This article builds on our previous discussions regarding the terminology used in the option sphere. You are now aware of why a Seller requires an Option Fee. You are also aware of how a Due Diligence period works. Today we will build on this knowledge by discussing the Price, Security Deposit and Development Approval conditions. In our final article in this series from Andrew Pine lawyer, we will put this information together to run through examples of how options work in the real world.
As has been outlined throughout this series – these articles should not be substituted for legal advice. You should never enter into an option of any kind before discussing this matter with a lawyer. Andrew Pine solicitor acts for numerous clients who regularly enter into option agreements. Andrew Pine lawyer can therefore be contacted on the details contained in this blog should you wish to receive legal advice that is tailored to your personal circumstances.
When a Buyer enters into a Call Option Agreement (or a Put & Call Option Agreement which is conditional on Due Diligence and/or Development Approval) they are obtaining the right but not the obligation to purchase the property. As discussed in our previous article from Andrew Pine solicitor, the Buyer will usually pay an Option Fee to the Seller for obtaining a right which does not come with a corresponding obligation to buy. More importantly, the price payable if the Buyer elects to proceed with purchasing the property must be agreed between the parties at the outset.
Because the price is fixed from the beginning, the Buyer wields a lot of the power. After signing an Option Agreement with the Seller they could contact other parties (such as developers) and obtain a price which is higher than that agreed to with the Seller. The Buyer could then assign its rights under the Option to the third party for the margin (the difference between what the Buyer is obliged to pay the Seller and what the third party is willing to pay for the property). This process can often be carried out without the Buyer having to pay transfer duty as the Buyer usually never owns the property at any point in the transaction.
The price agreed to between the parties is payable at Settlement. However part of the deposit can be paid beforehand, usually as a Security Deposit. Andrew Pine solicitor is experienced in advising a wide array of people dealing in Option Agreements. If you would like advice on options, please contact Andrew Pine lawyer on the details provided at the bottom of this article.
Under a usual Contract to purchase a property, a Buyer pays a deposit to the Seller to demonstrate that they are genuinely interested in purchasing. Any deposit they pay is attributed towards the purchase price, leaving the remainder payable at Settlement. The same is often true with Option Agreements. A Buyer under an Option usually pays a Security Deposit to the Seller, with this amount being subtracted off the price due at Settlement. How much is paid, when it is paid and whether these amounts are refundable should the Buyer elect not to proceed with purchasing the Property are all up for negotiation between the parties.
It is however common for part of a Security Deposit to be payable up front (at the same time as the Option Fee is payable). Another part of the Security Deposit may then be due when the Buyer confirms to the Seller that it is satisfied with its Due Diligence enquiries and/or it has obtained satisfactory Development Approval (if relevant). As noted above, any Security Deposit paid is then attributed towards the price payable at settlement, rather than an Option Fee which is merely a fee paid by the Buyer to the Seller for entering into the Option Agreement.
It is essential that you obtain tailored legal advice regarding Option Agreements and Security Deposits. Andrew Pine solicitor can advise you on these items regarding your individual circumstances. You can contact Andrew Pine lawyer on the details below.
Many Buyers enter into Option Agreements because they see the potential in the Property. The Property may have potential to be subdivided into smaller Lots, or be amalgamated with adjoining properties to form one bigger Lot. Alternatively, the Property could be changed from fee simple (free standing land) into strata (apartments or townhouses). Whatever the reason, Buyers may make an Option conditional upon them receiving a development approval application which is satisfactory to them.
As Councils quite often require the owner of a property to sign development application documentation, a good Development Approval condition in an Option will require the Seller to sign any development application documentation the Buyer puts in front of them.
It is also essential that the Development Approval clause gives a Buyer enough time to obtain the approval. Some councils can take extended periods of time in approving various forms of applications so it is important you check with your town planner as to how much time you will need.
Development Approval clauses are difficult and you should engage a lawyer experienced in Option Agreements. Andrew Pine solicitor is a lawyer experienced in advising clients on Option Agreements and Development Approval clauses. Andrew Pine lawyer can be contacted on the details found below.
In our next article we will wrap this series together by reviewing examples of Buyers and Sellers entering into Option Agreements.
Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.