A Call Option Agreement (“Agreement”) is when a proposed Buyer (“Grantee”), instead of entering directly into a Contract of Sale with the proposed Seller (“Grantor”), they enter into an agreement for a nominal fee whereby the Grantor grants the Grantee a right to call upon the Grantor to enter into a Contract of Sale at any time during the option period. The nominal fee is quite important as transfer duty is assessed on the fee. It is common to see option fees in the amount of $1.00.
The Contract of Sale (“Contract”) is annexed to the Agreement to note the negotiated terms of the Contract such as the purchase price, deposit amount, additional conditions etc. Once the Agreement is entered into, the terms of the Agreement and the Contract cannot be changed unless agreed between the parties. The Grantor will then hold the property exclusively for the Grantee until such time when the Call Option period expires. This interest in the property can be secured by a consent caveat which will prevent the Grantor from selling the property to another party and will only be removed if the Grantee exercises the option to purchase or when the Call Option period expires.
Such an Agreement has many benefits for a Grantee, e.g. where the Grantee requires time to conduct due diligence and/or obtain development approval on the property. Alternatively perhaps the Grantee is a builder who would like to build on the property with the intention to find a third party buyer who is interested in purchasing a house and land package. If the intention is to find a third party buyer then provided there is a nominee clause, it will allow the Grantee to avoid paying any transfer duty (provided the option fee is nominal). Another major benefit is if the property market is at a high, then the Grantee be able to lock the Grantor in with the proposed purchase price at the time of the Agreement, and perhaps after all conditions are satisfied, the market value of the property may have increased a lot more. However, please note this can also be a detriment to the Grantee, as if the property market crashes after having locked in a proposed purchase price, then when the Grantee exercises the option to purchase, they will be paying a purchase price higher perhaps than what the market value is at the time. Should the Grantee have the intention to exercise the option, but requires time to establish a purchasing entity for the purpose of this purchase, then the time under the option period can allow for this to occur.
The Call Option period depends on what is negotiated between parties but it can be for a period of 12 months or more (or sometimes less) depending on what parties are trying to achieve. As an example, it could be that from the date of the Agreement, the due diligence condition and/or development approval conditions would be due within 6 months and upon satisfaction of such conditions the Call Option period would then begin and expire 3 months later. If the Grantee does not exercise the option to purchase by the deadline then the Agreement would be at an end, and any fee paid may be forfeited or it could be refunded, depending on what was negotiated.
When the time comes and the Call Option is exercised, it is important that there is strict compliance with how it is to be exercised which should be reflected in the Option Agreement. It has been found by the courts previously that if the option is not validly exercised and the option period lapses then the Grantor may retain the funds paid by the Grantee and the Agreement will be at an end.
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We have the legal experience and knowledge to explain the risks and negotiate your Call Option Agreement and Contract prior to signing, to ensure there are no hidden surprises waiting for you down the track and that you are well informed before proceeding.