Option Agreements

What is an Option Agreement?

An option agreement is an agreement between two parties regarding an option to buy and/or sell a property. Generally, option agreements contain both put and call options, which involves:

  1. The owner of a property (the Grantor) granting the other party (the Grantee) an option to purchase the property (a Call Option) for a specified timeframe; and
  2. The Grantee giving the Grantor the option to sell the property to the Grantee (a Put Option) for a specified timeframe.

Neither party is bound to exercise their respective option, and the option exercise periods can be consecutive, overlapping or even simultaneous.

Consideration is paid for an option, however it is often nominal, with the intention of limiting the amount of transfer duty payable before a Contract of Sale is entered into.

Requirements for Option Agreements

An option agreement must be made in writing, signed by all parties, and have certainty. This means that the essential terms of the agreement must be clear and the agreement must:

  1. Identify the parties;
  2. Identify the option period;
  3. Identify the option fee and purchase price; and
  4. Identify the property and attach a copy of the proposed contract of sale.


While an option agreement will generally provide for both a put and a call option, if there is no put option, the Grantor will not have certainty as to whether they will secure a sale contract as the Grantee may decide not to exercise the call option. Once an option agreement is entered into, the Grantor effectively takes their property off the market for a period of time. Therefore, an important consideration for a Grantor of an option can be security.

An example of security is where an option agreement provides for multiple security deposits to be paid by the Grantee, such as upon the satisfaction of conditions. This may be an effective way to ensure the Grantor has sufficient security, and the Grantee still avoids large one-off payments towards the start of a project.

However, the parties should consider the transfer duty implications and the possibility that the option agreement could be deemed to be an instalment contract under s71 of the Property Law Act 1974 (Qld). If a deposit is to be non-refundable, it may be consideration and therefore increase the transfer duty payable.

Extending time under an option

When a Grantee is considering time frames for projects such as property developments, option agreements can provide flexibility through provisions which specifically provide for extensions of time. An example of this is where a Grantee may require an extension of a due date for a condition under the option agreement (e.g. due diligence). Option agreements can be drafted to provide that a Grantee may by notice in writing to the Grantor extend the due date by a set period. As mentioned above, the Grantor may require security such as an additional deposit payable upon any extension.

Nominee clauses

Option agreements may contain a nominee clause, which allows a Grantee to nominate an alternative purchaser when exercising the option. This effectively is a way to enable purchasers to secure the purchase of land at an agreed price, without having first finalised their purchasing entity. It can also allow a Grantee to find an alternative buyer, however care must be taken when drafting such a provision to ensure the ultimate purchasing entity does not acquire rights under the option agreement, as this would amount to an assignment and result in double transfer duty implications.

As noted above, the Grantor of an option will generally want to ensure that they have certainty as to whether they will ultimately secure a Contract of Sale. This is the reason that most option agreements contain both a call option and a put option. However, where an option agreement contains a nominee clause allowing the Grantee to nominate a purchasing entity other than themselves when they exercise the option, this can also raise questions about whether the Grantor is certain to ultimately secure a sale.

The Grantor should not only consider the implications of the nominated buyer defaulting under the Contract, but also what will happen if the Contract is conditional and the buyer validly terminates the Contract. In either case, the Grantor will likely not have any claim against the Grantee unless the option agreement contains such provisions.

The Grantor could consider:

  1. Drafting the option agreement to provide that the Grantee guarantees performance of a Nominee under the Contract of Sale entered into; or
  2. Drafting the option agreement to provide that the put option expires the later of a nominated date, or after a specified period of time following the termination of or buyer’s default under the nominee Contract.

Transfer Duty Implications

A call option is the acquisition of a new right under the Duties Act 2001, and a put and call option agreement relating to dutiable property (e.g. land in Queensland) is a dutiable transaction. Therefore, generally an option agreement and any subsequent Contract of Sale must both be assessed for transfer duty. While most standard contracts impose the obligation to pay the transfer duty on the Buyer, the Duties Act 2001 provides that all parties to a transaction are liable to pay transfer duty. It is therefore important for both the option agreement and the subsequent Contract of Sale to specify which party is to be liable for transfer duty in respect of the arrangement.

Pursuant to s11(7) of the Duties Act 2001, transfer duty will be calculated on the higher of:

  1. The dutiable value of the option fee/consideration paid to acquire the option (including any amounts payable on the satisfaction of a condition, even if the condition is not satisfied); and
  2. The market value of the right that is granted.

It is important to note that if a Contract of Sale is entered into, transfer duty will be calculated on the higher of:

  1. The purchase price/ consideration paid; and
  2. The unencumbered value of the property at the time the Contract is entered into.

This means that in the event the value of the property increases between the date the parties enter into the option agreement and the date they enter into a Contract of Sale, the calculation of transfer duty payable will also increase.

If an option agreement states that the option fee forms part of the consideration under the Sale Contract, a credit for the transfer duty already paid on the option agreement may be claimed when the Contract of Sale is assessed for transfer duty.

Furthermore, if an option to acquire land in Queensland is terminated or assigned, this is classified as a surrender of dutiable property and further transfer duty may be assessable.

If you are considering entering into an Option Agreement or require advice on a commercial project or property development, contact our experienced team on 07 5444 4750.


Sunshine Coast Lawyers

Check out some of our other resources including information on property zoning, liability for agent’s commission and development approval conditions attaching to the land.