In a fluctuating market with increased competition, it can be difficult to decide when the timing is ideal to transact and conduct business.

A Put and Call Option Agreement can be a useful tool for Buyers to negotiate and transact on agreed terms, providing the Buyer with a defined right to purchase while giving the Seller greater certainty around price and timeframes.

What is a Put and Call Option Agreement?

A Put and Call Option Agreement is an agreement between a potential Seller and a potential Buyer with regard to the sale or purchase of an asset (e.g. real property in Queensland, business assets, shares, inventory etc.).

Specifically:

1. The Buyer (or grantee) is given the option to require the Seller to sell the asset to them (“the Call Option”); and
2. The Seller (or grantor) is given the option to require the Buyer to purchase the asset (“the Put Option”).

The options are governed pursuant to set timeframes – and time is of the essence as to the parties’ exercise of their option.

While option agreements are frequently used in property development, Buyers should never discount the consequences of the Put Option, which in the early stages of negotiation is often overlooked.

In other words, if the Buyer elects not to exercise the Call Option by the expiry of the period, the Seller can compel the Buyer to purchase the asset by giving notice under the Put Option within the respective period. If the options are not exercised, they expire and generally any fees paid to the Seller are non-refundable.

Why use a Put and Call Option Agreement?

Once the parties’ intentions and the nature of the transaction have been considered, there are several key benefits to entering into an option agreement:

1. Purchase price – the price of the asset is locked for the relevant option period, irrespective of changing market conditions.
2. Transfer duty – postponement of the date on which transfer duty is payable under the resulting contract (though note the dutiable implications of the option agreement itself, discussed further below).
3. Due diligence – the option agreement can be made subject to certain conditions (e.g. satisfactory development approval, due diligence, finance), which allows the Buyer to undertake thorough due diligence on the asset or site (and the transaction generally) prior to deciding whether to exercise the Call Option.
4. Disposal considerations – delaying the disposal of an asset into a later tax year.
5. Nomination – a properly drafted nominee clause allows the grantee (as Buyer) to nominate a substitute purchaser to enter into and complete the resulting contract. The Buyer should obtain accounting, taxation and structuring advice regarding the transaction (particularly with regard to any changing laws and tax environment) so as to benefit from any nominee clause. Seller consent is not required for the nomination; however, this is separate from any novation or assignment clause.
6. Competing offers – the Seller is restricted from selling the asset to a third party while the option agreement is on foot (and careful regard should be given to the existence of any caveat or consent-to-caveat provisions which protect the Buyer’s interest in real property).

Key terms to look for in your agreement

The devil is in the detail. Certain terms, if not carefully drafted, could trigger unintended consequences for the Buyer.

Firstly, if you would like the right to buy the asset (for example, land in Queensland) but don’t want the Seller to be able to compel your purchase, then a Call Option alone is the answer.

Secondly, when entering into the agreement, careful attention should be given to:-

1. Option timeframes

We commonly see conventional conditions like a due diligence clause for 30–90 days, with a development approval condition running concurrently for 6–12 months. Settlement is typically a set timeframe from the exercise of the Call Option.

Review these dates carefully in tandem with your acquisition, funding and taxation objectives.

2. Option fees vs deposit

Option fees may be payable in consideration for the grant of each right (to sell and to purchase). This is carefully distinguished from a “contract deposit”.

The fees may vary depending on the purchase price and other factors (e.g. the length of the option period).

The option fee will not be automatically credited towards the contract deposit or contract price unless this is expressly provided for. However, this also depends on the characterisation and use of the option fee, which may be inconsistent with a contract deposit (which should be refundable).

A payment that is not refundable in any circumstances is arguably consideration, and therefore GST may be payable on the non-refundable amount. Furthermore, the inclusion of the option fee in the deposit or purchase price may result in the option agreement being an instalment contract.

It is essential that these clauses are carefully reviewed by a solicitor to minimise the risk of disputes arising in relation to the use, treatment and application of option fees.

3. Transfer duty, nominee clauses and disclosure

The acquisition of a new right (e.g. over land in Queensland) under an option agreement is a dutiable transaction, as is the surrender of an option over dutiable property.¹ Therefore, the option agreement and the resulting contract will both be assessed for transfer duty, and careful regard should be given to the transacting parties and the consideration paid under each agreement.

If an option agreement states that the option fee forms part of the consideration under the sale contract, a credit for the transfer duty already paid on the option agreement may be claimed when the contract is assessed for transfer duty.²

Further, the Property Law Act 2023 (Qld) may require Sellers of real property to provide renewed disclosure to a nominee purchaser, so agreements should properly account for this.

4. GST treatment

Careful regard should be given to how GST affects the option fees and the resulting contract.

Looking ahead

Put and call option agreements are complex documents that require careful drafting to achieve the intended outcome. Getting expert legal advice before entering into one is essential, particularly for development-focused transactions where the stakes are high and the variables are many.

This article is general information only and doesn’t constitute legal advice. It is not exhaustive, and every transaction is different – obtain independent legal, accounting and taxation advice specific to your circumstances before entering into an option agreement.

1. Section 9, Duties Act 2001 (Qld).
2. Section 23, Duties Act 2001 (Qld).