Passing on Put & Call Options – The new risks that Vendors need to be aware of

25 MAY 2021

 

A recent decision in the New South Wales Supreme Court has led to an interpretation of the meaning of “option to purchase” within the context of the Conveyancing Act (Act). The findings of the court in this matter are expected to have a significant impact on a grantee/vendor’s rights of recovery in the event that a contract relating to residential property and resulting from the exercise of a put option is rescinded.

What is a Put and Call Option?

For context, a put and call option deed has two elements, they are as follows:

  1. the first being the call option granting a grantee the right to purchase the property; and
  2. the second being a put option providing the grantor with the right to force the grantee to purchase the property,

during the respective periods prescribed under the deed.

What happened in BP7 Pty Ltd v Gavancorp Pty Ltd?

In the case of BP7 Pty Ltd (BP7) and Gavancorp Pty Ltd (Gavancorp), BP7 sought to rescind the contract which had arisen out of Gavancorp exercising its put option under the Deed. BP7 rescinded on the basis that the contract was subject to a cooling off period, as is generally accepted for residential purchases.  In accordance with section 66V(5) of the Act, if a purchaser rescinds they can be required to forfeit 0.25% of the purchase price to the Vendor. On rescission of the Contract, BP7 attempted to recover the call option fee under the Deed and only forfeit the 0.25% as provided for by law. Gavancorp rejected that BP7 had validly rescinded and refused to refund the call option fee less 0.25% of the purchase price.

Can a contract arising out of a put option be rescinded?

The significance of this case is realised in the court’s finding that BP7 had the right to rescind and was further entitled to recover the call option fee, less 0.25% of the purchase price rather than it being entirely forfeited to Gavancorp.

The interest in this finding arises due to the general understanding that, the right of rescission does not apply to a contract for a residential property which is pursuant to “the exercise of an option to purchase”. Notwithstanding this, the court found that the term “option to purchase” only related to call options. Hence, the case sets a precedent which provides that in situations where a contract relating to residential property arises out of a put option, the purchaser is entitled to rescind during the cooling off period. Further, the purchaser may have the call option fee refunded, subject to the purchaser not having waived its rights to cooling off by section 66w or otherwise.

How can a Vendor reduce the risk of a purchaser rescinding the contract?

The risk of a purchaser rescinding a contract for residential land is greatly mitigated if the Vendor ensures that a section 66w certificate is signed by the solicitor or conveyancer acting for the purchaser, at the time that the contract is entered into. The effect of a section 66w being to effectively waive the purchaser’s right to a cooling off period.

If you would like advice or assistance in relation to the above or any other Property matters, please contact our accredited property law specialist and Partner Ben Wong on bwong@marsdens.net.au or call (02) 4626 5077.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

 

Posts you may find interesting

News

POSTED: 11 Oct 2021
As time goes on, things that were familiar to us seem to be changing or being disrupted every single day.
Read more