Put and call options are widely used in the sale and purchase of commercial property in Queensland due to their flexibility and strategic advantages for both buyers and sellers.
What are Put and Call Options?
A Put and Call Option is simply an agreement or deed in which the seller grants the buyer the right to call on the seller to sell the property to the buyer (the call option) and the buyer grants a right to the seller to require the buyer to purchase the property from the seller – or in other words, the seller can “put” the property to the buyer (the put option).
The agreement or deed will annex a copy of the contract that the parties will enter into in the future, when the call option or the put option is exercised.
Why use them?
Both the seller and the buyer can benefit from entering into a Put and Call Option.
The main reason that a seller would use a put and call option deed is where the seller wants to lock in a buyer now, but delay entry into the contract itself until a later point in time, say, for taxation reasons or to align the contract dates with the seller’s operational prerogatives. A Put and Call Option allows the seller to secure the buyer now, and ensure that the contract of sale itself is not entered into until a later date.
The benefits for buyers include:
- Securing the property while the buyer undertakes due diligence, or obtains a development approval or financing;
- Flexibility in decision making. In Queensland, buyers may nominate a third party to exercise the option and purchase the property, without there being adverse stamp duty consequences. Put and Call Options with these nomination provisions allow a buyer to secure the property quickly, before the buyer’s ultimate purchasing entity is established. Put and Call Options are popular with investment trusts for this reason. The trustee will not wish to establish the trust until all funds are received, but for obvious reasons will want to have the property secured while investors are found;
- For property developments, a developer can secure a large parcel of land under a Put and Call Option, and then, after the land is subdivided, the developer can nominate an end-buyer of each lot to purchase directly from the seller. This saves the developer from paying stamp duty on the transfer of the land to the developer, before it’s on sale to the end buyers;
- Postponement of stamp duty obligations for long-term purchases. While the grant of an option is a dutiable transaction, the parties can agree on a low or nominal option fee that will attract stamp duty within 30 days after the Put and Call Option is signed. Stamp duty on the full purchase price won’t become payable until after the contract itself is entered into. This can be useful where there will be a long period between entering into the initial transaction documentation and settlement.
But, use them with caution.
While using a Put and Call Option can be beneficial for both parties to a transaction, they do need to be used with caution, as there are risks associated with them that can trap the unwary.
These risks include:
- Failure to exercise the option correctly. While Put and Call Options are often seen by parties as being as good as a binding contract for the sale of land, there is one final step that needs to be taken by either the buyer or the seller to bring the actual contract of sale into existence, and that is exercising the option strictly in accordance with the Put and Call Option Deed. Failure to exercise either the call option or the put option exactly as required under the Put and Call Option Deed (eg missing the last date for exercise, serving the notice of exercise of option in the wrong manner or at the wrong address, or failing to include all required documents when exercising the option) means that the exercise has not been exercised at all, and in that case, the party who failed to exercise the option correctly will have been disenfranchised;
- While reasonably rare, some banks will refuse to recognise the Put and Call Option in the same way as a contract itself and may refuse to lend to a developer seller on the security of a Put and Call Option, or may refuse to progress a finance application for a buyer on the basis of a Put and Call Option;
- drafting the Put and Call Option in a way that fails to effectively defer the stamp duty liability, or in a way that requires duty to be paid on the security deposit paid by the buyer;
- The Queensland Revenue Office changing their approach to levying duty where the buyer nominates a third party to purchase the property from the seller. Other jurisdictions have moved to close this window and to treat any nomination as a second dutiable transaction, effectively resulting in double stamp duty being payable; and
- Failing to understand that for most legislation that requires a seller to give a buyer some kind of notice or disclosure prior to entering into a contract of sale, that legislation will require the notice or disclosure to be given prior to entering into a Put and Call Option. There may also be a need to give a further notice or disclosure to any nominee appointed by the buyer, before the nominee exercises the call option to purchase the property.
Overall, Put and Call Options offer a balanced mechanism for managing risks and achieving strategic objectives in commercial property transactions, provided they are carefully structured and comply with all relevant legal requirements.
Please see our Property + Business Transactions Team if you would like to discuss how using a Put and Call Option can benefit your upcoming commercial property transaction.
For further information, contact Amanda Tolson or Carly Brailak.
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