.
- A land owner entering into a deed with a call option only, should require that the option fee be forfeited if the option is not ultimately exercised.
- The land owner should consider the legal costs involved and whether these should be payable by a prospective purchaser, particularly if it is possible that a sale does not eventuate.
- The land owner should consider the likely impact of the property market when agreeing on the purchase price. If the option period is lengthy there could be a substantial increase in the value of the property between signing the option deed and exercise of the option. Developers will sometimes offer premium prices for sought-after properties that take market increases into consideration.
- An option deed for residential property must comply with the disclosure requirements under relevant legislation and regulations.
- Stamp duty on the value of the property may not be payable on the option deed itself but becomes payable by the purchaser once the option is exercised and contracts are exchanged. Stamp duty may also be payable on the assignment of an option to a third party. Prospective purchasers should obtain sound legal advice in this regard.
- An option deed creates a caveatable interest in the property and prospective purchasers should lodge a caveat over the title of the property to protect that interest.
- Unlike most contracts for the sale and purchase of residential property, there are no cooling-off rights available to the purchaser once the option is exercised and the contract becomes immediately binding.
An option deed secures the right to buy and / or sell property at a future date and is an excellent way to provide flexibility over property transactions.
They are however technical, complex arrangements and generally involve large amounts of money. Parties entering an option agreement require sound legal advice and the deed should be carefully drafted to ensure the terms are appropriate for each parties’ requirements.
If you or someone you know wants more information or needs help or advice, please contact us on 02 90020520 or email [email protected].