If a financier of a residential development is relying on presales evidenced by “put and call options” rather than exchanged contracts for sale as part of their required minimum presales threshold, they may need to revisit their credit in light of a recent decision of the NSW Supreme Court.
The decision was handed down late in March this year: BP7 Pty Ltd v Gavancorp Pty Ltd  NSWSC 265 (Drake J). It raises issues for the “bankability” of deals that rely on presales that are documented not as exchanged contracts but rather as put and call options. Where a purchaser elects not to exercise its call option, but a contract for sale is nevertheless formed by the vendor exercising its put option, the exemption in section 66T(d) of the Conveyancing Act 1919 (NSW), (the Act), which excludes the cooling-off period in relation to certain contracts, does not apply.
The BP7 case involved 14 contracts for sale for apartments in two strata schemes, where each contract arose as a result of the developer vendor exercising a put option granted by the purchaser. The purchaser sought to rescind each contract during the statutory cooling-off period. The main question was whether the cooling-off period, and associated rescission rights, were available under the statute.
There are limited exemptions to the cooling off regime in section 66T of the Act. In particular, section 66T(d) states (as relevant) that “There is no cooling off period in relation to a contract for the sale of a residential property if….the contract is made in consequence of the exercise of an option to purchase property…”.
The central issue before the Court therefore was the meaning of “option to purchase” in section 66T(d) and, in particular, whether it included put options.
An associated issue was whether the purchaser was entitled to a refund of the option fees less the forfeited amount of 0.25% of the purchase prices under the contracts provided under section 66V.
The Court reiterated the rule that statutory expressions should be given their ordinary and natural meaning and held that “option to purchase” should be construed as a right in the nature of a call option, ie an option that gives the holder or grantee the right to purchase property. It follows that the exemption would not extend to contracts formed in consequence of the exercise of put options, which are an obligation of the purchaser rather than a right exercisable by it. On this basis, the Court held that the contracts were not excluded from the regime by section 66T(d) and so the cooling-off period applied. The plaintiff, as the purchaser, was entitled to rescind the contracts pursuant to s66U of the Act.
Further, the Court held that the plaintiff purchaser was entitled to a refund of the call option fees less 0.25% of the respective purchase prices under the contracts. This was despite the fact that the call option fee was not refundable except in certain defined events (which are not relevant here) and due to the particular drafting in the option deed which led the Court to conclude that “the call option fee should thus be regarded as an amount paid by the purchaser ‘in relation to the contract or on account of the purchase price’ of the property within the meaning of s 66V(10)”. On that basis, the amount of the call option fee fell within the purchase price for the purposes of s 66V of the Act.
Position in other jurisdictions
While the BP7 decision is only directly applicable in NSW, in relation to other jurisdictions we observe as follows:
- there is likely to be a similar issue:
- in the Australian Capital Territory, where section 6(2) of the Civil Law (Sale of Residential Property) Act 2003 (ACT) exempts from the cooling off regime contracts arising from the “exercise of an option to buy the property”; and
- in South Australia, where section 5(7)(f)(i) of the Land and Business (Sale and Conveyancing) Act 1994 (SA) exempts contracts for the sale of land “where the contract is made by the purchaser of an option to purchase the land”;
- in Queensland, section 160(1)(iii) of the Property Occupations Act 2014 (Qld) adopts more generic language in exempting “a contract formed because of the exercise of an option granted under an earlier contract” so the issue litigated in BP7 may not arise there;
- in Victoria, the cooling off provisions in section 31 of the Sale of Land Act 1962 (Vic) do not appear to have a relevant exemption at all relating to the exercise of an option of any kind; and
- in the Northern Territory, the cooling off provisions in section 17 of the Sale of Land (Rights and Duties of Parties) Act 2010 (NT) do not appear to have a relevant exemption relating to the exercise of an option of any kind.
There is no statutory cooling off regime for residential contracts in Tasmania or Western Australia.
Implications for financiers
The BP7 decision raises issues for the “bankability” of deals that rely (even in part) on presales that are closed not as exchanged contracts but rather as put and call options. This decision clearly opens the door for purchasers who wish to escape their bargain: if they do not exercise the call option, they may still rescind within the cooling off period if the developer vendor exercises the put option. It is not at all clear from the Act or the BP7 decision that the issue could have been dealt with by the vendor insisting on receipt of section 66W certificates before or at the time the put and call options were originally entered into.
This threatens a couple of the fundamental qualifying presales (QPS) criteria of such arrangements, which are usually required to be irrevocable and unconditional and with a purchaser who has no right to terminate or rescind the contract. While it is not common practice for put and call options to automatically be included in the concept of QPS, market forces and the specific nature of the development (eg a high end development or sales relating to penthouse apartments) could lead a vendor developer pressuring its financier to accept put and call options as part of its QPS. The key benefit for a purchaser of a put and call option for an off-the-plan residential apartment is the ability to delay its liability to pay transfer stamp duty, since it can control the timing of exercising the call option and not bring into effect an exchanged contract until a later stage, at which point the “dutiable transaction” arises.1
The BP7 decision means put and call options no longer provide the certainty to a vendor developer (and in turn its financier) that they were thought to, which can obviously have flow-on implications for the credit assessment for the financier. This may lead to QPS thresholds being limited to sales under exchanged contracts for sale.
Going forward, we would recommend that financiers consider carefully whether they should accept put and call options for residential real estate in relevant jurisdictions within the concept of QPS.
While this decision may have troubling implications for construction and development financing, Drake J noted that it is “…not the function of the court to seek to overcome what might be thought to be unintended consequences of legislation”.
As at the time of writing it does not appear that an appeal has been lodged but the decision may yet lead to calls for statutory amendment, so watch this space.