- An option enables a buyer to fix the price of a property at a certain date
- It enables them to investigate if the property is suitable for development, for example
- While the buyer is doing their research, the property is taken off the market
What is an option?
An option is put in place when a purchaser pays an ‘option fee’ to purchase a property at some fixed point in the future. When the fee is paid, the purchaser becomes the ‘option holder’.
The purpose of an option is normally to have the seller hold the property for a fixed timeframe to enable the purchaser to conduct due diligence:
- on subdividing the land into lots;
- on the viability and cost of erecting a building or commercial unit;
- on developing the property; or,
- for any other purpose.
If the option is not exercised, the option fee is forfeited.
Typically there is a date by which the option must be exercised. It has to be exercised before that date, otherwise it lapses. Normally, it cannot be extended.
Prior to exercising the option, the option holder can nominate a third party to exercise the option, which would mean the option would pass to that third party.
The option agreement prohibits the seller from selling the property and fixes the price at the agreed amount at the time the option is signed. Further, to protect their interest, a buyer can lodge a caveat.
Exercising an option
Normally, a nominal amount is paid for the option fee and stamp duty is assessed on that amount.
If the option amount is a large amount, the parties can agree to pay it in instalments prior to the option exercise date. It would be wise to only pay a large option fee if the purchaser were certain of their intention to buy the property.
The amount of stamp duty will be deducted from the duty payable on the contract after the option is exercised.
If the option is exercised, the option fee becomes the deposit and deducted from the purchase price.
An option secures the right to buy and/or sell property at a future date and might be a good way of providing some flexibility over certain property transactions.