Exercising Options? Take Care
Signed an option to buy a property? Make sure you exercise it on time and in the correct manner or risk losing it!
It is commonplace for a property purchase to be commenced with an option to purchase the land for various reasons, such as to allow time for a due diligence, to secure finance or a joint venture partner.
An option is usually formally exercised in accordance with its terms by the grantee giving a formal notice and the parties executing a formal document and signing a formal contract to purchase. In many instances, the terms of the option permit the assignment or novation of the right to exercise the option to a third party. For such a novation of the option to be valid, the option needs to be properly exercised.
In Kai Ling (Australia) Pty Ltd v Rosengreen  NSWCA 3, the court examined the requirements for effective novation of contract by the substitution of party, and whether on the facts of that matter, an option to purchase land was properly novated in favour of the substituted grantee.
On 30 April 2015, Mr Rosengreen granted to Saadie Group Pty Ltd (“Saadie Group”), by deed, an option to purchase certain land.
On 3 May 2015, Mr Michael Saadie presented to Mr Rosengreen a single sheet of paper in the same form as the execution page of the deed of option, save that the grantee was named as Kai Ling (Australia) Pty Ltd (“Kai Ling”) instead of Saadie Group. The sheet already bore the signatures of two persons on behalf of Kai Ling. Mr Michael Saadie (who was the father of the sole director of Saadie Group and was not an officer of Kai Ling) asked Mr Rosengreen to sign the sheet, saying that “we may need to change the name of the grantee but it does not change anything”. Mr Rosengreen signed as requested and gave the sheet back to Mr Michael Saadie. Kai Ling contended that the events of 3 May 2015 had brought about a novation of the option contract so that Kai Ling was the holder of the option in the place of Saadie Group. The primary judge dismissed the proceedings. Kai Ling appealed.
The Court held, dismissing the appeal with costs that:
(1) The evidence did not establish that Mr Michael Saadie acted with the authority of Kai Ling in dealing with Mr Rosengreen on 3 May 2015.
(2) There was no basis for a finding that there had been created among Mr Rosengreen, Saadie Group and Kai Ling the tripartite agreement necessary to effect novation.
(3) Mr Rosengreen and Saadie Group had, in any event, conducted themselves subsequently on the basis that they remained the parties to the option contract.
The Court approved the description of the nature of novation and of the elements that constitute it as found in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338;  HCA 6:
“A novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. It is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract. Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation. The effect of a novation is upon the obligations of both parties to the original, executory, contract. The enquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.”
Further, the element of intention was important: In Vickery v Woods (1952) 85 CLR 336;  HCA 7, Dixon J said that “the crux of novation is intention” in the form of consent by way of tripartite agreement; and that the intention may be express or, importantly for a case such as the present, may be implied from conduct and circumstances.
Kai Ling’s case was that the events of 3 May 2015 gave rise to a tripartite agreement among Mr Rosengreen, Saadie Group and Kai Ling by which Mr Rosengreen accepted undertakings from Kai Ling in place of those originally given to him by Saadie Group and released Saadie Group; Kai Ling gave those undertakings to Mr Rosengreen who in turn renewed in favour of Kai Ling the undertakings he had originally given to Saadie Group; and Saadie Group consented to its release by Mr Rosengreen and in turn released him from the original contract. Kai Ling maintained that all those elements, in immediately operative contractual form, can and should be found to have resulted from the events of 3 May 2015.
The appeal was dismissed as the Court agreed with the primary judge who held that Kai Ling had not established that, on 3 May 2015, all of Mr Rosengreen, Saadie Group and Kai Ling agreed that a new contract between Mr Rosengreen and Kai Ling was substituted for the old contract between Mr Rosengreen and Saadie Group and that the obligations of Mr Rosengreen and Saadie Group created on 30 April 2015 were discharged. His Honour’s’ conclusion was correct for three basic reasons:
1. In the absence of proof that Mr Michael Saadie had acted on 3 May 2015 with the authority of Kai Ling, it was not shown that Mr Rosengreen and Kai Ling had engaged in any conduct of a contractual kind towards one another on that day.
2. Even if there had been contractual conduct as between Mr Rosengreen and Kai Ling on 3 May 2015, the purpose of the contractual conduct was to deal with an apparently foreseen possible future need to “change the name” of the grantee of the option, as distinct from immediately substituting a new grantee.
3. As at 27 November 2015, two of the three relevant parties (Mr Rosengreen and Saadie Group) acted on a clear footing that they alone remained the parties to the option agreement made between them on 30 April 2015.
The case illustrates that the exercise of options where an interest is to be novated is a technical and a formal process that should be treated with care to ensure it is effective to novate the rights granted.
Getting this process and documentation wrong can be costly.
We are experts in property transactions. If you wish to discuss or seek advice on any aspects of options to buy property, or matters arising from this article, please contact us.