Not every property deal is ready to go to contract straight away. A buyer may need time to investigate the land, seek development approval or arrange finance before committing. A seller may want certainty that the sale will go ahead. A put and call option is a common way to bridge that gap. Understanding how options work can help you protect your position before you sign.

What is a put and call option?

A put and call option allows a landowner and a proposed purchaser to agree on a future sale without immediately entering into a contract for sale.

The arrangement has two parts:

• The purchaser’s call option gives the purchaser the right to require the landowner to sell.
• The landowner’s put option gives the landowner the right to require the purchaser to buy.

Usually, the purchaser has the first opportunity to exercise the call option. If it does not, the landowner may then be able to exercise the put option.

The option deed and the contract for sale

The option deed and the contract for sale are separate documents.

The option deed sets out how and when the options may be exercised, the option fee, the purchase price and any rights the purchaser has during the option period. For example, it may allow the purchaser to inspect the land, carry out investigations or apply for development approval. A copy of the agreed contract for sale is usually attached to the option deed.

When does the sale become binding?

Signing the option deed does not mean the land has been sold. The contract for sale comes into existence only when the call or put option is properly exercised.

The option must be exercised within the required time and in the exact way stated in the deed. Once exercised, the contract becomes binding and the parties must proceed to settlement in accordance with its terms.

Why purchasers use options

Purchasers often use options to secure a property while deciding whether the purchase is suitable. The option period can give the purchaser time to:

• carry out due diligence
• seek development approval
• arrange finance
• secure nearby properties.

Options and development land

Options are often used in relation to land that is being sold for future development. The purchaser pays an option fee to, in effect, take the property off the market while working out what parts of the land can be developed, where the roads should go and what size each lot in the subdivision should be. This allows the purchaser to decide whether the development is commercially viable before committing to the purchase.

Is the option fee refundable?

Usually, the option fee is released to the seller and is not refundable, even if the purchaser does not exercise their option. This is one reason it is important for both parties to understand the terms of the deed before signing.

The way an option is structured can also affect matters such as stamp duty and GST, so these should be considered at the outset.

Get advice before you sign an option deed

Options are very common, but they are also highly technical. A small error in how an option is drafted or exercised can have significant consequences for both buyers and sellers. If you are considering buying or selling under a put and call option, our experienced property law team can review the deed, explain your rights and obligations, and guide you through each step with confidence.

Get in touch to discuss your situation with our experienced team.