A put and call option agreement in property can be a powerful tool in the hands of a sophisticated buyer.

But how do put and call option agreements work in practice, what are the legal foundations that underpin them, and when should you consider using one?

What is an Option in General Terms?

An option represents a buyer's right to purchase property at a predetermined price within a specified timeframe. The buyer pays a fee to secure this exclusive right while the seller cannot market the property to others during the option period.

What Do the “Put” and “Call” Options Mean?

These mechanisms work as complementary protections:

• Call Option: Grants the buyer the right to “call” for the property sale. If the buyer decides to exercise the option within the agreed timeframe, the seller is obligated to sell at the agreed price. If the buyer decides not to exercise the option, they forfeit the option fee but have no further obligation.
• Put Option: Allows the seller to force the buyer to complete the purchase if the call option remains unexercised. This provides the seller with certainty that the transaction will proceed one way or another.

The buyer typically enjoys the longer timeframe to decide, while the seller gains protection against indefinite uncertainty through the put mechanism.

When Would You Use a Put and Call Option Agreement?

Key advantages for buyers include:

1. Securing favourable terms while arranging financing or development approvals;
2. Conducting thorough due diligence on development potential;
3. Locking in current pricing before market appreciation occurs;
4. Nominating alternate purchasers upon exercise.

Put and call option agreements are commonly used in property development contexts, where timing, planning approvals, and financing all need to align before a buyer can commit to a full purchase.

Some Tips for Property Buyers

Critical considerations when entering a put and call option agreement include:

1. Establish unambiguous, calculable option periods with precise dates;
2. Create straightforward exercise procedures with stable contact information;
3. Allocate separate periods for due diligence and development approval processes;
4. Secure property access and necessary information for assessment purposes;
5. Include nomination clauses permitting third-party buyer designation;
6. Clarify risk allocation regarding property damage and insurance obligations.

A Practical Example

Consider a scenario where Joe (buyer) and Suzie (seller) enter a put and call option agreement:

• $15,000 option fee with $1,000,000 + GST purchase price;
• 60-day due diligence window with 50% fee refund possibility;
• 120-day development approval period;
• Unrestricted site access for testing;
• Seller bears property risk and insurance;
• 180-day total option window with 14-day put exercise window thereafter;
• Contract execution via lawyer delivery.

This structure gives Joe time to assess the development potential and secure approvals, while Suzie knows that the transaction will eventually proceed through the put option if Joe doesn't exercise his call.

Don't Do it Without Legal Input

Put and call option agreements are sophisticated instruments 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.