Put and Call Options - Easy reading

Put and Call Options - Easy reading

By Brad Caldwell-Eyles | 24-06-16 Traditionally, an option allows one party the enforceable right to buy something at a future time at a particular price.

This is in fact a “call” option and there is another type of option – a “put” option – where a buyer grants the seller the right to compel the buyer to buy the asset at a specific price in the future.

It is rare for put options to exist in real estate transactions by themselves.

However put options and call options are often combined in one transaction, called a “put and call” option to achieve much the same effect as a conventional contract. This is because if the buyer doesn’t exercise its call option, the seller can compel the buyer to proceed under the put option.

The “consideration” (price) for the option can be nominal, say $10. This means the only stamp duty payable until the contract comes into existence (ie after the exercise of either one or both options), is negligible. This has an obvious attraction to buyers of development projects where the approval process extends to 12 months or more because the payment of substantial stamp duty on the actual purchase price is deferred.

Put and call options also allow greater flexibility to the buyer in that they can usually transfer their interest under the option far more efficiently (in terms of stamp duty and legal overheads) than if they had to sell the land or transfer the interest under a purchase contract. Most options of this type also contain provisions allowing the buyer to “nominate” a subsequent party to be the ultimate buyer.

Property marketers often take put and call options to gain the exclusive right to market lots for sale for a specific period of time.

Importantly, the buyer under a put and call option still has a caveatable interest in the property.
There are however some disadvantages to using a put and call option in place of a regular contract. They are more complex than a standard REIQ document and therefore involve greater time and legal expense in their preparation.

There will be some resistance from property owners who might regard this form of documentation as complex. Extra time is also often required to negotiate the terms of the option agreement.