Queensland Court of Appeal rules that a put and call option constitutes a contract

In brief – Vale v Delorain decision overturned

The case of Vale No. 1 Pty Limited as trustee for the Vale 1 Trust v Delorain Pty Limited as trustee for the Delorain Trust [2010] QCA 259, handed down on 28 September 2010, overturned the previous decision of the Supreme Court of Queensland that a put and call option did not constitute a "relevant contract" under section 364 of the Property Agents and Motor Dealers Act 2000 (Qld).

Grantee seeks to avoid liability to acquire property

The vendor, Delorain, sought to put to the grantee (or recipient of a put and call option) one of the properties which had not been taken up by a nominee of the grantee under the option. The grantee sought to avoid liability to acquire this lot on the basis that the consumer protection provisions under the Act were not complied with.

The contention of the purchaser, Vale, was that the provisions of that Act applied because the put and call option arrangements, together, constituted a "relevant contract". It should be noted that "relevant contract" is defined by s 364 of the Act as "a contract for the sale of residential property in Queensland other than a contract formed on a sale by auction."

Initial finding that put and call options not a "relevant contract" 

The Supreme Court of Queensland held that even though the relevant agreements included put options which, if exercised, bound both the grantor and the grantee with respect to the sale and transfer of the relevant properties, the arrangements were not the same as a contract for sale because the option agreements facilitated the marketing of residential lots to third party purchasers.

The Court held that its decision was reinforced by the fact that the ultimate buyer was not clearly identified in the option document and the identity of the buyer would not be known until such time as the buyer's call option expired and it either was forced to buy the property under the put option or, prior to that date, it had referred a third party buyer to the vendor who became the purchaser. Until the purchaser was identified, it was impossible to conclude that the arrangement was a contract for sale.

Deed ruled to be a contract for sale of residential property

The Queensland Court of Appeal held that it is not an undue restraint of the definition of "relevant contract" in s 364 of the Act to conclude that an agreement that facilitates the marketing of a lot to a third party purchaser is a "relevant contract" (at [83]).

The court held that because "the Deed imposed obligations upon it [the grantee] that required it to enter a contract to purchase the unit upon the exercise of options" (at [84]), the deed was a contract for the sale of residential property, notwithstanding the contingency of a sale to a referred buyer under clause 6 of the contract.

As a result of the deed falling within the definition of "relevant contract", the grantee was successful in its claim that certain requirements for residential property sales were not met. This meant that the grantee was entitled to terminate the contract.

Vendors using put and call otions must comply with all provisions 

This decision indicates that a put and call option constitutes a valid contract for the sale of land. Vendors need to be careful when issuing put and call options that they comply with all provisions necessary under any legislation or the law pertaining to the contract, otherwise the consequent contract may be invalidated or terminated or rescinded.

Furthermore, recipients of put and call options must be aware that they are entering into a potentially binding contract.