Put and Call Option Agreements Explained

Most buyers only ever sign a standard contract of sale, but if you own land that a developer wants, or you are involved in a larger commercial deal, you may instead be offered a put and call option agreement. It looks and feels different from a normal contract because it does not commit either side to a sale straight away. Instead, it grants rights that can later be turned into a binding contract. Understanding how the two options interact, and what happens if the underlying option is exercised, assigned or left to lapse, matters before you sign anything.

What a Put and Call Option Actually Is

A call option gives the potential buyer the right, but not the obligation, to require the owner to sell the property within an agreed period. A put option works the other way, giving the owner the right to require the buyer to purchase. When both are combined in a single deed, as is standard practice, either party can trigger a binding contract of sale during the option period, which is why these arrangements are usually described together as a put and call option agreement. Neither side is forced into a sale unless one of the options is actually exercised.

Why These Agreements Are Used

Put and call options are common in development deals because they let a buyer lock in the right to purchase a site while they complete due diligence, arrange a development approval, or secure finance, without either side committing to settlement before that work is done. A developer amalgamating several adjoining lots for a larger project might use options over each property so all the sites become available at roughly the same time, rather than risking one owner selling to someone else halfway through the process. For the landowner, the appeal is usually the option fee paid upfront in exchange for tying up the property for the option period, plus certainty about the eventual sale price if the option is exercised.

These structures also turn up in commercial purchase and subdivision transactions more often than in a standard residential sale, though they are not exclusive to development. An off-the-plan purchase can sometimes be structured with an option component as well, particularly in larger staged projects.

What to Look For in the Option Deed

The deed itself needs the same careful reading as any contract of sale, and then some. Key terms include the length of the option period, whether it can be extended, the option fee and whether any part of it is refundable, the process and notice required to exercise either option, and what happens if neither party exercises their option before the deadline. Because the underlying contract of sale is usually attached as a schedule to the option deed, all the usual contract review steps still apply to that attached contract, including title, special conditions and finance terms.

Duty and Tax Implications

Granting an option over land is generally treated as a dutiable transaction in its own right, separate from the duty payable when the underlying sale eventually completes. Revenue NSW, for example, sets out how transfer duty applies to the grant, transfer or exercise of an option over land in that state, including how a genuine, fully refundable security deposit is treated differently from a non-refundable option fee, and how any duty already paid on the option is usually credited against duty on the eventual transfer. The Revenue NSW guidance on transfer duty for options is a useful starting point, though every state assesses options differently and the position can change depending on how the deed is drafted. This is general information, not tax advice, and anyone entering into an option deed should get advice from their accountant and conveyancer about the duty consequences of the specific structure being used.

Assignment and Nomination

Many option deeds allow the buyer to nominate a related entity, or assign the benefit of the option to another buyer, before the option is exercised. This is common in development deals where the entity that negotiates the option is not necessarily the entity that ends up completing the purchase, for tax structuring or joint venture reasons. Nomination and assignment clauses need to be reviewed carefully because they can carry their own duty consequences, and a poorly drafted clause can create disputes about who actually holds the benefit of the option at the relevant time.

Risks Worth Understanding Before You Sign

For a landowner granting an option, the main risk is being tied up for the option period without full certainty the sale will proceed, during which time the property cannot easily be sold to anyone else. For a buyer, the risk is usually financial: an option fee paid to secure the right to buy is often not refundable if the option lapses unexercised, so it needs to be treated as a genuine cost of pursuing the deal rather than a deposit that will always come back. Both sides should also check what happens to any conditions, such as development approval being obtained, and whether failing to meet those conditions affects the option period itself.

Why a Conveyancer Should Review the Deed Before You Sign

Because an option deed effectively pre-negotiates a future contract of sale, any problems in the drafting only become obvious once the option is exercised, at which point renegotiating terms is much harder. Having a conveyancer or solicitor review the deed, the attached contract of sale, and the duty position before you sign gives you a clear picture of what you are actually committing to and what happens in every likely scenario, rather than just the one where everything goes to plan.