Call options over land are well understood commercially
but the legal effect of the documents is the subject of controversy
and clear drafting is crucial.
This is not just a theoretical issue. Of particular significance
is the flexible mechanism by which a nominee can be appointed to
exercise an option. Drafting impacts whether a nominee is duly
appointed and in what capacity the nominee acts, namely: as
principal or agent.
Unclear drafting can also have adverse stamp duty consequences,
as emphasised by the decision of Gzell J in CTI Joint Venture
Company Pty Ltd v. Chief Commissioner of State Revenue  NSWSC
20. The case involved the appointment of a nominee under a call
option over land in New South Wales.
Nomination provisions have a number of commercial advantages.
There may be advantages in a particular company or trustee in a
corporate group owning the relevant land, but there is insufficient
time to decide on this before the option is granted. In some cases
it may be advantageous to use a special purpose vehicle that has
not yet been incorporated or established at the time the option is
granted. These challenges are characteristic of tight commercial
A grantee may have entered into the option to develop the land
but wishes to take the opportunity to get value for an option in
the money without having to take on any development risk.
The grantee may be in financial distress and must get value for
the option either to pay its debts or because it is no longer
viable for the grantee to purchase the land.
The ability to nominate another entity to exercise an option
provides a practical and flexible solution. It is therefore
important from the grantee's perspective to have a nomination
mechanic. The challenge is in determining how the nomination
provision should be drafted.
Also, the drafting of the nomination provision is not the end of
the matter. If a grantee decides to appoint a nominee, the
circumstances and drafting of any arrangement between the grantee
and nominee may also trigger a stamp duty liability.
Relevantly, the key stamp duty drafting issues for options over
land in New South Wales are as follows:
Duty drafting questions
Is the option drafted as a conditional contract for sale?
Is the option drafted as an irrevocable offer?
Nomination if there is no put option
Is the nomination under the option an assignment or
Is the arrangement between the grantee and nominee an assignment
of the option?
Nomination if there is also a put option in
Generally dutiable – both on the option and
the market value of the land
There is a clear intention in the duties legislation in New
South Wales to charge duty on a nomination under a call option if
there is also a put option in place. The opportunity for drafting
is key in where there is only a call option.
In the CTI Joint Venture Company case, the Court had to decide
whether a nomination was an assignment or novation of the option.
If it was an assignment of the option it was liable to transfer
duty (the top marginal rate is 5.5%). The issue was not academic
because it was apparent that the option had value – the
nomination fee was in the order of $60 million. The taxpayer won
that case, but the Court had to undertake an arduous and detailed
review of the documents because there was no clear statement on
either the nature of the option or the character of the
The option is not the only document that needs to be considered
to determine whether duty is payable. The drafting of any agreement
between the grantee and nominee is also key. This is because, even
if the nomination provisions in the option indicate a novation, any
documents entered into between the grantee and nominee may
constitute an assignment of the option. For example, if the grantee
and nominee enter into an agreement to assign the option to, as
well as nominate the nominee then duty will be payable.
In light of the above, the drafting of an option and nomination
documents should address clearly:
whether the option is an irrevocable offer and to whom that
offer is made. An offer can be made to a single person or to a
number or class of persons. Whether an offer is made to a single
person or a number of persons impacts on the nature of a nomination
under the option;
the character of the nomination in the option and nomination
documents. Are they to be assignments, novations or an acceptance
by the nominee of an offer to it; and
the character of any agreement between the grantee and the
nominee. If the agreement assigns the option then duty will be
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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