Docstoc

Call Option Guidance Notes

Document Sample
Call Option Guidance Notes Powered By Docstoc
					                      Call Option Guidance Notes

What is a Call Option?

A Call Option gives the holder of the option agreement the right for the
property to be sold to him for a price as stated within the agreement.

Consideration is paid, a time scale in which the option can be exercised is
decided on and a purchase price of method for calculating a purchase price
will be stated within.


Who enters into an Option?

There are two parties to an option agreement. One party will be known as the
property owners and the other will be the option holder.

It is important that all legal owners of the property enter into the option
agreement and you should therefore check the title of the property to ensure
that you have the full story.

As option holder it is important to know or have a good idea as to all persons
who will wish to be on the legal title of the property once the purchase goes
through. A contract for the sale of the property could state that the property
cannot be assigned or entered into by any other party than that of the option
holder on the option agreement. If you may wish to assign the benefit of the
option to another person, this should be incorporated into the option
agreement.


How long before I have to exercise my Option?

A time scale will need to be incorporated into the agreement to be valid. This
can be anything up to 21 years being a time limit defined by statute.

There are practical issues to bear in mind when agreeing the time scale with
the property owners. How long do you want to tie up the property for? You
will have an idea of how long you wish to be involved in the transaction and if
it does not go through, whether you may be interested in the future or if you
will be happy for the property owners to deal with the property how they wish.

Depending on the financial situation of the property owners, they may need to
know that the deal will be tied up in a set time scale or thereafter they will be
free to try and arrange a further sale or re-mortgage of the property.

It may be that you are using an option agreement before any legal work has
been carried out. It could be that you are just waiting for one final thing to
come in. Bear in mind the time it may take to get the arrangements in place
for you to be able to complete on a purchase and if possible add on a
contingency time scale to be on the safe side.


Money paid under an Option

A consideration is paid and can be for any amount from £1 upwards. This
amount may be deductible from the eventual purchase price for the property
and is usually non-refundable should you decided not to exercise your option.

It is important that the option agreement specifies how the option sum is to be
dealt with.

If the option sum is not incorporated into the purchase price, this will be added
to the purchase price for the purposes of calculating Stamp Duty Land Tax
(SDLT).

 Example

 Option agreement entered into for consideration of £5,000.00 for the option
 holder to purchase the property for an additional Purchase Price of
 £125,000.00. The £5,000.00 option sum will be payable on the date the
 option agreement is entered into, £125,000.00 will be payable on
 completion of the purchase of the property and on the date of completion
 SDLT will be payable calculated on £130,000.00

 Alternatively, if the purchase price was to be £125,000.00 incorporating the
 option sum or £120,000.00 in addition to the option sum, on completion 0%
 SDLT would apply.



What are the liabilities under the Option?

It is always advised when entering into an option agreement that a certain
amount of due diligence is carried out. You are paying for the right to
purchase the property but if you do not check the title of the property or carry
out your searches, you may find the property is not mortgagable or that you
do not want to purchase the property and take that risk.

You are not bound to purchase the property until you exchange contracts in
the normal way. If you decide not to proceed, you can let the term of the
agreement lapse and you will only forfeit the money paid as the option sum in
addition to any other fees or disbursements you may have paid out in the
purchase of the property such as mortgage valuation or search fees.

If you are paying a nominal fee for the option agreement, you may be
prepared to take the risk of minimal or no due diligence. However, if you are
paying a larger sum for the option, you may not be happy to risk the payment
without knowing about the property.
What formailities are associated with an Option Agreement?

Registration
An Option Agreement, if singed by all parties is a valid agreement binding on
the property owners. If this is where it is left and just each party holds a copy
of the agreement, whilst being binding on the property owners, it will not bind
successors in title. Therefore is the owners sold the property to another
person within the term of the agreement without your consent, you will not be
able to exercise the option agreement against the property although you will
have other remedies available to you against the property owners for breach
of the agreement.

The option agreement can be registered with HM Land Registry (HMLR)
against the title of the property. This will cost a fee of £40 and the option
agreement must have wording within it in the form of a standard restriction
(HMLR prescribe the wording). A restriction will be against selling or re-
mortgaing without your consent which will mean you could allow the owners to
sell the property if you so wished. Your terms could be that the new owners
would take subject to the agreement so you can still exercise the agreement
at a later date (still within the original term) or that, for a fee, you will remove
the restriction and void the option agreement.

Notification and SDLT
Taking an option against a property is a notifiable event and therefore a
SDLT1 (Land Transaction Return Form) must be completed regardless of the
consideration paid for the same. It is your responsibility to ensure this is done
however a solicitor can aid you in completing this formality. You have 30 days
from the date of the agreement to file the form or you could be fined for late
submission.

If the option sum is for over £125,000.00, SDLT will be due on this amount as
from the date of the option agreement. On completion of the purchase, SDLT
will be recalculated and you will then have to pay the difference in the SDLT.

As with any other purchase, a further SDLT1 is due to be submitted on
completion and must be done again within 30 days.


Questions or Queries

If you have any questions or queries relating to an option agreement or you
require an option redrafted for your own needs or the needs of a specific
transaction, please do not hesitate to contact the Property Investment
Department at Attwells Solicitors LLP.
                         Property Investment Team


Laura Starling
Solicitor
Head of the Property Investment Department

Tel: 01473 746014
Fax: 01473 466840
Email: laura.starling@attwells.com


Carla Golbourn
Assistant to the Head of Department
Tel: 01473 746060
Email: carla.golbourn@attwells.com


Amy Brearley
Paralegal
Tel: 01473 746056
Email: amy.brearley@attwells.com


Claire Hogben
Trainee Solicitor
Tel: 01473 746010
Email: claire.hogben@attwells.com


Sally Jousiffe
Paralegal
Tel: 01473 746055
Email: sally.jousiffe@attwells.com


Amie Starling
Paralegal
Tel: 01473 746050
Email: amie.starling@attwells.com


Alex Harrington-Rutterford
Post Completions Support
Tel: 01473 746057
Email: alex.harrington-rutterford@attwells.com

				
DOCUMENT INFO