Termination of Put and Call Option Deeds, who keeps the fee?

What is a Put and Call Option Deed?

A put and call option allows either party the right to compel the other party to complete the sale and purchase of the property at a specified date. The purchaser has a call option that if exercised would compel the vendor to sell the property at an agreed price however if the call option is not exercised, then the vendor has a put option that compels the purchaser to buy the property at the agreed price.

Put and call option deeds are utilised in the sale of commercial property and/or by property developers in the residential market. Put and call option agreements can be useful for a few reasons:

• delay the obligation to pay transfer duty on the contract (note duty may still be payable on the option deed);

• potentially delay capital gains tax obligations;

• allow the purchaser to nominate another person or entity to enter into the resulting contract of sale without entering into a binding contract for sale to buy the property themselves; and

• allow the purchaser time to obtain development approval or to carry out due diligence on the property.

Termination of a Put and Call Option Deed

Option fees are payable for the consideration of granting the option.

A recent court of appeal decision of J&Z Holding (Aust) Pty Ltd v Vitti Pty Ltd (2024) NSWCA 2 assessed whether an option fee of $2,050,000 (Option Fee) paid by the purchaser under a Put and Call Option (Option Deed) can be credited as a deposit to the purchase price and refunded if the vendor defaults under the Contract for Sale.

The judges unanimously agreed that the wording in both the Option Deed and the Contract for Sale were ‘badly worded’ and contained ‘numerous errors’. The judges ruled in favour of the vendor for the following reasons:

• the Option Fee did not change character when the option was exercised, it remained the vendor’s ‘property’; and

• the ‘looseness in language is manifest’, the payment had the dual characteristics of being an option fee ‘as well as a deemed deposit’ that is payable not a deposit actually paid.

The purchaser could not recover the Option Fee paid because it was a credit in reduction of the purchase price payable by the purchaser at completion of the Contract for Sale.

Key Takeaways

The case highlights the need for careful drafting of put and call option deeds. Parties to a put and call option deed and contract for sale should prevent using the word ‘deposit’ and ‘option fee’ interchangeably. Parties should ensure that they clearly articulate the payment obligations and entitlements under a put and call option deed and contract for sale. For more personalised advice about put and call option deed, please contact our people.

Ron Zucker 0410 590 111

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333

Julia Zou 0426 670 202