There are key differences to understand when it comes to put and call options in a property context. Essentially, an option is an enforceable right with respect to a property.
An option is an agreement between a property owner and another for the owner to sell their property at a predetermined price at a predetermined time.
A call option is where the purchaser has a choice as to whether to contractually bind the owner of the property to sell the property.
A put option is where the owner of the property has a choice as to whether to contractually bind the purchaser to purchase its properly for a guaranteed price and at a specified a time.
An option period is the period of time where one party has the right to contractually bind the other to the property sale or purchase transaction,
Most people become first introduced to options when a property developer approaches them and neighbouring properties to acquire multiple properties for a development site. In these circumstances, the developer wants to enter into a call option whereby the vendor of a property will sell to the developer at an agreed price at a particular time in the future.
In such circumstances the developer will also attempt to enter into agreements with the adjoining land owners on similar terms and for a similar period of time.
It is during the option where the developer prepares design, diagrams and development drawings together with all other statutory requirements to enable it to file with the local council and application for development of that consolidated group of properties.
In reality, this is often to build medium to high density property such as apartments blocks and units or multiple villas or townhouses.
At times a put and call option will be entered into whereby the purchaser has the right to purchase the property at an agreed price at a point in time in the future and if they do not exercise their call option during the designated call option period, the owner can exercise a put option during the put option period requiring the purchaser to purchase the property at the agreed price.
For a purchaser who is a developer, the entering into a lengthy call option to purchase a property in the future provides the developer the opportunity to lock in a price for the land without having to make payments for the land until they are in possession of a development approval or other authority to construct on the land.
For a vendor, the entering into a put option gives them comfort that they are guaranteed a price that someone will pay for their property in the future.
One should be aware however that property prices do vary and while the price offered in a call option may seem quite considerable when entering into the option, if the property market rises substantially during the period before the option is required to be exercised, you will in effect be selling your property at lower than market price. Conversely, if the property market does not increase a vendor has the benefit of having a set sale price for the property and to make plans accordingly. However if the market has fallen it might be that the developer does not exercise their rights under the call option and all that has happened is that the vendor has been unable to sell his land his or her land for several years. In the unlikely event that a put and call option was entered into in where the vendor has the right to coerce the perspective purchaser to purchase the land, the often real world result is that the entity purchasing the property may not have the finances to complete the project and therefore the purchase.
Whether it is a call option or a put and call option, such agreements are required to be documented so as each party is aware of it rights and obligations. It is important to ensure that the basics are detailed: including the option fee, the purchase price and the contract, so as all parties can enter into the transaction fully advised and fully aware as to the consequences of such.
In any documentation for an option agreement the document will form at least two parts: Part 1 being the option agreement and Part 2 the proposed sale contract should the option be exercised. While provisions can be made to allow for variations to comply with regulatory requirements, it is usually intended that the contracts are utilised when the option is exercised.
For advice on all things related to your property purchase, contact the team of Property Lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.