Want the right to buy a property in the future?
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.
Want to buy a car but need time to get the money?
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.
Found your dream home but need time to find the money?
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.
Want to get back the shares from your Employee?
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 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 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 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.
What questions do I need to answer?
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)
Is there stamp duty on this type of transaction?
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.
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Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
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