Option Deeds: What are they and Potential Risks
Property transactions exist in a myriad of forms and structures depending on the agreed commercial terms and what the parties are intending to achieve.
Contracts of Sale are utilised by the parties to record their agreement to sell and/or buy a property.
Depending on the circumstances of the transaction and the parties intended outcomes, it may be appropriate and advantageous for the parties to consider whether also utilising an Option Deed may be of benefit.
What is an Option Deed?
An Option Deed is a precursor document to a Contract of Sale.
It is an agreement between a seller and purchaser to grant future rights to buy or sell a specified property on certain terms and conditions.
An Option Deed may contain a ‘Call Option,’ a ‘Put Option’ or a ‘Put and Call Option.’
- A Call Option gives the purchaser or a nominee a right to compel the seller to sell the property at a future point in time.
- A Put Option gives the seller right to compel the purchaser or a nominee to buy the property at a future point in time.
- If an Option Deed grants a ‘Put and Call Option,’ the Call Option generally operates first in time, meaning the purchaser or nominee has the first chance to buy the property.
If the Call Option is exercised, a Contract of Sale comes into existence and the Put Option becomes irrelevant as the purchaser or nominee has committed to buying the property. If the Call Option is not exercised, the seller may then exercise its Put Option.
An Option Deed will specify the dates within which a party can exercise its option. A Contract of Sale with agreed terms is annexed to the Option Deed and is executed once an option is exercised.
Option Deed Risks
Option Deeds can offer a range of benefits to the parties, the chief of which is striking a balance between flexibility and certainty in dealing with various situations arising during a property transaction.
Option Deeds, however, are technical and complex documents which require careful forethought and drafting to deal with potential future risks, particularly for longer term Option Deeds.
One main risk which arise with Option Deeds is stamp duty. When an option is exercised and a Contract of Sale entered into, stamp duty becomes payable by the buyer at settlement as it normally would in a standard conveyance.
However, in certain circumstances Option Deeds can attract double stamp duty under the Duties Act 2000 (Vic). For example, when transferring an option right or appointing a nominee to exercise an option. The occurrence of any ‘land development’ (as that term is defined by the Duties Act and the State Revenue Office of Victoria’s Rulings) after the date of the Option Deed also requires review and consideration.
It is prudent, and our recommendation, that separate tax advice also be obtained before an Option Deed is entered into.
If you have any questions in relation to Option Deeds, please contact Nafsika Starvaggi or a member of our Property Law Team.
