Conveyancers need to be careful when to choosing to use a Call Option to delay settlement on the purchase of a property. The essence of an option is the fixed time frame for exercise and the forfeiture of the option fee paid if the option is not exercised. In many instances, it might be preferable to use a Contract for Sale with a delayed settlement.

The wrong choice of a Call Option can result in a professional negligence suit, as the decision in North Coast Conveyancing v Bradbury [2015] NSWCA 361 illustrates. This is a decision of the Court of Appeal Supreme Court New South Wales (Basten JA, Leeming JA and Emmett AJA agreeing).

The Facts

The Bradburys retained North Coast Conveyancing to act upon their purchase of a residential property at Telegraph Point, near Port Macquarie.  They negotiated a 12 month delayed settlement period, to allow time to sell their farming property of some 500 acres near Yass, the proceeds of which were to fund the purchase price.

This suited the owners / sellers because they would receive funds - the option fee was $66,750 which was equivalent to a 10% deposit. The funds were to be used 'to complete the subdivision, including fencing and getting electricity onto the second block'. 

A Call Option was entered into with a 12 month option term. The Bradburys were given early occupation at a fee of $350 per week. At the end of the 12 month option term, the property at Yass remained unsold. The option was not exercised, and lapsed.

The Bradburys thought they would have a 6 months extension of time under the Call Option to sell the Yass property. But when they asked the owners for an extension of time to exercise the option, the owners refused. The owners forfeited the option fee.

The Bradburys sued their conveyancer for negligent advice, to recover the option fee paid and interest. They also sued for recompense for the expenditure for improvements upon the property (more than $20,000), but did not proceed with that claim.

The Court of Appeal's analysis

The conveyancer accepted that it had breached its duty of care in two respects:

  1. The conveyancer failed to give adequate advice as to the term of the option before the option was entered into. In particular, that the option term was 12 months, with no extension, and if they allowed the option to lapse, the option fee paid would be forfeited to the owners.
  2. The conveyancer failed to advise that the option should be exercised before the option term ended. Had the option been exercised, it would have placed the Bradburys in a better position to negotiate an extended settlement period, and might have enabled them to recover the option fee, as the deposit under the Contract for Sale, if they were lawfully able to rescind the Contract for Sale. 

The issues before the Court of Appeal were causation. In other words, the Bradburys said that if they had been advised that the option term was 12 months only, with no extensions, then they would not have entered into the option.

The Court did say that 'what was lost was not the full amount of the deposit (plus interest), but the loss of an opportunity'. But the Court was unable to come to any conclusion upon causation because the trial judge did not make critical findings of fact.

Therefore, the Court ordered a re-trial, and directed a mediation take place beforehand.

Our analysis

It was not clear why a Call Option was accepted by the conveyancer to document the purchase, as opposed to a Contract for Sale. 

The Call Option was not suitable to protect the interests of the purchasers because of its rigidity. That is, without a mechanism to extend the term, the option would lapse and the option fee would be forfeited if not exercised within its 12 month term. Also, the option fee was high - it was 10% of the price, and had the 'feel' of a deposit under a Contract for Sale. Therefore, provision should have been made in the option for a partial refund in the event that the option lapsed.

A Contract for Sale would have been preferable to protect the purchasers because of its flexibility. For instance, time needs to be made of the essence before a Contract is rescinded, which provides a basis for extending the settlement time. Also, as the Court pointed out, a Contract would have enabled the purchaser to rely upon the fact that a Positive Covenant attached to the land subdivision, which required a 10,000 litre water supply tank to be installed, and access for a brushfire tanker, as a defect in title giving rise to a right to rescind.

In this case, for these reasons, it was wrong to use a Call Option to document the agreement.