You are trying to put together a property syndicate. You want to buy a property for $100 million. You give the vendor (grantor) $50K. They give 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 $50K.
You have found an old Mercedes Benz SL for the fantastic price of $85 000. You ask the seller to hold it for you for one week in exchange for $1 000 while you plead with your parents for the money.
You and your spouse have found your dream property. But you need to wait two months to get finance. You ask the seller (grantor) to hold the property for you for the two months 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.
An Option Agreement makes these arrangements enforceable.
What is an Option Agreement?
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 Purchase Price within an agreed period.
When should I use an Option Agreement?
Option agreements can be used to hold and buy land. They can also be used for other assets such as cars and equipment.
Advantages of an Option Agreement
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 Purchase Price is stated in the Option Agreement.
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 get to always keep the Option Fee whether the option is exercised or not.
What questions do I need to answer?
1) How long the option is open for (Option Period)
2) The date the option is exercised (Exercise Date)
3) When full payment of the Purchase Price occurs if the option is exercised (Settlement Date)
4) Details of the Asset
5) The Option Fee (this goes to the Grantor whether you exercise the option or not)
6) The Purchase Price of the asset if the option is exercised (Purchased Price)
Is there stamp duty on this type of transaction?
There is generally no stamp duty on this document.
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. We are a law firm. We can help you answer the questions.
Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
39 Stirling Highway, Nedlands, WA
(Post Office Box 5169, Dalkeith, WA 6009)
Direct: 08 6389-0400
Reception: 08 6389-0100