This subtopic covers the preparation of the option agreement, and entry into the option, together with the relevant enquiries and lodging a caveat. It also provides a summary of GST and stamp duty issues.

The first step in preparing an option is to consider whether it will be an irrevocable offer or conditional contract. Alternatively, a third course may be adopted by stating that the “grantor grants an option to the grantee to purchase the property”.

The next step is to identify whether the document will be in the form of an agreement or a deed.

Finally, it will be necessary to identify whether a put option or put and call option should be used.

A standard call option is provided as an example which adopts the third course neutral alternative in the form of a deed.

There is also a checklist provided for drafting option agreements.

Essential terms of option

The option must identify the essential terms being:

• the parties, being the grantor and the grantee and, if relevant, allow for nominations;

• the option period, being the period during which the option may be exercised;

• the option fee, being the consideration for the owner of the property agreeing to be bound under the option to sell the property at a future date;

• the property the subject of the option. The details of the property are usually set out in the attached contract; and

• the price for the acquisition of the property, which is generally specified in the contract.

Usually, and as good practice, a contract will be attached to the option deed in a form sufficient to enable an enforceable contract on exercise of the option.

The guidance note also lists other matters that can be included in the option document such as legal costs, an extension to the option period, access to the property, development applications and security.

Residential Property — New South Wales

For residential property in New South Wales, the Conveyancing Act 1919 (NSW) sets out specific requirements including:

• a requirement that options be granted by exchange of counterparts;

• a prohibition on exercise of the option within 42 days after the date of the grant of the option;

• a cooling off notice; and

• attachment of certain documents, being a contract, title documents, drainage diagram and planning certificate under s 52A of the Conveyancing Act 1919 (NSW).

It is critical for both the grantor and grantee that these formalities are properly complied with as failure will render the option void or enable it to be rescinded by either party.

Property — Victoria

For Victorian properties, the Sale of Land Act 1962 (Vic) sets out the formalities required for the sale of land which will extend to options, including:

• provision of a cooling off notice in a sale contract (see s 31 of the Sale of Land Act 1962 (Vic)); and

• submission of a vendor’s statement to a purchaser before the sale contract is signed (see s 32 of the Sale of Land Act 1962 (Vic)).

The failure to comply with these requirements may allow the option to be cancelled.

Property — other states and territories

There are no equivalent provisions regarding options in South Australia, Tasmania, Western Australia or Queensland.

In the ACT, there is an exception to the usual formal requirements for the resulting contract of sale of land in some circumstances where the contract arises from an option. See Preparation.

On completion of the option document, it may be executed and exchanged and then will become binding on the parties.

The grantee will need to consider when to undertake the usual property enquiries at the following times:

• prior to entry into the option agreement;

• before the exercise of the option; and

• before completion of the contract.

In each case, the nature and extent of the enquiries depends on the amount of the option fee, the option period, the nature of the property and the price of the property. An example is provided in the guidance note to give a practical indication of what may be relevant. See Entry into an option.

Generally, the GST treatment of the option follows the GST treatment of the land the subject of the option. Accordingly, if the supply of land is GST-free as the supply of a going concern, then the option will be GST-free. See GST.

The stamp duty payable on an option varies for each state depending on the provisions in the relevant Duties Act in that state. In NSW, Victoria and the ACT, the grant of an option is not a dutiable transaction and thus does not attract stamp duty. Conversely, in Queensland, Western Australia, South Australia and the Northern Territory, the grant of an option will generally give rise to a dutiable transaction and attract stamp duty on the consideration for the grant of the option. In Queensland there may be a credit applicable in accordance with s 23(2) of the Duties Act 2001 (Qld). In Tasmania, the grant of an option is a dutiable transaction but usually attracts stamp duty only to the extent of the option fee. Duty on the property value is usually payable on only the transfer. The grant of a put and call option however will generally give rise to a dutiable transaction and attract stamp duty on the consideration for the property not just the grant of the option.

See Stamp duty.