Put and Call Options used in the right circumstances can be of great benefit to parties.  While they may mean some further documentation and are subject to particular rules for their formation and exercise, a properly drafted Option Agreement and, in particular, a properly drafted Put and Call Option Agreement, can bring added flexibility and cash flow benefits to parties, without jeopardising the certainty of a deal.

What are Options?

The terminology of options can be explained in basic terms as follows:

a)      Put Option

A Put Option is an option to sell i.e., an agreement containing a Put Option gives a seller the right to require a buyer to enter into a contract to purchase property on agreed terms.

b)      Call Option

A Call Option is an option to buy i.e., an agreement containing a Call Option gives a buyer the right to require a seller to enter into a contract to sell property on agreed terms.

c)      Put and Call Option Agreement

An agreement containing both a Put Option exercisable by the seller, and a Call Option exercisable by the buyer.

Basic Requirement for an Option

1. An Option for the sale and/or purchase of land must be in writing, and must clearly describe the parties, the  property to be sold and the consideration for the options.
2. Where possible, it is best to attach a copy of the contract that the parties intend to use when the option is exercised, to avoid any uncertainty.  If this is not possible, at least a full description of the proposed terms of sale should be included.
3. Options must be exercised by notice in writing  to the other party.

Why use Options

There are various situations in which options might be used. By way of example, Put and Call Options are often used:

1. Where the buyer does not, at the time of striking the deal, have details of the entity it will use to buy and own the property.  In that case, the Option Agreement would give the buyer the right to assign the option to a third party nominee to be the buyer under the contract prior to the exercise of the option. While transfer duty (previously known by the general term stamp  duty) is payable on the Option Agreement, it is payable only on the option fee and not on the value of the property being sold.  Using an option agreement, rather than a contract of sale, avoids potential double duty for a buyer or the cost and inconvenience of cancelling a contract, where they wish to change the purchasing entity for the property after the deal is signed. Transfer duty on the property sale would also not be payable until the option is exercised which would have the effect of postponing time for payment.
2. To adjust the timing of disposal of an asset.  A party may be willing to sell, but for tax planning reasons may prefer to dispose of the asset in a later financial year.  For example, if the parties sign a contract on 30 May, the seller will pay tax in that financial year, even though settlement doesn't occur until the next year. If the parties sign the Option Agreement on 30 May, exercisable after 30 June that year, in certain cases any tax liability is deferred to the following financial year.

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This is a newsletter intended only to provide general information about current legal issues and does not constitute, nor should it be used or treated as, professional or legal advice.  Readers should make their own enquiries or seek legal advice before making any decisions concerning their own interests.