What do you do when you like a property but cannot purchase it right away? Or a potential buyer agrees on a competitive price but cannot get into the contract of sale immediately. These are lucrative opportunities you would like to lock in. For such circumstances, the put-and-call option agreement exists.
Whether you are a developer eyeing the next big project or a seller seeking a safety net, utilising the call-and-put options can be beneficial. Through this comprehensive guide, we shed light on various aspects of the call and put contracts. So, stay with us until the end.
Understanding the Put and Call Option
Before discussing the put option and the call option in depth, let’s familiarise ourselves with the two common terms you will encounter throughout.
- Grantor: Owner of the property or seller.
- Grantee: A person who is interested in purchasing the property, i.e., the buyer
- Option agreement: The put and call agreement also referred to as option contract
In real estate, the call-and-pull option is a contractual agreement that benefits both parties by rendering them the flexibility to transact the property in the future at a pre-determined price. This option ensures that both the grantor and the grantee secure a future right without proceeding with a transaction simultaneously.
There are two pivotal options in the call and put contract:
What is a Call Option?
The call option enables the grantee the right to purchase the property at the pre-determined price within a specific period of time. It is the buyer who has the levy to exercise the option first. Only if they ignore to do so is the grantor enabled to exercise the put option. Also, the seller must sell the property once the buyer exercises the call option.
What is the Put Option?
Only when the grantee seizes the opportunity to execute the call option can the grantor utilise the put option within the agreed timeframe. When done, the buyer must purchase the property at the agreed price.
Here is a tabular representation of the Call option vs. Put option
| Aspect | Call Option | Put Option |
|---|---|---|
| Definition | Provides the buyer the right to purchase a property | Gives the seller the right to compel the buyer to purchase |
| Party in Control | Grantee | Grantor |
| Objective | Secures the property for future purchase at an agreed price | Ensures the buyer will buy the property in the future |
| Benefit | Buyer can lock in a purchase price and conduct due diligence | Seller has assurance that the property will be sold |
| Timeframe | Buyer has a set period to exercise their right to purchase | Seller can enforce the sale during a specified timeframe |
| Common Use | Often used by developers or investors to secure land deals | Used by sellers to guarantee a sale, often in complex deals |
| Risk | Market value may fall below the agreed price | Buyers may default or withdraw if they can’t meet the conditions |
| Example Scenario | Developer secures land while awaiting financing approvals | Seller wants assurance of sale after certain approvals are met |
More often, both these options are in a single agreement, ensuring flexibility and protection for both parties. Most buyers and sellers indulge in the call and put contracts during transactions of large developments where securing finance and receiving approvals is time-consuming.
Benefits of a Call and Put Contract
Put-and-call options offer a range of practical advantages for both the buyer and seller. Apart from providing security and flexibility, these also enable each party to reach their specific goals in terms of real estate. Below is a breakdown:
Grantee Advantages (Call Option)
- Lock the purchase price for your desired property at the outset
- Safeguard your finances from the rising real estate market
- Gain valuable time to conduct due diligence on the property
- Have enough timeline to explore mortgages and choose the most suitable one
- Procure development approvals before closing the transaction
- Explore property potential and ensure it’s apt for intended projects
- Finalise the deal without pressure
- Transfer rights to another party to complete the transaction
Grantor Advantages (Put Option)
- Security of a potential sale
- Assurance of funds for future financial planning or to fund other ventures
- Experience reduced uncertainty compared to traditional contracts
- Peace of mind knowing the buyer’s commitment
- Freedom to plan future investments, such as investing in new property or scaling a business
- Protect yourself from falling property values due to declining markets
- Choose the optimal movement to finalise the transaction
Best Practices for Using the Call and Put Options
Though the put and call options offer numerous advantages, using them effectively is pivotal for legal support. Below are a few best practices
- Always stress on defining every term, i.e., option period, purchase price and other conditions clearly in the agreement.
- Set your timelines realistically, ensuring these allow enough time for due diligence, avail approval, and financial arrangement.
- Fix the purchase price during the framing of the option agreement.
- Include all the necessary documents, such as the contract of sale, before signing the agreement.
- Consult a conveyancer or conveyancing lawyers to draft the deal, ensuring compliance with Australian property deals.
Summing Up
Put and call options provide flexibility, security, and peace of mind for both buyers and sellers in real estate transactions. Whether you’re a developer seeking to lock in a future purchase or a landowner wanting the assurance of a sale, these options offer significant benefits. With careful planning, clear agreements, and professional advice, put-and-call options can be a powerful tool in the real estate market.
At Easy Link Conveyancing, we simplify complex real estate processes. Our highly qualified expert conveyancers guarantee to complete property selling without any hitches while offering professional recommendations and support throughout the process. We are available for assistance at any stage of the process, whether you are a buyer or a seller. Give us a call today to find out how we may apply our expertise to your conveyancing Sydney and other suburbs requirements.