They have a wide variety of uses, including for real property, businesses or business assets and as tools for succession planning. This article focuses on their use for real property i. An Option Agreement can contain what is known as a put option, or call option, or both. This is the most common method of exercising options concerning real property, however other mechanisms available depending on specific circumstances or type of agreement. The purposes and type of Option Agreement will determine what is a reasonable basis for requiring option fees or deposits to be paid.
For example, an Option Agreement may provide that:. There can be adverse tax consequences of utilising a large non-refundable option fee, so it is imperative that consideration is given to the capital gains tax and GST treatment of option fees before the Option Agreement is entered into. There can also be the risk that the arrangement constitutes an instalment contract read more about those here if it is not properly prepared.
Where an Option Agreement is intended to be more mutually beneficial or grants both parties the right to compel the other to buy or sell respectively , it is more common for the Option Fee to be a nominal amount i. This may avoid some adverse tax and duty consequences.
Option Agreements may have set time frames during which a party may exercise its option, or otherwise the option periods can be triggered by certain events for example, the Buyer obtaining a development approval. Option Agreements can also allow for the asset to be sold to another party on exercise of the option.
This can be useful where the buyer has not yet determined or established the legal entity that is to acquire the asset. In summary, Option Agreements have a wide range of uses and may offer benefits over a sale contract alone, however there are a number of significant legal and tax issues that will need to be considered.
Sale contracts and option agreements each have their limitations and you should always seek advice before entering into an arrangement concerning real property. We have extensive experience in this area. Skip to content Property Development. What are the Different Options? Put Option — this is where the seller has the right to compel a buyer to buy the Property.
Call Option — this is where the buyer has the right to compel a seller to sell the Property. Put and Call Option — this may grant both parties the right to compel the other to buy or sell the Property. Usually these options would run consecutively — the call option first, and then the put option kicks in after the first option has expired.
How does it work? An Option Agreement usually contains two main parts: The body of the Option Agreement, which outlines the terms on which the parties may exercise their option; and The sale contract as an annexure to the Option Agreement. The Contract will often have all details and terms finalised, including the Purchase Price and length of contract.
On exercising an option, both parties will need to sign the agreed sale contract. Option Fees and Deposits The purposes and type of Option Agreement will determine what is a reasonable basis for requiring option fees or deposits to be paid. For example, an Option Agreement may provide that: The commercial basis for having a Call Option Fee is that the Seller is taking the property off the market for 6 months, without being guaranteed a sale.
Triggers for Options Option Agreements may have set time frames during which a party may exercise its option, or otherwise the option periods can be triggered by certain events for example, the Buyer obtaining a development approval. Nominees Option Agreements can also allow for the asset to be sold to another party on exercise of the option. Why use Option Agreements? There are many reasons why Option Agreements can be beneficial or necessary. Practical reasons — for example, where a property developer wishes to lock in the option to buy a property at a set price, but subject to its right to obtain development approvals for the land and determine a final buying entity; or Tax reasons for long sales — using an Option Agreement can defer tax or duty liabilities until a period more convenient for one of the parties, such as the next financial year for CGT purposes, or closer to the anticipated settlement date.
A Option can be attractive compared with using a long term unconditional sale contract. Paying Your Deposit under a Land Contract — when, where, who, what, how? Sellers — make sure you disclose all easements in the contract!More...