Put and Call Option Agreements are an important tool for any property developer or option seller. Ensuring your Put and Call Option Agreement is properly drafted can make a big impact on just how effective it is at protecting your needs. This is what separates a good property development lawyer from an average property lawyer.
You have just found a new development site and you want to get the seller signed up as soon as possible to secure it. The dollar signs are in your eyes and you get a bit caught up in getting the deal done and forget about the minor detail. Does this sound like you? A poorly drafted Put and Call Option Agreement can be the difference between a successful deal and a failure. Don’t let the dollar signs blind you from making good business decisions.
What is a Put and Call Option Agreement?
A put and call option agreement is a contract where one party agrees to sell one or more properties if requested by the buyer (a call option) and the other party agrees to buy the same property if requested by the seller (a put option).
It is extremely common for a Put and Call Option Agreement to include a right for the buyer to nominate a third party to be the buyer under the contract. This is the mechanism that allows you to on-sell property using an option agreement without ever having to settle on that property.
In practice, the call option runs for an agreed period of time giving the buyer the opportunity to buy the property by giving notice during that call option period. Once the call option period has expired, the seller then has the opportunity to force the buyer to buy the property by giving notice during the agreed put option period.
Why use a put and call option agreement?
The primary benefits of using a put and call option agreement rather than a normal contract of sale are the potential tax benefits. By using a put and call option agreement, you can:
- delay the buyer’s obligation to pay transfer duty
- nominate another buyer to buy the property without paying transfer duty twice
- change the period in which the property is sold for tax purposes which can impact on the tax obligations of the seller (primarily capital gains tax)
What if I don’t want to be forced to buy the property?
If you want the right to buy the property (a call option) but don’t want the owner to be able to force you to buy the property (a put option), then a call option agreement is the answer.
While it is often harder to get a land owner to agree to enter into a call option agreement, it is often more beneficial for the buyer given they can back out of the transaction before the call option is exercised.
What’s the catch? While there is no ‘catch’ as such, sellers will generally require a higher security deposit for a call option agreement than they would for a put and call option agreement where they can force you to buy the property. It is also common for the security deposit to be non-refundable and released to the seller once due diligence has been satisfied when using a call option agreement.
What are the usual time frames under an option agreement?
The most common time frames we see for ‘developer style’ option agreements are as follows:
- due diligence – 30 to 60 days
- development approval – 6 to 12 months after due diligence
- settlement – 30 days after exercise of the option
What to look for with your next Put and Call Option Agreement
The devil is in the detail and this is what separates the expert Property Development Lawyers from the average. Here are some tips and traps to look out for when negotiating your next Put and Call Option Deed.
Payment of uplift
One of the main reasons people use a Put and Call Option Agreement is to provide the option to on-sell the property without triggering double transfer duty in Queensland.
Sometimes the buyer will obtain a development approval and then on-sell the property under the option agreement at a higher price. Other times the buyer will on-sell the property for a profit straight away without obtaining any development approvals. This is often referred to as a ‘Short Option’.
Regardless of whether you intend to on-sell the property or not, it is often a good strategy to allow yourself the option to do this as another exit strategy. Circumstances change and flexibility always helps you deal with these changes.
There are generally four different ways you can structure an on-sale to an ultimate buyer under a Put and Call Option Agreement:
- Option that contemplates an on-sale – This strategy requires the Put and Call Option Deed to be properly drafted to contemplate you being able to on-sell the property under the document and to receive the profit at settlement.
- Nomination agreement – This strategy requires the Put and Call Option Agreement to have an appropriately drafted nomination clause. It is especially important that the clause is drafted so that it does not accidentally trigger transfer duty in Queensland.
- Assignment of the option – This strategy requires the Put and Call Option Agreement to have an appropriately drafted assignment clause. The most flexible drafting for the buyer allows the document to be assigned without the consent of the seller. More commonly, the document is drafted so that the option can be assigned with the seller’s consent and that this consent cannot be unreasonably withheld or delayed.
- Joint Venture Agreement – Using a JV Agreement structure to on-sell under a Put and Call Option Agreement allows you to stay in the deal and receive an uplift and/or profit sharing on the completed development. This structure can be a backup where the Option Agreement was not properly drafted to allow for nomination or assignment without triggering double duty or where the parties genuinely want to carry out the project together.
Choosing the best structure for your on sale will change on a case by case basis. We recommend speaking with your Property Lawyer to get advice on this before finalising any agreement with your ultimate buyer.
Properly drafted nomination clause
What is a nomination clause?
A nomination clause allows you to nominate another person to be the buyer of the property. The terms of their purchase will generally be determined by the terms outlined in your Put and Call Option Deed. The nomination clause is one of the most common mechanisms used to on-sell the property to a third party without you having to settle on the property or pay stamp duty.
What to look for in a nomination clause
The most important thing to look for in drafting of a nomination clause is to ensure that your ultimate buyer does not obtain any rights under the Put and Call Option Agreement. This means that you will still be the one to exercise the Call Option at the appropriate time and not the ultimate buyer.
The ultimate buyer has their rights under the resulting contract once you have exercised the Call Option.
This may sound like a subtle difference, however it may be the difference in whether your nomination triggers double transfer duty in Queensland or not.
Right to assign the Put and Call Option Deed
Including a right to assign the Option Agreement allows you to transfer all of your rights to an ultimate buyer. There are usually two different ways this can be structured:
- Right to assign without the seller’s consent – this can be harder to negotiate with the land owner as an experienced Property Lawyer will often try and negotiate this clause be amended to require the seller’s consent.
- Right to assign only with the seller’s consent – this structure is easier to negotiate, however makes it harder if you do decide to sell your rights under the Put and Call Option Agreement. If seller’s consent is required, the clause should be drafted so that their consent cannot be unreasonably withheld or delayed.
Assigning your rights under an Option Agreement should never be done without consulting an experienced Property Development Lawyer as you may accidentally trigger transfer duty on the assignment. This is an advanced strategy that is used in limited circumstances with proper advice.
Further Call Option Period if your third party buyer terminates
Where you have on-sold the property to a third party and exercised the Call Option, the third party then becomes the buyer under the resulting contract. This means you ‘lose control’ over this aspect of the deal for the duration of that contract.
Depending on the structure of the deal, it is often important that you have a further chance to on-sell the property or settle on it yourself if your third party fails to settle the first time. This allows you to recover the deal as required.
A perfect example of this mechanism in action is where you have entered into a ‘marketing style’ Put and Call Option Agreement for block of vacant land in a new subdivision. You on-sell the land to a third party buyer at a premium, but you also have other buyers that you know would be interested in purchasing the land if the first buyer fails to settle.
Imagine your first buyer fails to settle but your Call Option has expired and the developer then exercises the Put Option forcing you to buy the land, even though you had other buyers waiting? You would be surprised how often this happens with inexperienced Property Developments Lawyers in Queensland.
Subject to Due Diligence
Property development is a complex process that involves passing through a number of hurdles before a development even starts. The first step will usually be site identification, the second a high level due diligence, the third a high level feasibility study and then the fourth, your detailed due diligence.
Steps 1 to 3 above are usually carried out before you sign the Option Deed with little or not out of pocket expenses incurred. Once you have signed the paperwork and locked in the deal, that is when the detailed due diligence commences and you start spending money on your town planner, property lawyer and other consultants.
Not all due diligence clauses are created equally and it is important that your clause provides the level of protection you need. You can read more about the intricacies of due diligence clauses here: Click me
Subject to Development Approval
Once your deal has progressed through Stages 1 to 4 above and you are happy with the results of your due diligence, Step 5 will usually be the development approval process.
Not only is the detail in the drafting of the subject to DA clause important, so is the timing. Far too often we see developers try and negotiate deals with a DA period that is far too short for the development they intend to carry out. Compiling consultants reports and supporting materials for your development application can take months in itself and this is on top of the time required to then respond to any information requests from Council. Your town planner and Property Lawyer can provide guidance on the time frames you should be negotiating for your subject to DA clause.
You can read more about intricacies of subject to DA clauses here: Click me
Access to the property
Carrying out due diligence and compiling the reports required in support of your development application will generally require access to the property for various reasons. It is important that your Put and Call Option Agreement allows you, and your consultants, access for these purposes.
Another right of access that can be helpful is where you intend to on-sell the property. This can allow you to bring your potential buyers through the property as required.
We have some developers that also negotiate access to carry out early development works. This can become quite messy and is something that should only us done in very specific circumstances.
Right to caveat
Acquiring a development site under option and then going through the development approval process can be an expensive task. It is common for developers to spend $50,000 to $100,000 or more to get to the stage of having a site under option with a development approval. A consent caveat essentially ‘freezes’ the title to the property and protects you from the land owner being able to sell the property in breach of your Put and Call Option Agreement.
Right to erect signage
While this might not be the highest requirement on a developer’s checklist, this is a minor detail that can make life easier. The main signage that we would expect developers to require are:
- Signage complying with advertising requirements for your development application. In Queensland, this generally relates to impact assessable or notifiable code assessable development applications.
- Advertising signage for lots in the completed development.
How is the deposit you have paid treated on exercise of the Call Option?
If you exercise the Call Option in your own name or the land owner exercises the Put Option, the security deposit would usually then form the deposit under the resulting contract as you are buying the property. But what if you nominate a third party to be the ultimate buyer?
We often see inexperienced Property Lawyers draft Option Agreements that cause your security deposit to then be held as the deposit for your third party buyer under their contract. Yes, you ready that right. Your deposit is used as security for an unrelated ultimate buyer. It is important that the deposit clauses are properly drafted to give you the flexibility to avoid this scenario.
We generally recommend the deposit clause be drafted so that you have the choice on whether your deposit becomes the deposit under the third party contract. This election is usually made at the same time you exercise the Call Option and this strategy gives you the greatest level of flexibility.
On-selling property using Put and Call Option Agreements. How do I do it?
There are a number of different ways that you can on-sell a property using an option agreement. A summary is as follows:
Option that contemplates an on-sale
This model has provisions in the put and call option agreement that contemplates an on-sale and requires the seller to pay any uplift to you at settlement of the property.
Pros:
- Contract price is the higher price for the ultimate buyer. This makes it easier for them to get finance and also means they never know the uplift amount.
- No separate agreement needed with the ultimate buyer as long as they don’t need to take advantage of timeframes under the option agreement. They just sign the contract at a higher price.
Cons:
- The seller will be aware that you are contemplating an on-sale at the time you negotiate the option. This generally makes it harder to get the option agreement signed with the seller.
- Depending how the option and contract are structured, there can be less flexibility with the settlement date. For example, the option may have a 12 month DA period and the contract may have a 30 day settlement. If the ultimate buyer wants to take advantage of the 12 month DA period, there will still need to be a nomination deed with the ultimate buyer.
- Less flexibility on when you get paid your uplift as it will generally only be paid at settlement (unless there is a separate nomination agreement that goes with it).
- You can lose control of the option and the deal if the ultimate buyer fails to settle.
Nomination agreement
This model has you enter into a nomination agreement with the ultimate buyer where you agree to nominate the ultimate buyer under the put and call option agreement
Pros:
- There is a lot of flexibility in when you get paid your uplift and when you nominate the ultimate buyer.
- You retain control of the option agreement until the point the buyer is nominated.
- The seller is not aware of the uplift amount.
- Seller consent is not required for the nomination.
- No transfer duty is payable on the nomination.
- It is generally easier to negotiate the option agreement with the seller as it does not contemplate the on-sale provisions, other than allowing a nomination.
Cons:
- The buyer will sign a contract at the lower price. This means it will be harder for them to get finance on the increased price and also means the sale price with the land registry will generally be recorded at the lower amount.
- The buyer will be aware of the uplift amount.
Assignment of the option
This model has you enter into an assignment agreement with the ultimate buyer and then assign the option to the ultimate buyer.
Pros:
- Depending on the terms of the assignment agreement, you can be paid the uplift and then exit the deal without having to stay in until settlement.
Cons:
- Depending on the terms of the option agreement, you may require the consent of the seller to assign the option agreement.
- If the option agreement is drafted to allow assignment without seller consent, this will often be negotiated out by the seller’s lawyer.
- If it is a put and call option agreement, you can remain liable for the performance of the ultimate buyer under the option agreement following the assignment.
- The assignment can trigger a transfer duty liability on the value of the option.
Joint venture
This model has you enter into a joint venture agreement with the ultimate buyer and carry out the development as their partner.
Pros:
- Can allow you to share in the profits of the project which can lead to a higher payment to you.
- It is very flexible on how the deal is structured. This can include an acquisition fee paid to you upon settlement or earlier.
Cons:
- You are tied to the project until the end.
- Depending on how it is negotiated, you may not receive your profit share/uplift until settlement of the completed development.
Which option is best for on selling?
The most common way is to on-sell using a nomination agreement, however we have had experience with all four models.
Some examples:
- We assisted a client that went with an assignment agreement. They received a lump sum uplift payment and exited the deal entirely.
- Another client used a nomination agreement and on-sold the property within 3 days, got paid half of the uplift as a deposit on signing and then received the balance uplift at settlement about 30 days later.
- Another client is currently developing out the project with a funding partner. There was an acquisition fee paid on signing of the joint venture agreement and the funding partner is responsible for paying all costs to carry out the development.
- Another client has entered into a put and call option agreement for a number of blocks of land where the option agreement contemplates an on-sale at a premium. The uplift to the purchase price is then paid to our client on settlement of each lot.
The best option will generally depend on who the seller is, who the likely buyer is and the nature of the site. If the ultimate buyer is going to be a sophisticated developer, they shouldn’t be too put off by paying you an uplift under a nomination/assignment agreement. On the other hand, if it’s a 1 into 2 subdivision with a mum and dad buyer then you might struggle to get them to enter into a purchase under a nomination/assignment agreement.
Likewise, if you have an unsophisticated seller that you’ve worked hard to get across the line to sell, you might not want to scare them off with a put and call option agreement that contemplates an on-sale at a premium. Alternatively, if you have a motivated seller that you think will sign anything, this option allows you the greatest flexibility.
Got more questions?
McAndrew Law is a leading Brisbane Property Development Law Firm. We have extensive experience in drafting Put and Call Option Agreements for developers, option sellers and land owners to ensure your rights are protected. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.
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