An Option Agreement is a legally binding contract where a person (Grantee) buys the right to purchase an Asset at some point in the future from the Grantor (owner).
The Grantee has the right to either buy the Asset or let the option lapse. You choose how long the option is opened. The Option Fee can be $1 or $100 000 or whatever amount you wish – but you lose it if you subsequently don’t exercise the option. If you do exercise the option, you pay the Price within an agreed period.
Trying to put together a property syndicate. You want to buy a property (asset) for $100 million (exercise price). Need to get the town planning approval? You give the vendor (grantor) $50,000 (option fee). The vendor gives you the right to purchase the land within 8 weeks (option period). If you fail to raise the money you lose the option fee of $50,000.
You have found an old Mercedes Benz SL (asset) for the fantastic price of $85,000 (exercise price). You ask the seller (vendor) to hold the SL for you for one week in exchange for $1,000 (option fee). This gives you (grantee) time to plead with your parents for the money. If you get the money then the $1,000 comes off the purchase price. If you don’t exercise the option within the week then the car owner (grantor) keeps the $1,000. And the option is extinguished. The car owner is then able to sell the car to someone else.
You and your spouse (grantees) have found your dream property. But you need two months to try and get finance. You ask the seller (grantor) to hold the property for you for the two months (option period) and you pay them $2,000 (option fee) for that right. If at the end of the two months you still don’t have finance, they keep the $2,000 and the option is extinguished.
To keep loyal employees you update your company constitution to allow for non-voting shares. You then issue and allot the employees the non-voting shares. But you need to be able to buy the shares back, at any time you wish. You get the employee (grantor) to sign an option agreement allowing you (grantee) to buy the non-voting shares back.
An Call Option Agreement makes these arrangements enforceable.
No there is not. The option agreement and mechanism always remains the same. It is the same wording. But obviously, there is different due diligence that needs to be done on the asset you want to potential purchase. One of the main purposes of an option is to give you time to do your due diligence on the asset you are buying. The option gives you that time. For example:
Shares: check if there are encumbrances. Get your accountant to check the financials. Do a historic search of the company at ASIC. Are the shares held in a trust? Any issues with FIRB if the shareholder is or will be a foreigner? Is the company up-to-date on its tax? Is the company being sued?
Real estate: do a title search. Are there any caveats or encumbrances? What is the town planning looking like now, and in the future? Are the building structures all approved by the local council?
Car, caravan, trailer: are their any encumbrances? You can do a used car search or vehicle search if you have a VIN or chassis number. Or you can search by serial number if you only have the manufacturer’s number. The Personal Property Securities Register provides you with a certificate.
Animal: is the animal registered. Did the vet check the animal? Is an animal even an ‘asset’.
An Option Agreement is a legally binding contract where a person (Grantee) buys the right to purchase an Asset at some point in the future from the Grantor (owner). The Grantee has the right to either buy the Asset or let the option lapse. You choose how long the option is opened. The Option Fee can be $1 or $100 000 or whatever amount you wish – but you lose it if you subsequently don’t exercise the option. If you do exercise the option, you pay the Price within an agreed period.
Option agreements can be used to hold and buy land. They can also be used for other assets such as cars and equipment.
For the Grantee (the person who wants to buy the asset)
1) Securing an Option Agreement minimises risk. You can be confident that you have a legally binding agreement that prevents the Grantor (the person who owns the asset) from selling the Asset to another party during the Option Period.
2) The Option Agreement states the price if you exercise the option.
For the Grantor
1) If the economy is experiencing a downturn, you can guarantee to the Grantee time to organise the purchase and due diligence of the Asset.
2) You keep the Option Fee whether the option is exercised or not.
You can add additional rules or documents to the Option Agreement. This is at any time, even before it is signed. You do this by ‘an exchange of emails’. The Option Agreement expressly grants this power.
You can even attach to the email a draft sale agreement, which the parties must sign if the Option is exercised by the Grantee.
You lend the Grantor some money. (Build the Loan Agreement here.) If the Grantor does not pay back the money within, say, 8 months only then can you exercise the option. This may be for shares, property or any other assets. You achieve this additional set of rules via an exchange of emails. You do this before the Call Option is signed.
1) The day that the Option is open (Start of Option Exercising Period)
2) The day the Option Period ends (End of Option Exercising Period)
3) The date the option is exercised (Exercise Date)
4) When full payment of the Purchase Price occurs if the option is exercised (Settlement Date)
5) Details of the Asset
6) The Option Fee (this goes to the Grantor whether you exercise the option or not)
7) The Price of the asset if the option is exercised (Price)
There is generally no stamp duty on this document in Australia.
Have a look at the Sample document and there are many training videos and hints to help you as you build the document.
For more legal advice telephone us.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
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