Long Saad Woodbridge

Exercising a Call Option Incorrectly – Big Repercussions

Further to our recent article on Put and Call Options titled ‘Put and Call Options in NSW: Stamp Duty Legislative Overhaul – The End of an Era’, comes a bigger issue in connection with the exercise of the Option itself.

Generally, an Option Agreement is utilised to allow parties to sell or purchase property at a future date with minimal upfront costs. For example, an Option Agreement allows a Purchaser the right to purchase an asset from a Vendor at a certain (fixed) price, known as a “Call Option”, with the Vendor having an obligation to sell that same asset to the Purchaser at that price (even if the value of the property has increased).

If either party fails to adhere to their obligations under an Option Agreement, then the other party may seek legal recourse to enforce the terms of the Option Agreement. However, this right only arises if in fact the Option has been exercised correctly in the first place.

Whilst an Option Agreement may provide such a benefit for a party, if it is not exercised correctly from the outset, then this may cause the party to lose out on the Property entirely, highlighting that one must be extremely careful to ensure that all of the requirements of the Option are strictly adhered to.

In a recent example, the case of Payne v Trinity [2021] NSWSC 986 reiterated the strict nature of terms set out in Option Agreements. In this case, the Plaintiffs were required to:

  1. deliver a duly executed notice of exercise of the Call Option;
  2. pay the sum of $280,000 by way of cheque to the defendant’s solicitor; and
  3. provide a dated Contract of Sale executed by the Plaintiffs.

All of this was to be completed by 5:00pm on 24 of April 2021, with time being of the essence.

On Saturday, 24 April 2021, one of the Plaintiffs attempted to transfer, by way of EFT, the sum of $280,000.00. This was unsuccessful and was ultimately sent to the Defendant on Monday, 26 April 2021.

The key question for the Court was ‘what would a reasonable business person understand the terms of the Deed to mean?’

Unfortunately for the Plaintiffs, Justice Darke found that a reasonable business person would understand that the Call Option expiry was strictly 5:00pm on 24 of April 2021. He further observed that even if 26 April 2021 was accepted, the Option would still not have been validly exercised as the amount was to be delivered to the Defendant’s solicitor by way of cheque (not EFT). 

This case highlights the importance of validly exercising an Option and the overall consequences that may flow should there be a failure to do so. As such, it is important to have a solicitor review your Option Deed to advise you of your obligations prior to exercising the Option. 

Long Saad Woodbridge’s Property Team has decades of experience within the property sector and can assist you in ensuring that your Option Agreement is exercised validly. Our team thrives on paying keen attention to detail to ensure that you comply with your obligations pursuant to an Option Agreement.

If you are considering entering into an Option Agreement, require an Option Agreement to be prepared, or simply need advice as to how to exercise an Option Agreement, please do not hesitate to contact a member of our Property Law Team.

Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.



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