Put options won't kill cooling-off periods in NSW residential contracts for sale

Under the Conveyancing Act 1919 (NSW), there are cooling-off rights for contracts for the sale of residential property (section 66S) unless an exception under section 66T applies. There is no cooling-off period however if the contract is made in consequence of the exercise of an option to purchase property, other than an option that is void.

A key issue is whether the exercise of a put option amounted to an "option to purchase property" and consequently triggers an exception to the cooling-off period. That question came before the NSW Supreme Court in BP7 Pty Ltd v Gavancorp Pty Ltd (2021) NSWSC 265.

The dispute concerned the rescission of 14 contracts for the sale of land within the cooling-off period pursuant to section 66U of the Conveyancing Act. The Sale Contracts were entered into upon the exercise of put options contained within Deeds of Put and Call Option agreed between BP7 and a number of land owners. BP7 did not exercise any of the call options, but the land owners exercised their put options. BP7 then rescinded the contracts within the cooling-off period. Could it do that?

The meaning of "option to purchase property"

The Court determined that "option to purchase property" should be given its ordinary meaning: an option able to be taken (by the holder of the option) to purchase certain property. A put option is not an option of that character and does not involve the exercise of a choice to purchase property.

It was put to the court that an option to purchase could be read as “option to compel a purchase”, “option leading to a purchase” or “option pertaining to a purchase”. Justice Darke rejected these arguments responding "[t]o my mind, 'to' in 'option to purchase' is concerned with the nature of the choice given by the option; that is to say, what can be chosen". He went on to conclude "the expression 'option to purchase' as found within Division 9 and section 66T should be construed to mean an option in the nature of a call option, which gives the holder or grantee the right to purchase the relevant property."

The Court held that a cooling-off period applied in relation to the Sale Contracts as the exemption in section 66T(d) did not apply, and that BP7 was consequently entitled to rescind the contracts.

Key takeaways for cooling-off periods in residential contracts for sale

Purchasers under any residential contract for sale that results from the exercise of a put option will obtain the benefit of the protections under Division 8 of the Conveyancing Act including cooling-off rights.

It is important to remember that these cooling-off rights can still be excluded in some circumstances, including where the purchaser gives a certificate that complies with section 66W of the Conveyancing Act.

Position in the ACT

ACT legislative requirements

In the ACT, the sale of residential property is dealt with under the Civil Law (Sale of Residential Property) Act 2003 (ACT). Part 2 of the Act provides for the sale of residential property and includes cooling-off provisions.

Relevantly, the Sale of Residential Property Act provides at section 6, in relation to part 2:

(2) this part does not apply to a contract or proposed contract for the sale of residential property if-

(a) the contract arises from the exercise of an option to buy the property and-

    (i) the option was contained in a will or sublease; or

    (ii) the period for exercise of the option was longer than 60 days; or

(b) the buyer is a related person of the seller.

Given this, where a contract or proposed contract arises from the exercise of an option to buy the property and one of the above criteria are met, cooling-off provisions under the Act will apply in relation to the sale. There are exceptions to cooling-off rights under the Act as set out below.

In the ACT the statutory cooling-off period will not apply to residential sale contracts where:

• the contract results from the exercise of an option to buy under a will or sublease;
• the contract results from an option to buy for which the option period was available for longer than 60 days;
• the buyer is a corporation;
• the property is sold by tender;
• the property is sold by auction;
• the property is passed in at auction and the contract was made on the same day with a buyer who was recorded in the bidders record at the auction; and
• the buyer waives the cooling-off period (in compliance with the Act).

In the ACT the buyer may waive the cooling-off period for the contract if, before entering into the contract:

• the buyer receives legal advice from a lawyer in relation to the effect of the cooling-off period;
• the lawyer signs a certificate that complies with section 17 to that effect; and
• the buyer gives a copy of the certificate to the seller.

How Gavancorp would be decided in the ACT

While the decision in Gavancorp has clarified the difference between put and call options in NSW, currently there is no local precedent as to how the court would interpret "option to buy" in the context of cooling-off periods in the ACT.

The Sale of Residential Property Act does not define "option to buy" and the Act's Explanatory Statement and other extrinsic material do not clarify the intended meaning. Where a case like Gavancorp that turns on the reading of "option to buy" was heard in the ACT, a similar exercise of statutory interpretation may be required.

In this respect Justice Darke's decision in Gavancorp provides a useful indication, particularly as the construction of the relevant sections are similar between the jurisdictions:

• section 66T(d) Conveyancing Act (NSW) – 'the contract is made in consequence of the exercise of an option to purchase the property"; and
• section 6(2)(a) Sale of Residential Property Act (ACT) – "the contract arises from the exercise of an option to buy the property".

It would seem that Justice Darke's interpretation of the ordinary meaning of "option to purchase" in Gavancorp could be similarly applied to the meaning of "option to buy" in the ACT legislation.

However, as set out above the ACT legislation has the additional requirement that the option is either contained within a will or sublease, or that the option period is longer than 60 days. In Gavancorp the put option period was available for 10 business days following the date of expiry of the call option. Although the call option period was open for 18 months from the date of the contract, it does not appear that the put option period would satisfy section 2(a)(ii) requiring that the period for exercise of the option be for longer than 60 days. The put option was also not contained in a will or sublease.

Given this, if Gavancorp was heard in the ACT it is unlikely that the court would have found it necessary to consider whether the put option amounted to an "option to buy" and the cooling off period would have applied in relation to the Sale Contracts.

Position in Queensland

Queensland legislative requirements

In Queensland, section 160(1) of the Property Occupations Act 2014 (Qld) (POA) creates a cooling-off period upon purchase of residential property: 

(1) This part applies to a contract, including a contract granting an option to purchase (a relevant contract):

(a) for the sale of residential property; but

(b) does not include: […]

(iii) a contract (a later contract) formed because of the exercise of an option granted under an earlier contract, if the parties to the later contract are the same as the parties to the earlier contract; […]

Therefore, the cooling-off period provisions in POA will not apply where:

• the parties to a later contract are the same as those to the relevant earlier contract: and
• a "later contract" arises out of the exercise of the option granted under an "earlier contract".

How Gavancorp would be decided in Queensland

The key question in Queensland is whether or not a put option is a "contract" for the purposes of section 160(1)(b)(iii).  The opening paragraph of section 160(1) makes it clear that a contract includes "a contract granting an option to purchase".  Given the Court in Gavancorp considered that a contract entered into by exercise of a put option was not a contract "made in consequence of the exercise of an option to purchase property" there may have been a similar problem for put options in Queensland but for the Queensland Court of Appeal decision in JLF Corporation Pty Ltd v Matos [2016] QCA 355.

That case was about the validity of a contract entered into upon exercise of a put option in light of issues regarding compliance with the POA and warning statements.  The Court noted that a contract formed upon the exercise of a put option is within the terms of the exclusion in section 160(1)(b)(iii) because it would be “a contract… formed because of the exercise of an option granted under an earlier contract, if the parties to the later contract are the same as the parties to the earlier contract”.

While the decision in JLF Corporation provides some comfort that the cooling-off exception applies to put option contracts, to remove any risk of a new approach by the Court following Gavancorp, or a change in the legislation for longer term options, it may be better to obtain a waiver of the cooling-off period under both the put option and the proposed contract at the time the put option is entered into.

Gavancorp also highlights another important issue arising out of the section 160(1)(b)(iii) exclusion in that the parties to the contract must be the same as those in the earlier option deed or agreement.  This means the cooling-off period applies to contracts arising out of the exercise of an option where the parties are not the same, for example under a nomination or assignment.  For this reason, a waiver of the cooling-off period from the party seeking to exercise a call option is usually required as a condition of the exercise.  While this is not necessary where the parties remain the same, under the current legislation, taking the same approach for all parties would also minimise the risk of a future change to the legislation.

Position in Victoria

Victorian legislative requirements

In Victoria, the sale of property is dealt with under the Sale of Land Act 1962 (Vic). Section 31 of that Act gives purchasers rights to cool off under a contract for the sale of land within three clear business days of that contract being entered into unless:

• the land is used primarily for industrial or commercial purposes;
• the land is more than 20 hectares in size and used primarily for farming; or
• one of the stated exceptions applies.

In Victoria, the relevant exceptions to the statutory cooling-off period for residential sale contracts are enlivened where:

• the sale is by publicly advertised auction;
• the property is sold:
  • within 3 clear business days before the day a publicly advertised auction for that property is to be held;
  • ·on the day a publicly advertised auction for that property is held; or
  • within 3 clear business days after the day a publicly advertised auction for that property was held;
• the seller and purchaser previously signed a contract for sale of the same property in substantially the same terms; or
• the purchaser is an estate agent or a corporate body.

Relevantly, section 31 does not contain an exception from the statutory cooling-off regime relating to the exercise of either a put option or a call option. Accordingly, the issue raised in the Gavancorp decision will not arise and an individual (non-corporate) purchaser under a contract of sale for residential land arising consequent upon the exercise of either a put option or a call option will prima facie have a right to cool off.

How Gavancorp would be decided in Victoria

As noted above, the issue raised in the Gavancorp decision would not arise in Victoria given that there is no exception to the statutory cooling-off regime in Victoria for contracts entered into consequent upon the exercise of options (whether they be put options or call options). However, the statutory cooling-off rights would not have applied to BP7, had it contracted to purchase residential land in Victoria and not New South Wales, as BP7 is a corporate body.

Position in WA

There is no cooling-off period for real estate contracts in WA, unless the parties contractually agree to include one.