How Developers Structure Option Agreements

What Is an Option Agreement?

An option agreement is a contract giving one party the right (but not obligation) to enter into a future property transaction at agreed terms. It's the developer's preferred tool for tying up land where the eventual purchase depends on uncertain events — DA approval, rezoning, pre-sales, or finance.

For the vendor, an option agreement is a way to:

• Lock in a price today
• Receive a non-refundable option fee upfront
• Avoid the risk of the developer walking away from a normal contract
• Convert speculative development upside into cash

The Three Variants

1. Call Option (Developer Buys)

The developer has the call — the right to call (require) the vendor to sell. The vendor is committed if the developer exercises; the developer is not committed unless they exercise.

Vendor protection: limited. The developer can walk away by simply not exercising the call.

When used: where the developer needs to control the site but isn't yet sure they want to proceed (e.g., parallel-tracking multiple sites, awaiting DA outcome).

2. Put Option (Vendor Forces Sale)

The vendor has the put — the right to put the property to the developer (force them to buy). The developer is committed if the vendor exercises; the vendor is not committed.

Vendor protection: maximum. The vendor controls the trigger.

When used: rarely — most developers won't accept the asymmetric risk.

3. Put and Call Option (Both Parties Have Rights)

The most common structure in Brisbane development. The developer has a call option (right to buy during a defined period). The vendor has a put option (right to force sale at the back-end of the period if the developer hasn't exercised the call).

Vendor protection: high. The deal will settle one way or another, unless triggers fail.

When used: standard for development sites with DA-conditional or amalgamation-conditional structures.

Anatomy of a Put and Call Option Agreement

A typical Brisbane put-and-call option deed includes:

The option fee is critical: it's the non-refundable consideration that makes the option binding. If the developer doesn't exercise, the vendor keeps the fee. If they do exercise, the fee is usually deductible from the purchase price.

Worked Example — A Brisbane Site

Suppose you own a 1,500 sqm Mixed Use site in Stones Corner, currently worth $4.5m as-is, and a developer believes it's worth $6m subject to DA for a 30-apartment building.

A put-and-call structure might look like:

• Option fee: $90k (2% of $4.5m), paid on signing, non-refundable
• Call period: 18 months
• Put period: months 16-18
• Strike price: $6m, less the $90k option fee = $5.91m on settlement
• Exercise condition: developer obtains DA for ≥25 apartments
• Settlement: 30 days after exercise

If DA is granted within 18 months, the developer exercises the call and pays $5.91m on settlement. Total proceeds to the vendor: $6m ($90k fee + $5.91m balance).

If DA is not granted, the developer doesn't exercise. At month 18, the vendor exercises the put — but only if a put trigger fires (typically: vendor entitled to put if developer hasn't exercised call by put-period start). The developer is forced to buy at the strike price.

If the put trigger doesn't fire (most options have triggers tied to milestone failure on the developer's side), the deal lapses. The vendor keeps the $90k fee and the property.

Why Vendors Like Options

The economics for the vendor are usually attractive:

1. Cash today: a non-refundable option fee, paid upfront
2. Locked price: protected from market falls
3. Optionality on upside: if the developer succeeds, vendor gets development pricing
4. Fallback: if the developer fails, vendor keeps both the fee and the property
5. No double-cost: if the developer walks, the vendor can list the property the next day

Why Some Vendors Decline Options

The downsides:

1. Property is encumbered: the option binds the title — vendor can't sell to anyone else
2. No certainty of completion: deal may lapse
3. Tax timing complications: option fee is income; final settlement is capital gains
4. Long lock-up period: 18-36 months out of the market
5. Caveat risk: developer's caveat can complicate other dealings

Structuring Tips for Vendors

If you're considering an option agreement:

1. Engage a specialist property lawyer — option law is technical and the standard REIQ contract is not appropriate
2. Negotiate a higher option fee — 2-3% is preferable to 1%, and aligns interests
3. Insist on a put trigger — without one, the developer can walk and your only recourse is to keep the fee
4. Lock in CPI escalation for option periods over 18 months
5. Limit the developer's ability to assign the option to a third party without your consent
6. Right to occupy — if you need to keep living in the home, negotiate a licence to occupy clause

Daniel McCormack

Managing Director, ACRES — Australian Commercial & Residential Group

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