An option is created when a vendor (also called a “grantor”) grants a purchaser (also called a “grantee”) an option to enter into a contract to purchase property.
There are three types of options:
· Call Option – when the purchaser can compel the vendor to sell the property
· Put Option – when the vendor can compel the purchaser to buy the property
· Call and Put Option – involves a Call Option and a Put Option, exercisable in a staged manner
Vendors use options because they want to receive a higher price for their property, than if they sell the property at market price.
Purchasers use options because they want to aggregate properties for redevelopment and obtain development approvals. The purchasers are willing to secure a property at a higher price, because they believe the value will go up.
Some examples where options are used include:[1]
· A developer may want to buy a land, because the government wants to re-zone an area from rural to residential.
o The developer buys an acre of land for $1 million with an option period of 2 years.
o The developer pays $25,000 option fee to secure the option, followed by another $100,000 after 60 days due diligence period.
o The developer obtains development approval for a residential land subdivision, at their cost, during the option period.
· A developer may want to buy a few suburban blocks and redevelop some townhouses.
o The developer buys a land at 20%-25% above their market value for an option period of 12 months.
o The developer pays an option fee of 5% or 10%.
o The developer then obtains development approval for a few townhouses at their cost during the option period.
· A developer may want to buy old strata units or offices and redevelop into a high-rise apartment.
o The developer buys the units or offices at 50% to 80% above their market value for an option period of 3 years.
o At least 75% of the strata owners must grant an option to the developer. Under strata law, this means that the remaining owners can be forced to sell.[2]
o The developer pays an option fee of 10%.
o The developer obtains development approval for high-rise apartments or an office tower at their cost during the option period.
· A renovator may want to buy a run-down house or apartment and on-sell it after renovation.
o The renovator buys the property at 5% above its market value for an option period of 6 months.
o The renovator pays 5% or 10% option fee.
o The renovator is given immediate access to renovate and completes a cosmetic renovation.
o The renovator on-sells the option (called “flipping a property”) at a profit.
How Is Stamp Duty Assessed?
An option to purchase land is a dutiable property in NSW.[3]
1. The option is granted.
· Option Deeds are signed and exchanged.
· Option fee is paid and released to the grantor.
· If the property is residential, then the Option Deed must contain a non-exercise period of 42 days, a cooling-off rights statement and attach a contract for sale of land (“Contract”) with the purchase price and the statutory certificates.[4]
· No duty is payable on the grant of the option, whether it is a Call Option or a Put and Call Option.
2. The option is exercised.
· An option is exercised by the grantee, when:
i. it serves a notice of exercise of option;
ii. a signed Contract;
iii. pays the 10% deposit payable (less the option fee paid).
· The vendor signs and exchanges the Contract.
· Duty is payable by the purchaser on the Contract, within 3 months of the option exercise date.
3. A nominee is appointed.
· Most options permit the grantee to transfer the option by nominating someone else to exercise the option. In this case, a Nomination Deed is used.
· Alternatively, the grantee can request the grantor to enter into a Contract directly with the nominee. In this case, a Novation Deed is used.
· The nominee pays a nomination fee to the grantee.
· Duty is payable by the nominee on the nomination fee as of the nomination date or novation date.[5]
· If it is a Put and Call Option, duty is also payable by the grantee on the purchase price of the property, within 3 months from the nomination date or novation date.[6]
4. The option is assigned.
· Most options permit the grantee to transfer the option by assigning the option to someone else. In this case, a Deed of Assignment is used.
· The assignee pays an assignment fee to the grantee.
· Duty is payable by the assignee on the assignment fee as of the assignment date.[7]
· If it is a Put and Call Option, duty is also payable by the grantee on the purchase price of the property, within 3 months from the assignment date.[8]
5. The option lapses.
· If an option is not exercised before the option expiry date, it lapses.
· The option fee is not refundable and the option ceases to have legal effect.
· No duty is payable when an option lapses.
[1] CCH, Cordato - When is stamp duty payable on property options in NSW?
[2] Strata Schemes Development Act 2015 (NSW) Pt 10 Strata Renewal Process for freehold strata schemes
[3] Duties Act 1997 (NSW) s11(1)(k) definition of “dutiable property”
[4] Conveyancing Act 1919 (NSW) Div 9 Options for purchase of residential property.
[5] Duties Act 1997 (NSW) s9B – “purchaser duty”
[6] Duties Act 1997 (NSW) s107(3) – “call option assignment duty”; s108 persons liable
[7] Duties Act 1997 (NSW) s9B – “purchaser duty”
[8] Duties Act 1997 (NSW) s107(3) – “call option assignment duty”; s108 persons liable
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*
Key Contacts
Christine Sun
Partner | Public Notary
Cyril Xing
Special Counsel | Accredited Property Law Specialist NSW | Nationally Accredited Mediator
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