Options can be tremendously useful for property developers.
However, there are a number of issues in Victoria that limit their effectiveness.
I have summarised below some issues that can arise.
Section 32 / Vendor’s Statement
An option can fall within the definition of a ‘contract of sale’ under the Sale of Land Act. Technically this requires that the option include a section 32/vendor’s statement.
This might allow potential purchasers to escape their obligations under an option agreement in some circumstances.
In some cases, the up-front option fee can fall within the statutory definition of ‘deposit’ and therefore is required to be held in a trust account until the option is unconditional.
Land Development and Options
A common strategy to profit from property is to get an option over a property; get a permit to subdivide the property and then assign the option to a third-party purchaser.
However, where ‘land development’ occurs the State Revenue Office is likely to seek to impose stamp duty on the assignment of the option as well as the purchase by the third-party purchaser.
Land development includes obtaining plans and permits.
It may be that a different form of agreement would be preferable if this is your intention.
Options and Leases
Similar complications can arise when options and leases are combined.
In simple terms, if a lease involves payments above normal market rent (and option fees are one example) the State Revenue Office will treat the lease as equivalent to a sale and impose stamp duty on the lease.
It is also worth noting that the State Revenue Office is requiring more information than ever before to be both input into their forms and also certified by the lawyers / conveyancers to be correct. This will undoubtedly increase the level of compliance with these provisions.
Delay sale for CGT purposes
Capital Gains Tax (CGT) is generally triggered when the contract to sell a property becomes unconditional.
Some vendors may wish to defer the crystallization of their tax liability to a future tax year. Options can be used to achieve this deferment whilst still giving both parties sufficient certainty to plan their affairs and / or progress their plans.
An option might be designed to allow a potential purchaser time to investigate the property and conduct a due diligence clause.
If this is the case, then a standard contract of sale with a due diligence clause and / or an extended settlement date may be simpler and more readily acceptable to a vendor.
However, the optimal structure generally depends on a range of factors that that may be unique to the proposed transaction.
Lewis O’Brien and Associates have been assisting clients to select the implement the right structures for more than 20 years.
We hope to assist you with your next transaction.