Put & Call options are often used by developers purchasing parcels of residential property as a means of delaying stamp duty. We have written previously about some of the risks involved with these structures for vendors.
A “put and call option” actually comprises two options: a ‘call option’ conferring to the purchaser a right (but not an obligation) to purchase a property at a given price after a certain period of time from a vendor; and a ‘put option’, which is almost the mirror image, being an option conferred on the vendor to make the purchaser buy a property from the vendor at a given price after a certain period of time. As with the call option, it is a right, not an obligation, that the vendor holds.
There is normally non-refundable ‘option fees’ involved, with the call option fee usually being around 10% of the subsequent purchase price but the put option is normally just a nominal amount. However it is customary for the contracts to say that any option fees received by the vendor are credited against the purchase price once contracts are exchanged.
The combination of those two options create something very similar to a binding contract for sale – however it is different enough in the eyes of the tax authorities (at least for now) to NOT trigger a tax event linked to a signing a conventional contract for sale.
However, a recent case in the Supreme Court, BP7 Pty Ltd v Gavancorp Pty Ltd  NSWSC 265 has highlighted risks for ‘Mums and Dads’ entering into these transactions with the developers.
In the BP7 case, a developer and a number of individual vendors signed put and call options for residential property in South Sydney. The individuals who owned the property received handsome (call) option fees from the developer, totaling in the millions of dollars.
However, when it came time to exercise the call option, the developer declined to do so.
The vendors therefore exercised their put options, compelling the developer/purchaser to buy the property from them. The developer/purchaser exchanged said contracts, in compliance with the put option but then proceeded to rescind the contract, citing its rights under Section 66U of the Conveyancing Act – their so-called ‘cooling off rights’.
This caught the vendors by surprise, as they had been assuming that cooling-off rights do not apply to contracts exchanged under an option. Specifically, they were hoping to rely on Section 66T of the Conveyancing Act which states:
There is no cooling off period in relation to a contract for the sale of residential property if–
(a) at or before the time the contract is made, the purchaser gives to the vendor (or the vendor’s solicitor or agent) a certificate that complies with section 66W, or
(b) the property is sold by public auction, or
(c) the contract is made on the same day as the property was offered for sale by public auction but passed in, or
(d) the contract is made in consequence of the exercise of an option to purchase the property, other than an option that is void under section 66ZG.
However, the judge found that Section 66T(d) only relates to call options (i.e. options to purchase) rather than put options. As it was the put option that had been exercised (not the call option), a cooling-off period in favour of the purchaser/developer still applied.
The real coup de grace was that the judge found that the option fees the vendors had received needed to be repaid too, since, the moment the contract was formed upon exercise of the put, those fees became part of the deposit. When the contract was validly rescinded, those monies had to be returned to the developer.
It probably would have been better if the vendors, rather than exercising their put, simply did nothing at least so they could keep their option fees.
The judge in BPM did say that there was nothing to stop the vendors obtaining a 66W certificate (a statutory certificate issued by a solicitor waiving the cooling off period) from the purchasers when they exercised the put. But they had failed to do so.
The BPM case may make vendors even more cautious about entering into these non-traditional structures with developers going forward.
If you have any questions about this article, please contact the office on 1800 870 407 and one of our solicitors/conveyancers will be able to assist.