Put and Call Options in NSW: A Complete Guide for Vendors and Investors

What Are Put and Call Options?

A put and call option is a legal arrangement used in NSW property transactions where the vendor and purchaser each hold the right — but not the obligation — to compel the other party to complete a sale. Put and call options are commonly used in development deals where a purchaser (typically a developer) needs time to assess feasibility, obtain approvals, or secure finance before committing to purchase.

CLS Legal has been advising property vendors, developers, and investors in NSW since 2010.

Understanding how these options work — and where the risks sit — is essential before you sign anything.

Call Options

How a Call Option Works

A call option is granted by the vendor (the “grantor”) to a potential purchaser (the “grantee”) in exchange for an agreed option fee. That fee is usually released to the vendor when the option is granted.

As part of the arrangement, the parties agree on the price the grantee will pay if they choose to exercise the option and proceed with the purchase. A full contract for the sale of land must be attached to the call option so that the terms of any eventual sale are agreed from the outset.

Time Is of the Essence

For the purchaser, the deadline to exercise the option is absolute. A failure to exercise an option on its terms or on time is one of the very few things in property law that cannot be remedied. If the option expires at 3pm on a given day and the grantee is five minutes late, the option is gone. The vendor is then free to renegotiate terms entirely.

Extension Provisions

Call options often allow the grantee to extend the option period by paying an additional fee to the grantor. In practice, assume the developer will extend unless the project looks financially unviable or development consent is clearly not going to be granted.

Structure your extension fee to be meaningful. Set it at a level that discourages casual extensions — the developer should only extend when the project genuinely looks viable and they have what is often called “imminent certainty” regarding development approval.

Who Uses Call Options and Why?

The grantee is most often a property developer looking to add value — whether by obtaining development consent on a single site or as part of a broader site amalgamation.

Benefits to the vendor:

The price a developer is willing to pay is typically higher than the current market value of the property in its existing state.
You receive the option fee upfront.

Benefits to the developer:

They are only committed to paying the option fee. If they cannot obtain development consent or add value, they are not obligated to proceed.
They lock in a known land cost — the only variable in a development feasibility they can control.
They secure a commitment from the vendor while negotiating with other landowners.
They have the option period to assess economic viability without taking on holding costs.
Holding costs (rates, financing, land tax) do not become their problem until after settlement.
Stamp duty is not payable until three months after contracts are exchanged, effectively deferring up to 5.5% of the purchase cost.

A Critical Warning for Vendors

You do not have a binding agreement for the sale of your property until contracts are exchanged. If you grant a call option, do not commit to any purchase or other arrangement that depends on receiving the sale proceeds — until the option is exercised and contracts have been exchanged.

How Developers Assess Feasibility

Development is a numbers game. When a developer prepares a feasibility study, they calculate the total cost of the project against the expected return. The cost stack typically includes:

The purchase price of the land
Acquisition costs — stamp duty, legal fees, and other transaction costs
Development approval costs — architects, town planners, engineers, and consultants. These costs range from approximately $250,000 for a small site to $1 million or more for larger developments, increasing with the number of stages and complexity of the site
Holding costs from settlement through to completion and sale — financing costs, council rates, land tax, and similar outgoings
Council contributions — including Section 7.11 contributions (formerly Section 94) for future infrastructure and affordable housing
Construction costs
Selling costs — agents’ fees, marketing fees, legal fees
Taxes — capital gains tax and GST. The sale of new residential developments is subject to GST. Because purchasers typically resist paying GST separately, new developments are generally sold at a GST-inclusive price.

Developers target approximately 20% profit on a project. The reason that margin needs to be that high is that real-world outcomes rarely match feasibility projections — there are too many variables.

If you are a vendor dealing with a developer and want to understand whether their offer reflects genuine feasibility, call CLS Legal on (02) 9279 0919 before you sign.

What Call Option Agreements Cover

A call option agreement typically includes:

An obligation on the vendor to sign all documents necessary for the developer to obtain the required approvals
A right for the developer and their consultants to have reasonable access to the property to carry out surveys and tests for the development application or feasibility study

Access Rights: Proceed With Care

If the developer wants to carry out more invasive testing — such as digging test holes for an environmental or geotechnical report — do not agree unless you are fully indemnified against any damage or claim that results from that work.

More importantly: do not give the developer any right to carry out works on the property before settlement. Surveys and pre-DA enquiries are acceptable. Occupation or physical works are not.

This is not a theoretical concern. CLS Legal acted for the successful defendant in J Cummins Pty Limited v F & D Bonaccorso Pty Limited [2014] NSWSC 1064, a Supreme Court case arising directly from a vendor granting a developer access to refurbish a property during the option period. CLS Legal did not act for the landowner when the option was originally granted.

Intellectual Property in the Development Application

If the developer covers the whole potential development site, include a clause stating that if the option is not exercised, all of the developer’s rights — including copyright in the development application and associated reports — transfer to the vendor.

If a developer obtains consent but then does not exercise their option, the consent remains in place until it expires (typically five years after it is granted). That consented property can then be sold, though vendors should be aware of any intellectual property issues attached to the DA documentation.

Optional Clauses to Consider

A call option can include a range of other provisions, such as:

The purchase price increases if the developer’s consent results in additional floor space ratio (FSR)
The purchase price is indexed to reflect percentage increases in property values during the option period, preserving the vendor’s buying power
The purchase price includes the vendor acquiring a property or properties in the completed development (note: this type of arrangement carries significant complexity and risk)
The developer is required to pay the vendor’s legal costs
Where a property is being sold as a development site, the vendor has the right to remove existing structures or items (for example, established plants) on completion
The vendor may remain in occupation after settlement until the property is required for demolition
Any other specific conditions addressing the vendor’s concerns

A Note on Developer Risk Appetite

All developers have a risk appetite. The most disciplined ones follow a clear set of rules and rarely deviate from them. Be wary of a developer who offers any price without apparent concern for feasibility. If they do not seem worried about the numbers, they may be gambling on price growth rather than building to a genuine development margin. The facts in the Bonaccorso case referred to above are instructive reading on this point.

Put Options

How a Put Option Works

A put option is the mechanism that makes a combined put and call option arrangement binding on both parties while preserving the stamp duty deferral benefit.

The put option is granted in the same agreement as the call option. A separate nominal put option fee must be paid — and it is important that this fee is recorded as a distinct amount, separate from the call option fee.

The put option is granted on the same contract terms as the call option.

Timing

The put option period begins when the call option period expires. It is typically short.

During the put option period, the vendor can exercise the put option, which requires the purchaser to enter into and complete the contract.

Effect of the Combined Structure

A put and call option arrangement is as effective as an unconditional contract for the sale of property. The key difference is that the vendor retains the choice of whether to “put” the purchaser — that is, require them to complete. A vendor would typically do this in a rising market where they believe a subsequent sale might achieve a better price.

If the vendor chooses not to exercise the put option, they are entitled to retain the call option fee already paid by the purchaser.