The What, How and Why of Put and Call options

In Brief

Put and call options are a use­ful way of allow­ing par­ties to enter into an agree­ment to sell or acquire land at a future point in time, requir­ing min­i­mum upfront com­mit­ment. In the most sim­plis­tic of terms, rights grant­ed under a put and call option are a future right to com­pel a sell­er to sell land (the ​“call option”), or a buy­er to buy land (the ​“put option”).

This arti­cle will cov­er some of the basic and com­mon fea­tures of put and call options.

What is a call option?

A call option is grant­ed by a sell­er of land in favour of a buy­er. It is an enforce­able right that, when exer­cised by a buy­er, requires the sell­er to sell the land the sub­ject of the call option to the buyer. 

A call option is ben­e­fi­cial to a buy­er, with some of the main advan­tages being:

1. sub­ject to nego­ti­a­tion, it gives the buy­er the oppor­tu­ni­ty to under­take due dili­gence on the land, lodge a DA and obtain approvals to devel­op the land and secure finance for the acqui­si­tion before the buy­er exer­cis­es the call option; 
2. a call option gives rise to a caveat­able inter­est in the land in favour of the buy­er; and 
3. the price (which must be agreed before the call option deed is entered into) will not change, regard­less of mar­ket fluc­tu­a­tions (which of course, if most suit­able to a buy­er if the mar­ket val­ue of the land increas­es dur­ing the call option peri­od (see below)).

What is a Put option?

A put option is the oppo­site of a call option, and is grant­ed by a buy­er in favour of a sell­er of land. The buy­er grants an enforce­able right to the sell­er, which allows the sell­er to require the buy­er to buy the land the sub­ject of the put option, at a future point in time. 

How is a put and call option documented?

Put and call options are doc­u­ments by way of deed. 
The usu­al tech­ni­cal term for the par­ties to an option deed are:

1. grantor being the sell­er; and
2. grantee, being the buyer.

The option deed must have annexed to it a com­plete and valid con­tract for sale and pur­chase of land (in addi­tion to oth­er tech­ni­cal doc­u­ments). This there­fore requires all aspects of the trans­ac­tion to be agreed before the option deed is entered into (eg, pur­chase price, deposit and set­tle­ment period). 

Once the rel­e­vant option is exer­cised by a par­ty, the con­tract for sale and pur­chase of land that is annexed to the option deed becomes bind­ing on the par­ties and the trans­ac­tion pro­gress­es as a typ­i­cal conveyance.

Fea­tures of Put and call options

Notwith­stand­ing the above­men­tioned dif­fer­ences between a put option and a call option, the fea­tures not­ed below are essen­tial­ly the same between the two.

Option fee
As the sub­ject mat­ter of an option deed is an inter­est in land, con­sid­er­a­tion is required to be paid when the option deed is entered into (ie, on exchange of option deeds). 
Depend­ing on the type of option that is being agreed, the con­sid­er­a­tion is either:

1. a ​“call option fee”, paid by the buy­er to the sell­er; or
2. a ​“put option fee”, paid by the sell­er to the buyer.

If the agree­ment is for a put and call option, both forms of con­sid­er­a­tion are payable. The con­sid­er­a­tion can be nom­i­nal.

Option exer­cise period
A call option exer­cise peri­od is a set peri­od of time dur­ing which the buy­er can exer­cise its call option. A put option exer­cise peri­od is a set peri­od of time dur­ing which the buy­er can exer­cise its put option. This time­frame is agreed by the par­ties before the option deed is entered into.

Ordi­nar­i­ly, these two peri­ods of time are sequential.

If, the call option peri­od expires and the buy­er has not exer­cised its call option requir­ing the sell­er to sell the land, the buy­er becomes pre­clud­ed from doing so. This means that the sell­er can exer­cise its put option dur­ing the put option exer­cise peri­od and require the buy­er to buy the land.

Nei­ther par­ty is com­pelled to exer­cise their option dur­ing the rel­e­vant option exer­cise peri­od. If nei­ther par­ty exer­cis­es their option, the option comes to an end at the expi­ra­tion of the final option peri­od. This means that the buy­er los­es the exclu­sive right to buy the land and the sell­er los­es its buy­er (but is oth­er­wise free to deal with the land).

Assign­ment
A buy­er who has entered into a call option deed, but has not yet exer­cised the call option, may be enti­tled to assign its rights under the call option deed to a third par­ty. On com­ple­tion of the assign­ment, the third par­ty will step into the shoes of the buy­er as if it were the orig­i­nal buy­er under the call option deed. The third par­ty and the sell­er then pro­ceed with the trans­ac­tion in accor­dance with the terms of the call option deed.

Nom­i­na­tions
A buy­er may also be enti­tled to appoint one or more third par­ties as a nom­i­nee to exer­cise the call option on behalf of the buyer. 

The appoint­ment of a nom­i­nee is dif­fer­ent to an assign­ment (where the buy­er assigns its rights under the call option deed). If a nom­i­nee does exer­cise the call option, the con­tract which comes into exis­tence will be between the nom­i­nee and the sell­er, instead of between the buy­er and the seller. 

Stamp duty considerations

When a put option or a call option is exer­cised, stamp duty becomes payable by the buy­er as it nor­mal­ly would for a stan­dard con­veyance (ie, on exchange of contracts).

Stamp duty impli­ca­tions also arise when assign­ing an option or appoint­ing a nom­i­nee to exer­cise an option. The stamp duty lia­bil­i­ty can be sig­nif­i­cant and spe­cial­ist stamp duty advice should be sought if an assign­ment or nom­i­na­tion is considered.

The above is a brief sum­ma­ry of some of the main mat­ters an option deed should con­tain. How­ev­er, there are many more con­sid­er­a­tions to take into account. It is impor­tant that an option deed is tai­lored to your role in the trans­ac­tion and also the out­come that you want to achieve.

Swaab Attor­neys’ prop­er­ty team have in depth knowl­edge and expe­ri­ence in act­ing for buy­ers, own­ers groups and sell­ers on put and call option trans­ac­tions. We have recent­ly act­ed for a num­ber of clients who have utilised put and call options to acquire an inter­est in mul­ti-titled sites (or mar­ket an inter­est in mul­ti-titled sites) for devel­op­ment, DA approval and assignment.