When you agree to buy a property that doesn’t exist: put and call option deeds (Part II)

In July this year, we published an article discussing the benefits and risks of using Put and Call Option Deeds (an agreement granting a right to buy from or sell to the other party, in the future). Put and Call Options are useful, as they provide some flexibility around the timing of when purchases of property occur. However, (as the case in our earlier article highlighted) care should be taken when relying on such agreements.

Recently, the Supreme Court of NSW has been asked to deal with another dispute about Put and Call Options agreements. [1] In this case, the parties entered into a Put and Call Option Deed (the Deed) for some land which, at the time of the Deed, was still part of a larger, unsubdivided, plot of land. The parties intended that the larger plot would be subdivided, which would allow for the sale and purchase of the smaller plot of land.

Before the Option was exercised, the Local Council issued a “Local Environmental Plan”. Essentially, the larger plot of land was rezoned, and this prohibited it from being subdivided. The problem for the parties was that, now, the land the vendor had agreed to sell to the purchaser could not be brought into existence.

The plaintiff (the Purchaser) sued the defendant (the Vendor) for the return of the Option Fee they had paid under the Deed. They argued the agreement had been “frustrated”, that the basis of what they had contracted for had been lost.

However, the Judge rejected that argument. His Honour found that other (additional) clauses in the Deed, clearly showed the parties had turned their minds to similar circumstances occurring, which might also have prevented the larger plot of land being subdivided.

This case reiterates the point made in our earlier article. Put and Call Options are not same as a Contract for Sale of Land. As such, treating them like one can lead to problems for either party in the future.

Here, the Purchaser was unsuccessful in arguing they had “lost” what they bargained for, as the Deed was not (strictly speaking) the same as an agreement to purchase the subdivided plot of land. They could not recover the Option Fee, as it was not a “deposit” as in a usual Contract for Sale of Land.

The case also serves as a useful reminder. Put and Call Option agreements deal with future transactions. As such, there is a degree of uncertainty as to what those future circumstances will be. Here, the Put and Call Option agreement was drafted in such a way that the Court found the Purchaser was the party that bore the risk the larger plot of land could not be subdivided, even though this was not explicitly stated in the agreement.

It is important to ensure a Put and Call Option agreement is drafted in such a way, that both parties understand who bears the risk of future circumstances not eventuating as expected.

This article was co-authored by Law Cadet Ben Goodhew.

[1]Opera Properties Pty Ltd v The Uniting Church in Australia Property Trust (NSW) [2021] NSWSC 1436.

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