Put and call options have become increasingly common in today’s market particularly in relation to large developments with significant value. At the same time, there has been an increase in the risks for legal practitioners drafting put and call options.
What are Put and Call Options?
A put and call option is an agreement between a vendor (the grantor) and a prospective purchaser (the grantee) whereby it is agreed:
- The grantor gives the grantee a call option to buy property from the grantor at a fixed price within a specified period of time; and
- The grantee gives the grantor a put option to sell the property to the grantee at a fixed price within a specified period of time.
There is no formation of a final contract when a put and call option agreement is entered into because the grantor and grantee are not obliged to sell or purchase the property.
Risks in Drafting Put and Call Option Agreements
There are no prescribed forms and terms vary for put and call option agreements. As such, it is important for solicitors to be cautious when drafting the agreements.
In the case of CTI Joint Venture Company Pty Ltd v Chief Commissioner of State Revenue (2013) 87 ATR 709, the Court had to expend considerable time and effort to determine whether or not an option deed nominating a third party purchaser was an assignment or novation of the option. This was due to ambiguous and unclear drafting of the agreement which did not clearly indicate the nature of the option or the nomination. In the end, the Court found the option deed was not an assignment. If it had been held it was an assignment then it would have resulted in a substantial amount of duty on the $60,500,000.00 nomination fee.
Exercising the Option
Since the case of Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987), the courts have taken a substance over form approach in relation to the exercise of options. The identification of the requirements for the exercise of an option remains a question of construction in each case.
If the agreement specifically and clearly states how the option is to be exercised and strict compliance is required then the exercise of the option is not effective if it does not comply with the procedure set out in the agreement (Comdox No 24 Pty Ltd v Robins [2009] NSWSC 367 at [23]).
There can be serious consequences for a solicitor if a court finds an attempted exercise of an option has failed due to a lack of compliance with the requirements set out in the agreement. A solicitor can face damages for:
- Lost option fee;
- Loss of on-sale;
- Increase purchased price for an alternative property; and
- Loss of profits for a property intended to be developed.
