Conveyancing Table of Contents
In this chapter1. Generally To the rule that an offer may be revoked at any time before acceptance, an option to purchase, if given for valuable consideration, stands as an exception. An option is an offer made by one person ( the grantor) to sell and to another (the grantee) which that other is entitled to convert into a concluded contract of purchase on giving the prescribed notice, and otherwise complying with the conditions required for the exercise of the option. The offer, if valuable consideration for it is given by the offeree, is not revocable within the period stated in the option. An option should contain by inclusion or by reference all the terms and conditions of the agreement, which exercise of the option will conclude, as well as stipulating the method of exercise and laying down the conditions required for exercise of the option. It is possible to annex a draft of the contract for sale of land that will be entered into to the option agreement. The grantee of an option must give particular attention to the method of exercising the option as the procedure is sometimes technical and must be strictly adhered to if the option is to be validly exercised. The notice of exercise of the option will generally need to be be given in writing. If the notice is to be served on the registered office of the grantor an Australian Securities Commission search should be obtained to locate the registered office at the time of the exercise of the option. If the notice of exercise is to addressed to two registered proprietors do not address it to just one. If it requires that a copy document executed by the grantee be attached to the notice do not rely on the document previously having been handed over. Above all the option must be exercised within time even though the parties may be negotiating a new agreement. An option has been held to be a disposition of an interest in land within the provisions of s. 54A of the Conveyancing Act, 1919 and thus it must be in writing. An options terms must also be stated with certainty for it to be enforceable. It should be noted that without granting an option it is possible for the owner of a property to grant a right of first refusal to another person. That is, the owner will offer the property to that person at the best price offered and allow that person to either buy the property at that price or refuse to purchase the property. 2. Effect of vendor disclosure legislation Regulation 6(2)(b) of the Conveyancing (Vendor Disclosure & Warranty) Regulation, 1986 provides that exempt is:- "...a contract arising from the exercise of an option where, by the terms of the option, the option was capable of being exercised only after the expiration of 3 months from the date it was granted" The question in practitioners minds was whether a contract annexed to an option had to contain vendor disclosure documents required by s. 52A of the Conveyancing Act, 1919 and the Conveyancing (Vendor Disclosure and Warranty) Regulation, 1986 particularly where, following the exercise of an option, the parties were obliged to enter into a contract for sale in the form annexed to the option. This question was resolved to some extent by Todd v. Georgievski1 where it was held that the vendor disclosure requirements of s. 52A of the Conveyancing Act, 1919 and the Conveyancing (Vendor Disclosure and Warranty) Regulation, 1986 did not apply to options but did apply to a contract for sale arising from the exercise of an option unless the option was capable of being exercised only after the expiration of 3 months from the date it was granted. By contrast with the "cooling-off" legislation2 the "vendor disclosure and warranty" legislation applies to all land with very few exceptions. The "cooling-off" legislation relates only to "residential land" as it is defined in that legislation. 3. Effect of now repealed Anti-Gazumping (Preliminary Agreement) Legislation This legislation ceased operation on the 1st October, 1990. Up until then 66U of the Conveyancing Act provided: "An option granted on or after the appointed day (1st June, 1988) for the purchase of residential property is void if it is exercisable within 30 days after it is granted or, if a different period is prescribed, within that period." The legislation did not apply to a sale of residential property that resulted from the exercise of an option that was not void under s. 66U. Section 66U made invalid any option which was for a period of up to 30 days and was exercisable within 30 days. Accordingly preliminary agreements strictly did not apply to options and contracts formed on exercise of options, because short term options were invalidated and long term options were exempted. Accordingly, if an option was not exercisable for three months, the requirements for vendor disclosure and warranty did not apply to the contract. However, if an option were not exercisable within 30 days but exercisable within three months, the contract (but not the option itself) needed to comply with the disclosure and warranty regulation, otherwise the contract would be rescindable by the purchaser. 4. Effect of 1989 (Cooling Off)Amendments There is now a 5 day cooling-off period for options3 relating to residential properties as for contracts for sale4. The cooling off period commences when the option is granted and ends on the fifth business day after the day on which the option was granted.5 The cooling-off period can be extended, shortened or excluded similarly to the provisions dealing with contracts for sale6. There is no cooling-off period when the option is granted on the same day as the property was offered for sale by public auction but passed in, or if a certificate is given to the vendor at or before the option is granted, that complies with s. 66ZF. Section 66ZC makes provisions relating to a certificate excluding or shortening the cooling-off period are effectively identical to those contained in Div. 8 of Pt. 4. The mode of rescission during cooling-off7 and the consequences of rescission8 are similar to the provisions relating to contracts for the sale of residential property. Division 9 of Part 4 creates new restrictions on the grant of options for the purchase of residential properties. It adopts several of the provisions contained in Div. 8 Pt. 4 applying to contracts for the sale of residential properties. The formal requirements of options now are:- (a) An option is void unless it is signed in duplicate by both parties9. This is to ensure that the grantee also signs the option and that each party should have a signed copy. (b) Vendors who by written or broadcast advertisement offer to grant an option to purchase residential property are required to have available for inspection the draft option or agreement, the contract and the disclosure documents10. There is a similar requirement for estate agents11. (c) The option is void if it is exercisable within 42 days after it is granted12. In view of the cooling-off entitlement the rationale or need for this provision is questionable. Most residential options are likely to be relatively lengthy, subject to subdivision, development or building approvals. (d) The option document must contain a statement in the prescribed form relating to the cooling-off13. Failure to do so entitles the purchaser to rescind the option and the resultant contract. This requirement should not be overlooked, as it must appear in the option, which most solicitors prepare for the specific transaction. (e) The option document should have attached to it a copy of the proposed contract for sale and the documents required to be attached to the contract under s. 52A of the Conveyancing Act 14, otherwise the option may be rescinded by either party. The party which should have this entitlement to rescind is the grantee (purchaser), although it is not unreasonable in favour of grantors when the grantee prepares the option e.g.. when a developer approaches a private landowner for an option. Regulations may provide prescribed terms, conditions and warranties in options, including those contained in regulations made for the purposes of s. 52A of the Conveyancing Act15. To evaluate these option provisions the regulation would need to be considered. It is understood that there will be no form of option prescribed by the government unless that course becomes necessary due to abuses of the system16. 5. Stamp duty on options Stamp duty is payable on the value of the option or the consideration paid for the option, whichever is the greater17. That is, the value of the option is what is taken into account and not the underlying property the subject of the option. By way of concession, the duty payable on any agreement "made in pursuance of and by the exercise of the option" is reduced by the amount of the ad valorem duty paid on the agreement creating the option18. However, care must be taken if the option agreement is varied. If A grants an option to B to buy land for $ 10 million. The option fee is $ 1 million and the initial option period is three months. Then the period is extended by one month for a further option fee of $ 100,000.00. The option is exercised by notice in writing just prior to the end of the four month period. The duty on the option agreement is $ 40,490 based on the $ 1 million option fee. Duty on the variation instrument is $ 1,990 based on the $ 100,000 option fee. Duty on the notice of exercise of the option would be $ 533,500 based on the $ 10 million purchase price (duty $ 535,490) less the credit of $ 1,990 i.e. not a credit of $ 40,490, nor of $ 40.490 plus $ 1,990.
1 (1987) 10 NSWLR 319. 2 Also the former "preliminary agreement" legislation. 3 In Snape v. Kiernan3 it was held that the cooling-off provisions of the Land Sales Act, 1964 may be availed of by the grantor of an option. This interpretation of the Land Sales Act was based on the particular wording of the that Act which did not refer to "purchaser" as such. The cooling-off provisions of the Land Sales Act have now been repealed as part of the "anti-gazumping" reforms of 1988. The 1989 "cooling-off" legislation contains separate provions that apply to options. 4 Section 66ZB Conveyancing Act, 1919. 5 Ibid s. 66ZB(2-3). 6 Ibid s. 66ZB(4-6). 7 Ibid s. 66ZD. 8 Ibid s. 66ZE. 9 Ibid s. 66ZG(1)(a). 10 Ibid s. 66R(2). 11 Section 84AA(2)(3) of the the Property Stock & Business Agents Act, 1941. 12 Section 66ZG(1)(b) Conveyancing Act, 1919. 13 Ibid s. 66ZH(1). 14 Ibid s. 66ZI(2). 15 Ibid s. 66ZA. 16 Anti Gazumping Legislation by David De Carvalho & Bill Macquarie, The New Conveyancing Legislation 90/1, The College of Law Continuing Legal Educatin 1990, p. 43. 17 Section 40A Stamp Duties Act, 1920. 18 Section 40A(2) Stamp Duties Act, 1920.
