Acquisition of Property
Using an Option
At the risk of repeating myself and to illustrate what it means to have a competent lawyer working with you, I’ll say again: the following information is a general survey of some contractual matters that may arise in considering the. It’s not intended to be an in-depth analysis, nor specific advice. Appropriate professional advice should be sought as and when specific projects are considered and undertaken. This is how lawyers talk. Get used to it: it’s for your own good.
Using options to acquire land
An option is a contractual right to do something (buy land), provided that the right is exercised within the terms on which it is granted (such as specific time limits or specific methods of giving notice of your intent to exercise the right). The advantage of using options is to gain control of land without having to incur large capital outlays. Rather than contracting to buy the land and come up with the purchase price, stamp duty and costs in a limited time frame, you obtain the right to acquire the land at some point in the future.
Your option-based strategy is to ‘tie up’ the land you have identified as presenting a profitable opportunity, so that you have time to develop it, increase its value and ideally sell it on before you have actually had to pay for it yourself. To a large extent, achieving this ideal scenario will depend on your ability to negotiate favourable terms with the owner of the land and with the other people whose cooperation you will need to develop it (surveyors, town planners and so on). For example, you can negotiate to:
• gain unrestricted access to the site for your surveyor and consultants so they can survey it and have plans for subdivision prepared
• have the vendor sign legal authorities allowing you to lodge an application with the council for subdivision or development of the property (if you are intending to do that)
• get the surveyor and others to work ‘on spec’: that is, to delay charging you for their services until the project is completed and cash from sales starts to come in.
One effective means of setting up this scenario is a put and call option. A call option gives the grantee of the option (the would-be purchaser of the property) a right to buy specified parcels of land from the grantor (the would-be vendor) in accordance with the terms of the option, if and when the grantee exercises the option.
A put option gives the grantee (the would-be vendor) a right to sell specified parcels of land to the grantor (the would be purchaser) in accordance with the terms of the option, if and when the grantee exercises the option. Put and call option documents incorporate a call option in favour of the purchaser and a put option in favour of the vendor. The option document or deed should refer to an attached standard contract of sale, which specifies the terms of the sale in the event that either of the options are exercised. That way, no unforeseen disagreements on terms will effectively frustrate the exercise of the option.
As the option to be used in these circumstances relates to an interest in land, there are certain specific legal requirements. It must be in written form and signed by the parties to the agreement in order to be enforceable, under the relevant legislation. Liability for stamp duty becomes an issue. Make sure this is taken into account when you seek legal advice on creating option documentation for your specific needs.
The details of the option deed will vary according to your specific requirements and the law in your state, so I hate to repeat myself again, but it’s for your protection.
• You must consult a qualified legal specialist for help in drawing up specific deeds.
• You are strongly advised to attach a standard contract of sale to the option documentation.