VIDEO: Property Insights - Land Option Contracts

If you are a property developer looking at purchasing land or a redevelopment opportunity, it can take some time to conduct all of the necessary background research and obtain development approval.  You want to secure the property and ensure it isn’t purchased by anyone else, but you don’t want to lock yourself into the purchase and risk losing money if you can’t get the necessary approvals in time.

Similarly, if you are selling a property and expect to make a large capital gain on the sale, you might want to lock in a buyer but find a way to defer your capital gain to a future date.

When these situations arise, the most common way to secure the sale or purchase of the property is to use land option contracts.

When it comes to land transactions, options are more complex than regular sale of land contracts because the legislation is far more rigid and unforgiving.

Given the complexities involved, it is imperative to have an experienced property law lawyer assisting you with your option paperwork. At Maclarens we have significant experience working with clients on a wide variety of land option contracts and can look after your best interests while we walk you through the process to ensure the transaction runs as smoothly as possible.

So what is an option?

Land option contracts are agreements in which a landowner agrees to sell property at a stipulated exercise price to a potential buyer (usually a developer) within a specified period of time.

An option agreement grants one party the right, but not the obligation, to compel the other party to enter into a sale of land contract.  Under a property option agreement, the vendor and buyer agree to a sale price, the vendor receives an option fee, and, if the option is exercised and the deal goes ahead, the buyer pays the full price when he or she is ready.

Importantly, if the option is not exercised within the specified period the option lapses and the parties are freed from their obligations.

A “call option” gives the purchaser the right to compel the owner of the land to enter into the sale of land contract for a predetermined price.

A “put option” gives the owner of the land the right to compel a buyer to purchase the property at a specific price in the future

Sometimes a call option will be combined with a put option and be called a “put and call option”.

A put and call option is ordinarily drafted so that the call option period is first allowing the buyer an opportunity to call on the contract of sale of land, with the put option period going second allowing the owner of the land to call on the contract of sale of land if the buyer had not yet in acted the contract of sale of land.

Put and call options are commonly used for long-term transactions and can be particularly beneficial for tax and stamp duty reasons.  An experienced property lawyer will be able to provide advice regarding the potential benefits of a put and call option and how best to proceed.

So, what are some of the risks of drafting option agreements?

With a standard contract of sale of land, if the vendor makes an error in the contract and does not for example include one of the prescribed documents as required by the conveyancing sale of land regulation, it is the buyer who will have a limited right of rescission.

Options are different.

In 2016 the Supreme Court carefully analysed the legislation regarding options and concluded that the Vendor could rescind the contract if the paperwork was not compliant: even though they were the ones who Prepared the defective paperwork.

For example a residential sale of land option must not be able to be exercised within the first 42 days of the agreement. If the documents fail to recognise this, the documents will be defective and either party can pull out. Similarly, if the prescribed documents are not attached then either party has rescission rights rather than just the buyer having rescission rights.

More recently, in 2021 the Supreme Court once again analysed the potential pitfalls with option agreements.

At this time, the Supreme Court looked at the legislation and determined that the section 66ZF certificate waiving the cooling off period in a call option, did not waive the cooling off period in the put option.

The consequences of this were horrendous as a purchaser was able to pull out of 13 separate contracts on the basis that they had only given a section 66ZF certificate and not a section 66W certificate as well, meaning they did have a cooling off period for the put option contract.

As you can see land options are a very complex area of law. These transactions often relate to large scale property developments and can involve many millions of dollars.  They can also take up many years of everyone’s lives!

Put and Call Option Agreements are an important tool for any property developer or option seller.

Ensuring your Put and Call Option Agreement is properly drafted will make a big impact on just how effective it is at protecting your needs. This is also what separates a good property development lawyer from an average property lawyer. If you are a developer looking to secure property in advance, or a vendor who has been approached by a developer to sell your property, you need to make sure that you speak to an experienced property lawyer about any option you wish to enter.

Contact the experienced team at Maclarens for more information.