In part 2 of this series, Partner Matthew Russell takes a deep dive into the importance of ensuring Put and Call Option Agreements are drafted in your favour.
In part one of this series, we examined the benefits of a Put and Call Option Agreement and how they work. Let’s dig a little deeper to examine what you, as the Buyer, should be mindful of in the drafting of the Option Agreements.
The drafting of the Put and Call Option Agreement requires careful consideration. If the Agreement is poorly drafted, it could have significant consequences, including that your right to exercise your option is ineffective or otherwise open to challenge. This could be disastrous, especially if you’ve paid a significant security deposit fee that is not refundable.
A properly drafted Put and Call Option Agreement should:
- Contain a clear method for the exercise of the call option and put option, including by allowing the exercise to occur by email to each party’s respective lawyer.
- Be subject to the Buyer undertaking satisfactory due diligence investigations and/or obtaining a satisfactory development approval (if applicable);
- Allow the Developer or Buyer to:
- access the property to conduct soil tests and other investigations;
- lodge and advance a development application with Council;
- register a non-lapsing caveat over the Property (to protect its interest in the property);
- market the property (or any new lots created from the redevelopment of the property) for sale; and
- be entitled to nominate a third party entity as the buyer under the Contract.
- Include a provision which allows the Buyer to have a second chance of exercising the Call Option if for whatever reason the Seller forms the view the Buyer’s first exercise of the option was ineffective. That way, the Buyer does not lose the benefit of the option by some technical default.
- Identify who bears the risk of damage to the Property while the Put and Call Option period is on foot. For example, is there a right for the buyer to terminate in the event of damage to the property or is the buyer still obliged to complete the Contract in this instance? Whilst this may not be an issue if a Developer is simply going to demolish the property after settlement, it is certainly worth considering especially if a Buyer is paying a significant purchase price for the Property.
- Ensure that care is given to any potential instalment contract issues (i.e. if there is a non-refundable security deposit) as well as any transfer duty issues especially with any nominee or assignment rights – it is critical to get this right!
In many cases, savvy Developers or Buyers may seek to use a Put and Call Option Agreement to on-sell the Property. This means they use the nominee provisions in the Agreement to nominate a third party buyer to purchase the property and possibly obtain a profit, all without becoming the registered owner. A Nomination Agreement is typically entered into in these circumstances, however it’s important to note that the Developer or Buyer would likely bear the cost of any agent’s commission for the on-sale, any additional GST that the Seller would be liable for, as well as ensuring that any transfer duty in respect of the right granted under any nomination agreement is paid (usually by the incoming third party buyer).
As you can see, the drafting of a Put and Call Option Agreement can be complex and it’s critical that your Put and Call Option Agreement (and any Nomination Agreement) is drafted correctly. We’re here to help.
Matthew Russell and his team can be contacted on (07) 3226 3944 or email Matthew at email@example.com
Think Option Agreements. Think Nicholsons.