Put and Call Option Agreements

Put and Call in a rising market

One of the advantages of purchasing property “off the plan” is the ability to negotiate with the developer to document the agreement via a “Put and Call Option” agreement. If you’re considering a purchase in a new development, especially in a rising market, it is worth considering a Put and Call Option Agreement and we recommend seeking independent advice. Here’s how they work.

Call Option

A Call Option Agreement (on its own) empowers the buyer (or grantee, as they are referred to in the Agreement). It requires the seller to sell the property at an agreed time and price if the buyer exercises the option. From a buyer’s point of view, the property can be reserved (withdrawn from the market) but there is no obligation to buy unless the buyer chooses to exercise the “option”. The developer (or grantor) may require the buyer to pay a non-refundable Call Option Fee in exchange for being granted the call option over the property and removing the property from the market during this time without the guarantee of a sale.

Put Option

A Put Option Agreement (on its own) empowers the seller. It requires the buyer to buy the property at an agreed time and price if the seller exercises the option. From a buyer’s point of view, a deal is only locked in if the seller exercises their option to sell on the date.

A ‘Put and Call’ Option

More common is a Put and Call Option Agreement where the two options, combined, function similar to a regular sale contract. Effectively, both parties are committed to the sale – unless both parties choose not to exercise the option. The buyer is provided a period of time in which to exercise the call option and, if not exercised by a specific date, the put option period for the developer will commence (generally this is a period of one month after the call option period expires).

Benefits of Put and Call

So what’s the difference? The Call Option and Put and Call Option Agreements allow the official entity that will ultimately settle on the property to be entered at a later date. This is handy if a buyer needs to set up a new entity and the name is not known at the time the agreement is made.

The buyer also has the ability to “assign” their right to a related or non-related third party. That gives the buyer an opportunity to on-sell the property to a third party, in most instances for a profit. The third party effectively becomes “the buyer” under the agreement. Given that only the deposit needs to be outlaid to enter into a Put and Call, the potential profit that can be made without ever owning the property can be quite large. When buying “off the plan” there can be a year or more between making the agreement and the settlement of a contract. In the meantime the market can change and in a rising market that means opportunity for profit.

There are also tax advantages. Our strong advice is to consult with your financial adviser as to the specific tax implications of any purchase. Because the actual transfer of property is delayed, the original buyer may be exempt from paying transfer duty where the nomination clause in the Put and Call Option Agreement is carefully drafted. The ability to delay a sale may also give rise to the buyer allocating the sale to a specific tax period.