Option Agreements are usually used to allow parties to agree to sell and purchase property but to delay the formation of the final contract. The reasons an Option Agreement is usually entered into are:
- To delay the payment of duty;
- To delay the sale of a capital asset until a later tax year;
- To allow time before committing to the buying entity to ultimately acquire the property; or
- To allow the on-sale of the property without having to pay transfer duty twice.
This article focuses on points A and B above, being the nomination of a different entity rather than the grantee to purchase the property, and how to avoid dangers associated with such nomination clauses.
Option Agreements often include nomination clauses that allow the grantee to nominate someone else to acquire the property. Read on to find out some of our top tips to avoid common mistakes in such clauses in Queensland agreements:
Avoiding Double Duty
When drafting an Option Agreement, it is important to ensure that the ultimate buyer does not obtain any rights under the Option Agreement. The grantee must exercise the call option at the appropriate time and not the ultimate buyer. The ultimate buyer will have rights under the resulting contract once the call option has been exercised. A mistake in this regard may trigger double transfer duty in Queensland.
An Option Agreement is a dutiable transaction as the call option is the acquisition of a new right. The dutiable value of the call option is the higher of the call option fee and the market value of the right that is granted. A credit for the duty paid on a call option fee will apply where: (a) the call option is exercised, and (b) the call option fee is credited to the price i.e. the duty payable on the resulting contract will be reduced by the duty paid on the Option Agreement.
An exchanged call option for land is an “existing right” as defined in the Duties Act 2001 and so is also “dutiable property”. Any transfer or agreement to transfer the call option is therefore a dutiable transaction. If a nomination is, in substance, an assignment of the call option then duty will apply again.
The put option is not the acquisition of a new right and so a put option agreement is not a dutiable transaction.
Application of deposit under Option Agreement to the Contract
If an option is exercised under the Option Agreement the deposit under the Option Agreement will usually form part of the deposit under the resultant contract. However, if a nominee is nominated to be the ultimate buyer under the contract then it is unlikely that the grantee will want its deposit to be held as the deposit for the third party buyer under the contract. Deposit clauses need to be properly drafted to give the grantee the flexibility to avoid the loss of its deposit and also to ensure that the ultimate buyer has no interest in the Option Agreement to avoid double duty.
Option fee as deposit under the contract
Often, an Option Agreement states that the option fee will become the deposit under the contract formed on the exercise of an option. The option fee is the consideration for the grant of the call option and becomes the property of the grantor. However, a deposit should be refundable. As a result, the exercise of the option and the subsequent valid termination of the contract may result in the refund of the deposit and effective loss of the option fee for the grantor.
Further, the inclusion of the option fee in the contract deposit may result in the option agreement being an installment contract. Issues regarding installment contracts have been explained in our article at Deposits Under Sale Contracts – The Tips And Traps – Rouse Lawyers.
Non-refundable deposits
Sometimes an Option Agreement will require the payment of a non-refundable deposit by the grantee. A payment that is not refundable in any circumstances is arguably consideration and therefore GST may be payable on the non-refundable deposit. To avoid this situation the deposit should be refundable if the grantor defaults under the Option Agreement.
Where an amount paid by the grantee/buyer is released to a seller (or the grantor) and is not refundable, such payment may result in the option agreement being an installment contract.
Disclosure Requirements
A nominee will be the new buyer under a contract and therefore all relevant disclosure and other procedural and formal obligations need to be satisfied before the buyer enters into the contract (even if such procedural and formal obligations have been met under the Option Agreement) to ensure that the contract is binding on the ultimate buyer.
What next?
If you are looking to enter into a Put and Call Option Agreement, or have an issue with an existing agreement, our experienced Rouse Lawyers team is here to assist. If you have any questions, you may contact us via our website or call us on 07 3648 9900.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.