Your option to sell residential property to a developer in NSW may be worthless

In brief - The decision in BP7 Pty Ltd v Gavancorp [2021] NSWSC 265 (Gavancorp) raises serious concerns for sellers of residential property who have entered into option agreements with developers

Fourteen neighbouring owners of residential property lost everything in a recent dispute with a developer. The owners were parties to a legally binding put and call option deed. They were each paid an option fee worth 10% of the purchase price for their property. 

Trouble arose when they sought to exercise the put option under the deed to require the developer to purchase each property. Ultimately they were surprised to discover their put options were worthless and received a big legal bill.

The reason they were worthless arose from the cooling off period under the Conveyancing Act 1919 (NSW) (Act) that applies to the sale of residential property in NSW. A purchaser may rescind a contract for the sale of residential property during the five-business-day cooling off period (ten business days for off-the-plan contracts). If the contract is rescinded, the purchaser is entitled to recover the whole of the deposit (less only 0.25% of the price). 

Importantly, there is no cooling off period if:

• "the purchaser gives … a certificate" from the purchaser's solicitor or conveyancer that the cooling off period does not apply; or

• "the contract is made in consequence of the exercise of an option to purchase the property". 

The developer did not exercise the call option it held to purchase the property. So the owners exercised their put option to enter into a contract with the developer for the sale and purchase of the property. 

The developer, upon the exercise of the put option:

• was not required by the option deed to provide a cooling off certificate so did not do so;

• during the cooling off period served a notice of rescission on each owner; 

• claimed it was entitled to a refund of the deposit (less 0.25% of the price); and

• later claimed the developer's legal costs arising from the dispute. 

The issue that arose for consideration by the Supreme Court in Gavancorp was whether, like a call option, the put option was an option to purchase the property. 

Supreme Court of New South Wales' findings

In summary, the Court held that:

• there is ordinarily no cooling off period in relation to a contract arising from the exercise of a call option served by a purchaser (like the developer) on an owner - this is because such a contract "… is made in consequence of the exercise of an option to purchase the property"; but

• there is a cooling off period in relation to the contract arising from the exercise of a put option (like those served by the owners on the developer) as such a contract is not "… made in consequence of the exercise of an option to purchase the property" but is more properly to be considered as made in consequence of the exercise of an option to sell the property.

Developer entitled to rescind contracts under the cooling off period and recover option fees, legal costs and generally all other money paid to the selling owners

On the face of it, the owners appear to have done everything right. They each exercised their respective put option during the required option period in accordance with the requirements of the option deed. But as the option deed did not expressly require the developer to provide a cooling off certificate and the developer did not provide one, the developer was lawfully entitled to rescind under the cooling off period. 

The developer was then also entitled to recover the deposit and other money paid to the owners. This was because the Act provides that upon rescission under a cooling off period:

• the "balance of the deposit remaining after deduction of any amount forfeited [0.25%] is payable to the purchaser"; and

• the deposit includes "… any amount paid by the purchaser in relation to the contract or on account of the purchase price of residential property" - potentially broad enough to include not only option fees paid to the owners but also any other security deposits, legal costs and other amounts paid by the developer in relation to the contract.

Accordingly, upon rescission the developer was entitled to a refund of the call option fees. The developer was also successful in recovering its legal costs from the dispute.

Considerations for owners of residential property using option deeds

If you have been granted a put option in connection with residential property, then you ought to consider that carefully. Even though had the owners above not exercised their put options they would not have received the full purchase price, they likely would have retained their call option fees and avoided costly legal proceedings.

What more is able to be done to make the exercise of the put option legally enforceable? Is an owner under a standard option deed able to require the developer to provide a cooling off certificate without an express obligation in the option deed to do so? 

You may need to consider these matters carefully if you hold a put option over residential property. If you do not, you may get a nasty shock if you choose to exercise it. 

Addendum - With effect from 1 September 2022 the Conveyancing Regulation was amended so that the cooling off provisions do not apply to "to a contract made in consequence of the exercise of an option to compel the purchase of land".