Key Takeaway Points
- Parties to commercial, industrial and other property transactions in Queensland can benefit from put and call option agreements in certain circumstances.
- Despite a number of advantages, put and call options still carry risks which must be addressed when considering these types of agreements.
- Developers (whether buyer or selling) are advised to consult with legal professionals so that the desired effect of a put and call option agreement is achieved.
Overview
Put and call option agreements are sometimes used in commercial property transactions across Queensland and other States. These agreements are employed for their structured flexibility and strategic advantages for both buyers and sellers, and can assist parties with certainty, timing, due diligence and development approval processes.
Whether you are a seller in need of a safety net of being able to ‘put’ your property to a buyer to purchase, or a developer / buyer seeking rights to ‘call’ on a seller to sell you a property and secure your next project site, there are benefits to be gained specific to each party. However, these agreements must still be entered into with caution due to their associated risks.
In this Insight we will provide an overview of the advantages of put and call option agreements particular to both parties to a commercial property transaction alongside the common risks of such agreements.
What are put and call options?
A put and call option is a legally binding agreement between two parties providing them with rights but not immediate obligations to buy or sell a property at a later date on mutually agreed terms.
Before we discuss the pros and cons of put and call option agreements, it is important to understand the following concepts:
- Call option: A call option is an irrevocable right granted by the seller to the buyer to ‘call’ on the seller to sell the property to the buyer at a later date on agreed terms; and
- Put option: A put option is an irrevocable right granted by the buyer to the seller to ‘put’ the property to the buyer and require them to purchase it from the seller at a later date on agreed terms.
Parties can enter into a call option agreement, a put option agreement, or a put and call option agreement.
The agreement will annex a copy of the contract that the parties will enter in the future when one of them exercises a put or call option. Note that these rights to buy or sell may only be exercised within the allocated timeframe set under the agreement and are subject to the parties complying with the process set out in the agreement to exercise the notice.
A put and call option agreement may also provide for an option fee payable for the granting of the option.
Benefits to sellers
A seller often entertains entering put and call option agreements to guarantee a sale in complex deals. By having this option on hand, a seller can lock in a buyer and enter into a contract of sale for the property at a later stage. This may be done for tax purposes or other matters aligned with the seller’s operations.
Ultimately, the exercise of a put option gives some assurance to a seller that the property will be sold provided that the put option is exercised within the required timeframe.
Benefits to buyers
Call options are useful to developers or investors looking to secure land deals while they obtain development approval, or buyers in general who wish to lock in a purchase price and conduct due diligence or obtain financing before entering into a contract.
Additionally, in Queensland, a call option can give a buyer the ability to nominate another party to complete the purchase of the property. This can be particularly useful to developers who have identified a site but have not yet established (or do not wish to establish until due diligence and other enquiries / conditions are satisfied) a special purpose vehicle to complete the purchase.
Associated risks
As we have outlined, put and call option agreements can provide various benefits for sellers and buyers depending on their differing circumstances. Despite these advantages, caution should still be taken to avoid unintended consequences. Some risks may include:
- Missing an exercise window or failing to exercise an option in the agreed upon method or in accordance with the put and call option agreement. A failure to do so means the option has not been exercised at all, consequently disenfranchising the unsuccessful party from their right – this can be after significant expense has been incurred if a development approval has been obtained or extensive due diligence enquiries have been carried out;
- A party adversely dealing with the property the subject of the option prior to an option being exercised;
- The rare incident that a bank refuses to recognise a put and call option agreement in the same way they recognise a contract of sale, thus refusing to progress a finance application until an option is exercised and the contract of sale is entered into (noting that such contracts are typically unconditional and binding on buyers even if finance is then declined); and
- Failing to execute the put and call option agreement properly or incompletely, rendering the agreement unenforceable (noting that this same risk applies, however, to contracts of sale).
While this is not an exhaustive list, a comprehensive and thoughtful put and call option agreement should anticipate and address these risks up front to avoid any surprises down the line.
Next steps
Our Property team is happy to assist if you have any queries about put and call option agreements and how they may benefit or affect your future transactions and developments.
