Revisiting a purchaser’s cooling off rights on exercise of a put option in New South Wales

Vendors who enter into a binding arrangement for the sale of residential property by way of put and call option, and their financiers relying upon such arrangements in construction funding, may be impacted by a recent decision. The NSW Supreme Court allowed a purchaser to rescind contracts arising from the exercise of a put option, essentially because the contracts were not exempt from the provisions of the Conveyancing Act which would ordinarily exclude cooling off rights for the benefit of a purchaser.

Background
The case BP7 Pty Ltd v Gavancorp Pty Ltd [2021] NSW SC 265 is of significant interest to vendors and financiers, where a sale of residential property is effected by way of put and call option.

The case considered whether the cooling off provisions of the Conveyancing Act would apply to a contract arising from the exercise of a put option, meaning that on exercise of the put option by the vendor the purchaser would have the benefit of a cooling off period in which they could rescind the contract and obtain a refund of deposit moneys paid less the prescribed deduction.

The decision confirmed that, in the circumstances of the case, a cooling off period would apply and the purchaser was entitled to rescind even although the intent of the parties was likely that such a right would not exist. For the vendor or financier who is relying on a sale by this methodology, the outcome is troubling.

Facts
The facts of the case are as follows:

• BP7 Pty Ltd entered (BP7, Buyer or Grantee) into 14 contracts (following the exercise of the put option contained in Deeds of Put and Call Option dated 4 September 2018 (Deed)) with one or more of the defendants (vendors) for the purchase of various strata residential lots in two strata schemes.
• The call options were not exercised. The contracts arose pursuant to the exercise of put options by the vendors.
• The put options were exercised in accordance with the Deed within the ‘Put Option Period’ on 5 March 2020.
• As is customary a contract was deemed to be entered between the parties on the terms annexed to the Put and Call Option Deed on the date the put Option was exercised.
• BP7 purported to rescind the contracts pursuant to section 66U of the Conveyancing Act NSW (Act) which gives the purchaser the cooling off period in section 66S and 66T of the Act.
• The question was whether BP7 had validly rescinded the contracts and was it entitled to the refund of the call option fee which had been credited as the deposit less 0.25% of the purchase price.
• No cooling off certificate was provide by any solicitor for BP7.
• On 11 March BP7 purported to rescind the contract entered consequent upon the exercise of the option and sought for the call option fee (less 0.25% of the relevant purchase price) to be refunded to it.

Legal issues
There is a cooling off period for the sale of residential property in accordance with section 66S of the Act. There is no cooling off period if the purchaser gives the vendor a certificate under section 66W of the Act.

Section 66T(d) provides that there is no cooling off period if the contract is made in consequence of the exercise of an option to purchase a property, other than an option which is void under section 66ZG. The section provides:
“There is no cooling off period in relation to a contract for the sale of residential property if– …
(d) the contract is made in consequence of the exercise of an option to purchase the property, other than an option that is void under section 66ZG.“

BP7 argued that the contracts were not of a kind which were exempt from the cooling off provisions under section 66T(d) because they were not made in consequence of the exercise of an option to purchase. Specifically, they said that a contract entered as a consequence of the exercise of a put option was not an option to purchase a property. The BP7 argument was that a put option was not an option to purchase, rather an option to sell and therefore not subject to the exemption in section 66T(d) that there is no cooling off period.

The solicitors for the vendors argued in effect that the contract arising consequent upon exercise of a put option should be exempt from the cooling off provisions which would otherwise apply on entry into a contract for the sale of residential property. The court found in favour of BP7 meaning they were entitled to rescind. The court specifically noted that it is “not the function of the court to seek to overcome what might be thought to be unintended consequences of legislation.”

So how does a vendor deal with this?
A potential solution may be for the vendor to insist on obtaining a section 66w certificate by which the purchaser waives it’s rights to a cooling off period in respect of a contract for sale of residential property at the same time as it obtains a similar certificate in respect of the cooling off rights the purchaser has when it enters into the put and call option in respect of residential property.

It may seem somewhat nonsensical for two certificates to be obtained, one of which is obtained in respect of a contract that never arises because neither option is exercised. However, no vendor or financier will likely want to rely on a covenant from the purchaser to provide such a certificate at the relevant time. This issue will be subject to further discussion and consideration.

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