In the real estate industry, an option is a contractual right granted under a written agreement that allows the grantor and grantee to buy or sell property at a future date.
The benefits of an option agreement for real estate developers are as follows:
- The ability to lock in a fixed purchase price regardless of market fluctuations and decide to purchase at a future date.
- Allows for extended development-related conditions (e.g., time to secure agreements to purchase any adjacent land, a longer due diligence period, and obtain development approval).
- Defers the obligation to pay stamp duty on the sale price.
- Provides more time to establish the final purchasing legal entity (purchaser entity).
- May include a nomination clause, allowing another buyer to be nominated to purchase the property (e.g., through a trust/family trust).
- Allows additional time for fundraising.
- Offers the ability to consider reselling the property for profit.
For the seller, the benefits of an option agreement are as follows:
- Locks in a sale price that may be higher than the current market value.
- Defers the obligation to pay capital gains tax.
- Forces the buyer to purchase the property at the agreed sale price.
If you have any questions, please feel free to contact Ensure Legal or Lawyer Stephen Kwok.
