Put & Call Options - there's a catch
Put and Call Options are a useful alternative to the traditional way of buying and selling property, which utilises a standard contract for sale. The vendor grants the purchaser the right to call on the vendor to sell the property and if the option is not taken up, the purchaser grants the vendor the right to require the purchaser to buy it.
These options are commonly used when the title of a property has not yet come into existence (such as a home unit bought off the plan) or where a long term settlement has been negotiated in which case the payment of stamp duty may be postponed.
For a vendor, the key to these arrangements is the Put Option, the ability to put or require the purchaser to buy the property if the call option is not exercised. That right has been significantly impacted by a recent NSW Supreme Court decision in BP7 Pty Ltd v Gavancorp Pty Ltd
Whether under a contract for sale or an option, purchasers in NSW have cooling off rights. Unless those rights are waived, a purchaser has a period of between 5 and 10 business days to change his or her mind, rescind and get most of their deposit back. As a matter of course, vendors require purchasers to waive cooling off rights when the contract or option is exchanged.
A vendor and purchaser entered into 14 put and call options for the purchase and sale of residential strata units.
The call option fees or deposits represented 10% of the purchase prices.
The standard cooling off waiver certificate was provided.
The purchaser failed to exercise any of the call options. The vendor then purported to exercise the put options, activating what it thought was its right to sell and the purchaser’s obligation to buy.
The purchaser instead rescinded the contracts alleging that its cooling off rights had never been waived. It demanded that its deposit be refunded.
Cooling off rights for residential property under either a contract or option can be negated by a purchaser providing a cooling off waiver certificate. In the case of an option, the wording of the legislation deals with the waiver of rights where contracts come into existence as a result of an option to purchase a property.
The purchaser argued that the contract was not formed as a result of an option to purchase but rather, because of a put option, the right to sell. This subtle legal difference, it argued, was not covered under conveyancing laws and as a result, its cooing off rights had not been waived.
The Court found in the purchaser’s favour. The contracts were rescinded and the purchaser was entitled to a refund of most of the deposit.
Can a Vendor be Protected?
If this case is not overturned on appeal or the Government does not introduce legislation having retrospective effect, the position of vendors holding put options may be already adversely impacted.
Until the situation is resolved, it should be standard practice for vendors to obtain a specific cooling off waiver certificate from the purchaser in relation to a put option at the time the options are exchanged. Anything less may result in a no sale for vendors and the significant financial risk which might arise in a falling market.
Our property experts are here to help. Please contact:.
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Steve Williams 0404 821 464
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Anna Polhill 0431 174 352