Put and call option definition property
This can be useful where the buyer has not yet determined or established the legal entity that is to acquire the asset. In summary, Option Agreements have a wide range of uses and may offer benefits over a sale contract alone, however there are a number of significant legal and tax issues that will need to be considered. Sale contracts and option agreements each have their limitations and you should always seek advice before entering into an arrangement concerning real property.
We have extensive experience in this area. Skip to content Property Development. What are the Different Options? Put Option — this is where the seller has the right to compel a buyer to buy the Property. Call Option — this is where the buyer has the right to compel a seller to sell the Property.
Put and Call Option — this may grant both parties the right to compel the other to buy or sell the Property. Usually these options would run consecutively — the call option first, and then the put option kicks in after the first option has expired. How does it work? An Option Agreement usually contains two main parts: The body of the Option Agreement, which outlines the terms on which the parties may exercise their option; and The sale contract as an annexure to the Option Agreement. The Contract will often have all details and terms finalised, including the Purchase Price and length of contract.
On exercising an option, both parties will need to sign the agreed sale contract. Option Fees and Deposits The purposes and type of Option Agreement will determine what is a reasonable basis for requiring option fees or deposits to be paid.
For example, an Option Agreement may provide that: The commercial basis for having a Call Option Fee is that the Seller is taking the property off the market for 6 months, without being guaranteed a sale.
Triggers for Options Option Agreements may have set time frames during which a party may exercise its option, or otherwise the option periods can be triggered by certain events for example, the Buyer obtaining a development approval. The beneficial owner is treated as the person making the grant. If the beneficial owner is making taxable supplies above the registration threshold they will have to register for VAT.
They will then need to account for the VAT due on the supply and can claim any input tax that arises, subject to the normal rules. The beneficial owner may also request voluntary registration where the value of taxable supplies is below the registration threshold. However, where the trustees receive the benefit of the proceeds they should register for VAT as a single person if the value of their taxable supplies is above the registration threshold.
Where more than one person owns land or buildings, or receives the benefit of the proceeds from the grant of an interest in land or buildings, we treat them as a single person making a single supply for VAT purposes. If the joint owners are making taxable supplies above the registration threshold they will have to register for VAT as a partnership, subject to the normal rules, even if no legal partnership exists.
The joint owners may also request voluntary registration where the value of taxable supplies is below the registration threshold. If you are obliged to dispose of land or buildings under a compulsory purchase order you are making a supply for VAT purposes. Your supply will generally be exempt, unless you have opted to tax. If at the time of supply you do not know how much you will receive, there will be a tax point each time you receive any payment for the purchase.
If you grant someone the right to purchase an interest in your land or building within a specified time you are making a supply of an interest in land.
The liability of your supply will be whatever the liability of the land or building would be if supplied at that time. The supply, made by the prospective purchaser, is not one of an interest in land and therefore falls outside the scope of the exemption for land supplies. There are three common ways in which a landlord can recover rent from a third party. If you do receive payment from a third party you should still address any related VAT invoice to your tenant, as your supply is still to him and not the third party.
If a tenant sub-lets land or buildings to a third party and the tenant defaults on payment of rent to the landlord, the landlord can issue a notice under the Law of Distress Amendment Act and collect the rent arrears from the third party. In turn the third party can reduce his rent payable to the tenant by the amount he has paid to the landlord.
If this happens the supply chain remains the same; there is a supply of the land or building from the landlord to the tenant and a supply of the land or building from the tenant to the third party. If the landlord has opted to tax, any tax invoice must be issued to the tenant. A surety or guarantor is normally party to any agreement between the landlord and the tenant. However, there is no supply by the landlord to the surety or guarantor.
The surety or guarantor will not be able to recover any tax paid. Landlords have, under common law, had the historic right to recover unpaid rent from former tenants and their guarantors and sureties as well as from current tenants, their guarantors and sureties. This right was regulated more tightly following the Act but the principle is the same, i. However, the Act does permit a former tenant who settles the outstanding debt to apply for an intermediary lease.
If you transfer or dispose of land or buildings that form part of the assets of your business free of charge you will still be making a supply. Where you have previously been eligible for input tax recovery in respect of the land or building whether on the purchase or on the construction services when the building was built or substantially reconstructed then its free disposal or transfer may trigger an output tax charge.
The value of such charges is calculated by reference to the market value of the property at the time of the disposal or transfer. Your supply will be standard rated, for example, if you are disposing of the freehold of a new commercial building or if you have opted to tax and the option is not disapplied.
For further information, see section 3. Where you intend to put a building to private or non-business use and the acquisition, construction, reconstruction or refurbishment costs have been incurred on or after 1 January you must only recover that proportion of the VAT that relates to your taxable business supplies.
It is important that when considering the appropriate apportionment that you take into account all the intended future use over the economic life of the building normally reckoned as ten years, in line with the Capital Goods Scheme CGS. If the acquisition, construction, reconstruction or refurbishment costs incurred on or after 1 January are assets of the business and create a capital item, i.
If you are transferring land or buildings that are capital items for the purposes of the capital goods scheme, you should make the purchaser aware of any capital goods scheme adjustments you have made. You will need to provide the purchaser with sufficient information to enable them to carry out any future adjustments under the scheme that might be necessary.
If you cancel your VAT registration because you are closing down your business or trading below the registration limits, some or all of the assets on hand including land and buildings may be treated as supplied by you when you deregister.
You will have to account for VAT on these assets if the following conditions are met:. If the land or buildings are capital items for the purposes of the capital goods scheme you may need to make a final adjustment under the scheme. If you are a farmer operating under the Agricultural Flat Rate Scheme and can produce a certificate of evidence to that effect, then this paragraph does not apply to you.
If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they are being supplied.
The input tax you incur on the construction of such works is attributable to your supplies of the development that is served by the road or sewer. For example, if your supplies of the land or buildings are taxable supplies, such as new houses, then the input tax you incur on constructing the roads and sewers is recoverable according to the normal rules.
Where you make exempt supplies you will not be able to recover all your input tax. As a developer of a private housing or industrial estate you may transfer, for a nominal monetary consideration or peppercorn, the basic amenities of estate roads, footpaths, communal parking and open space to a management company that will maintain them. This is not a supply, but the input tax you incurred on the building costs is attributable to the supplies of the land and buildings of the development itself.
The money obtained can be used to support development by funding infrastructure that the council, local communities and neighbourhoods want. It is a levy charged upon developers. CIL is not consideration for any supplies by local authorities to developers and consequently it is outside the scope of VAT.
Developers can elect not to pay money to the local authority but instead to transfer an asset such as land to the authority. Again this is not consideration for any supplies by the local authority to the developer.
However, the transfer of the asset can result in a supply of it by the developer to the local authority. As a developer you may provide many other types of goods and services free, or for a purely nominal charge, to the local or other authority under section of the Town and Country Planning Act or other similar agreements. Such goods and services may include buildings such as community centres or schools, amenity land or civil engineering works.
Alternatively, they may be in the form of services such as an agreement to construct something on land already owned by the authority or a third party. Any such provision of goods or services is not a supply for a consideration to the local or other authority, or to the third party. Consequently, no VAT is chargeable by you on the handing over of the land or building or the completion of the works. However, the input tax you incur is attributable to your supplies of land and buildings on the development for which the planning permission was given.
When a development is undertaken there may need to be road improvements. These road improvements will normally be undertaken in one of the following ways:. The Highways Agency will arrange for the works to be carried out.
Under section of the Highways Act , the Highways Agency may then recover from you, the developer, the costs incurred by the Highways Agency on certain road improvements. These costs will normally include irrecoverable VAT that has been charged to the Highways Agency by a contractor.
As there is no supply between the Highways Agency and yourself, but merely a reimbursement by you of VAT inclusive costs, you are not entitled to recover the VAT element as your input tax. If you, the developer, are permitted by the Highways Agency to carry out the works at your own cost, then there is no supply by you of the works to the Highways Agency. This is because you do not receive any consideration for the works from the Highways Agency.
However you may recover the input tax as attributable to your own ultimate supply of land and buildings from the development. For example, if the development is a taxable supply you can recover all the input tax.
You may be required to pay sums of money, or sums of money in addition to buildings or works, to a local authority or a third party under section of the Town and Country Planning Act and other similar agreements.
You may, for example, pay money towards the future maintenance of a building or land, or as a contribution towards improvement of the infrastructure. Such sums are not consideration for taxable supplies to you by the local authority or by the third party.
If you mortgage your property, as security for borrowing money, you are not making a supply of that property. If a financial institution, or any other person, sells land or buildings belonging to you in satisfaction of a debt owed by you, you are making a supply.
If tax is due on that supply, the person selling the land or buildings is responsible for accounting for that VAT please see paragraph 9. If a person obtains a Court Order and forecloses on land or buildings belonging to you, there is a supply by you to that person of the land or building. However, it is possible that the land or building could be treated as an asset of a business that is transferred as a going concern. The person foreclosing can opt to tax.
If the land or building is subsequently sold the person foreclosing makes the supply. A lender may repossess land or buildings, or appoint an LPA receiver without foreclosing, where the land and buildings are rented out to tenants.
If the rental income received by the lender is used to reduce the debt you owe, or to make interest payments due in respect of that debt, a supply by you to the tenant takes place. If the supply is standard-rated the lender or LPA receiver should account for VAT on your behalf please see paragraph 9. There is no supply for VAT purposes by a prospective tenant if you pay that prospective tenant for doing no more than entering into a lease with you.
However, if you pay an inducement to a prospective tenant who, in return, provides a benefit to you other than that customarily derived from entering the lease, then there is a supply. The VAT liability of the supply will depend on the nature of the benefits provided, which could for example involve undertaking improvements or repairs to the building.
Where the tenant acts as an anchor tenant in order to attract other tenants their supply will always be a standard rated supply. In such cases, the input tax you incur on the payment to the tenant is attributable to your lettings of the building and will generally be recoverable where you have opted to tax see notice A.
An inducement paid by a tenant to a third party to accept the assignment of a lease is not consideration for the assignment or grant but is a standard-rated supply of services by the third party. Rent is the periodic payment made by a tenant to a landlord and is normally the subject of a written agreement.
Rent payments can be non-monetary, and can include costs incurred by the landlord under the agreement which are recharged to the tenant. This will include items such as service charges and rates where the landlord is the rateable person. If you grant a rent-free period or a rental reduction to a tenant who agrees to do something in return, then you have both made and received a supply.
Both supplies will be of equal value, but will not necessarily have the same VAT liability. If nothing is done or received in return for the rent-free period then, so far as that period is concerned, no supply has been made.
If you pay a tenant or licensee to surrender any interest in, right over or licence to occupy land that is a supply to you by the tenant. That supply is generally exempt, unless the tenant has opted to tax. Some variations to leases simply alter one or more of the terms, such as permitting the building to be used for a purpose that was originally prohibited.
Other variations to a lease are more fundamental, such as an extension to the length of the tenancy or an alteration to the demised area. Where the latter occurs the old lease is treated as surrendered and a new lease granted in its place. Any consideration you receive for either type of variation is exempt, unless you have opted to tax. Restrictive covenants are placed on land to control its use. A typical restrictive covenant is one that forbids any development of the land.
If you agree to give up a restrictive covenant in return for payment your supply will be exempt, unless you have opted to tax the land the restrictive covenant applied to or the supply of the land is itself excluded from exemption see paragraph 3. Examples of items for which statutory compensation is given on the tenant quitting property are milk quotas left behind, manurial values and standing crops. Where you and the tenant agree that the tenant will leave in return for additional payment, the payment you make will be consideration for the tenant surrendering the lease and will generally be exempt, unless the tenant has opted to tax.
Generally any payment that you, as a prospective tenant, have to make in order to obtain the grant of a lease or licence is part consideration for that grant. Whether the payment attracts VAT depends on whether the landlord has opted to tax. Many leases provide that an existing tenant shall make good any legal or other advisory costs incurred by the landlord as a result of the tenant exercising rights already granted under the lease.
As a result the landlord may incur legal or surveyors fees. In these circumstances the reimbursement payments by the tenant to the landlord are consideration for the principal supply of the lease. If you have to make a payment to your landlord to obtain some additional right, it is consideration for the variation of the lease and is exempt unless the landlord has opted to tax.
When a tenanted building is sold or a lease is assigned mid-way through a rent period, an adjustment is normally made to the consideration at the point of completion.
These rent adjustments are not consideration for any supply and are outside the scope of VAT. For VAT purposes the consideration for the sale of the building or the assignment of the lease is the full value of the supply before any rent adjustment is made. Where arrears of rent become due following a rent review output tax should normally be accounted for on the payment where an option to tax has been made, even if the arrears relate to period before the option to tax took effect.
See Notice A Opting to tax land and buildings. The general rule is that payment becomes consideration for a supply for VAT purposes when there is a direct link between what is paid and goods or services supplied in return for it. By contrast a payment freely given, with nothing supplied in return, is not consideration for a supply.
Where, for example, a landlord contributes toward the cost borne by a tenant of fitting out the demised premises, it is necessary to determine who is responsible for that work. If, as is quite often the case, it is the tenant then the contribution by the landlord is unlikely to be consideration for a supply by the tenant, unless there is some other benefit received in return for it.
For these purposes, the fact that the landlord may be able to claim Plant and Machinery Allowance in relation to the contribution paid is not of itself such a benefit received in return for that payment.
The terms of a lease may provide for the landlord to recover from tenants, at or near the termination of the lease, an amount to cover the cost of restoring the property to its original condition. If, as a landlord, you carry out refurbishment works following receipt of a dilapidation payment, the input tax you incur in carrying out those works should be treated as follows:.
It is common for leases between landlords and tenants to lay down that the landlord shall provide, and the tenants shall pay for, the upkeep of the building as a whole. The lease may provide for an inclusive rental, or it may require the tenants to contribute by means of a charge additional to the basic rent.
These charges are generally referred to as service charges, maintenance charges or additional rent. The services provided may include:. If, as a landlord or licensor, you are obliged under the terms of the lease to provide services similar to those above, the service charges follow the same VAT liability as the premium or rents payable under the lease or licence normally exempt, unless you have opted to tax.
If you provide services to someone who owns the freehold of a building and there are no continuing supplies of accommodation to which the service charge can be linked, your charge is always standard-rated. If you provide services to the occupants of holiday accommodation your supply is standard-rated. If you are responsible for providing services to the occupants of a building in which you have no interest, your services will always be standard-rated subject to the VAT registration threshold as they are not part of the supply of the accommodation itself.
Your supply is still standard-rated. If you collect payments from the other occupants for their share of the rent, rates and other costs, and you pass the full amount of these to the landlord, you should treat the sums collected from the other occupants as disbursements.
As a landlord you may make charges to your tenants for items other than general services. These charges tend to fall into three categories:. If you the landlord are the policyholder or rateable person, any payment for insurance or rates made by the tenants is further payment for the main supply of accommodation. If the phone account is in your name, any charge you make to tenants is payment for a standard-rated supply by you.
This includes the cost of calls, installation and rental. If the account is in the name of the tenant, but you pay the bill, the recovery of this from the tenant is a disbursement. If you make a charge under the terms of the lease to tenants for the use of facilities that form a common part of the premises, such as reception and switchboard services, any payment you receive will be further consideration for the main supply of accommodation. If you make a separate charge for office services, such as typing and photocopying, this is a separate standard-rated supply.
However, if under the terms of the lease, there is one inclusive charge for office services and accommodation together, and the tenants are expected to pay for the services regardless of whether they actually use them, the liability of the services will follow that of the main supply of office accommodation. Fixtures and fittings are regarded as part of the overall supply of the accommodation and any charges for them are normally included in the rent.
However if you provide fixtures and fittings under a separate agreement your supply will normally be standard-rated. If you make a separate charge for un-metered supplies of gas and electricity used by tenants, it should be treated as further payment for the main supply of accommodation. However, where you operate a secondary meter, the charges to the tenants for the gas and electricity they use are consideration for separate supplies of fuel and power.
These supplies will be standard-rated unless the fuel supplied is of a de-minimis quantity, in which case the supply will be subject to the reduced rate. The charge raised by you to the occupants for managing the development as a whole, and administering the collection of service charges and so on, is further payment for the main supply of accommodation.
If the charges for the use of recreational facilities are compulsory, irrespective of whether the tenant uses the facilities, then the liability will follow the main supply of accommodation. If you are the owner or tenant of the premises and you do not grant other occupants an exempt licence to occupy land see paragraphs 2. This applies even if you are simply passing on an appropriate share of your costs.
You can treat such payments as disbursements. Service charges relating to the upkeep of common areas of an estate of dwellings, or the common areas of a multi-occupied dwelling, are exempt from VAT so long as:.
This is because the service charge is treated as ancillary to the main supply of exempt domestic accommodation. If you provide services to freehold owners of dwellings your supply is taxable because there is no supply of domestic accommodation to link those services to. However this is unfair to freehold owners, especially those living on the same estate as leaseholders.
To address this inequity an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings toward the:. Where you apply the concession and treat the service charges as exempt your right to recover the associated input tax may be restricted. This may also have an impact on your eligibility to remain registered for VAT.
If the landlord makes a separate charge for un-metered supplies of gas and electricity used by occupants, it should be treated as further payment for the main supply of exempt domestic accommodation. However, if the landlord operates a secondary credit meter, the charges to the occupants for the gas and electricity they use are separate supplies of fuel and power subject to VAT at the reduced rate.
Optional services supplied personally to occupants, such as shopping, carpet cleaning or painting a private flat, are standard-rated. The charge made by the landlord to the occupants for managing the estate and collecting the service charges is further payment for the main supply of exempt domestic accommodation. A managing agent acting on behalf of a landlord can treat the mandatory service charges to occupants as exempt, providing the agent invoices and collects the service charges directly from the occupants.
Occupants of an estate may form a tenant-controlled management company. Sometimes that company will purchase the freehold of the estate and engage a service provider to maintain the common areas and provide any necessary warden or housekeepers. Providing the tenant-controlled management company is bound by the terms of the lease to maintain the common areas of the estate or provide a warden , and the occupants are invoiced by and pay the service charges directly to the service provider the service charges may still be treated as exempt.
Until the Commonhold and Leasehold Reform Act English law recognised only two forms of property ownership. In addition to introducing a new alternative to leasehold as a means of property ownership the Act of also reformed residential leasehold law.
Commonhold will be available for residential, commercial or mixed use developments. The reforms are intended to give unit-holders the security of freehold ownership by addressing some of the drawbacks of leasehold such as the diminishing value of leases. They also seek to overcome the difficulties in enforcing positive obligations, such as such as an obligation to keep property in good repair, in freehold land.
A commonhold may only be registered upon the agreement of all those with a prescribed interest in the property. The developer of a property, or a landlord, may enter into an agreement with existing occupants or future identified unit-holders to set up a commonhold. This is most likely to happen where a leasehold development is being converted to a commonhold. Alternatively, property may be registered as a commonhold in advance of the future unit-holders being identified.
The developer will then sell the units in the same way as any other freehold property. The unit-holders acquire a freehold interest in a specific unit. It is the commonhold association, a type of management company, that owns the freehold of the common parts. The members of the commonhold association will be unit-holders. However, where a unit is jointly owned, only one of the joint owners will become a member. The commonhold association is responsible for the upkeep of the common parts and will provide an estimate of annual expenditure, the commonhold assessment.
A commonhold unit is a freehold in a property that follows the normal VAT accounting rules. These rules are set out in Section 3. The developer of a qualifying building that is a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential or a relevant charitable purpose may zero-rate the first supply of a commonhold unit in the property if the normal conditions for zero-rating are met see Notice , Buildings and Construction. In setting up a commonhold there are 3 basic forms of transaction.
These are set out below together with their VAT treatment. For both residential and commercial property, the freehold interest in the common parts is vested in the commonhold association.
Normally there will be no consideration attributed to the disposal but it is a supply for VAT purposes and there will be a requirement to charge VAT if the conditions of paragraph 7. This may occur when the proprietors of existing freehold properties apply for commonhold status because they have communal facilities such as shared roadways, paths or services etc. This could entail some or all of the existing freeholders giving up title to areas of their land constituting what are to become the common parts.
Any payment made to a former freeholder is likely to be seen as consideration for the surrender of the freehold interest. The liability being as follows:.
Leasehold conversions will generally occur in developments that already have existing leaseholders in place prior to the establishment of the commonhold. Following agreement between the interested parties and the land being registered as commonhold all pre-existing leases are extinguished. Where the former leaseholder gains ownership of a commonhold unit in the same property that was demised under the lease, the only supply is that of the freehold. The lease ceases to have legal effect and there is no supply of it for VAT purposes.
However when the lease is extinguished and the freehold is transferred to some other person, or the freehold units have different boundaries from the previous leasehold premises, for VAT purposes there is a supply of a surrender of an interest in the property by the former leaseholder. Where the leaseholder pays a consideration for the freehold interest in the unit he acquires, the liability for.
Charges can be levied by the commonhold association to pay for the upkeep of common parts. These charges are referred to as commonhold assessments and reserve fund levies and are treated in the same way as service charges to a long leaseholder or a non-commonhold freeholder. Alternatively, the commonhold association may engage a service provider to maintain the common parts of an estate.
In this case its position is akin to that of a tenant-controlled management company as explained in paragraph As the commonhold association is obliged under the commonhold community statement to maintain the common parts, then providing the unit-holders are invoiced by and pay the service charges directly to the service provider, the charges raised under the commonhold assessment may still be treated as exempt.
This part of the legislation is generally directed at residential leaseholders in a multi-occupancy building. It amends the Leasehold Reform Housing and Urban Development Act which permitted leaseholders to acquire the freehold interest in a property through collective enfranchisement and to extend the length of their individual leases. Amendments are also made to other legislation including the Landlord and Tenant Act , which introduced rights for tenants in relation to the payment of service charges.
These include various provisions concerning the rights to collective enfranchisement. The freehold title of the property is vested in a nominee that must be a qualifying Right to Enfranchisement Company RTE.