This article was written by Nancy Wang Principal Solicitor at W & G Lawyers.
Picture the moment. You hold a call option over a development site. The deposit, a substantial sum, was paid to the owner months ago and the deed says it is non-refundable unless the owner is in breach. The option expires in a matter of days. During the option period a government proposal has surfaced that may take a strip of the frontage, and with it the viability of the project. Nobody has breached anything. The owner is sympathetic, and the owner has your money.
You are standing at a crossroads where every road appears to lead somewhere you do not want to go. This article is about that crossroads, and about the counter-intuitive road that a buyer took in a 2024 Supreme Court of Queensland decision to recover a $275,000 deposit. The buyer did not step back from the deal. It stepped further in.
The roads that lead nowhere
The first road is to do nothing. The option period runs out, the call option lapses, and you tell yourself the money is the price of a lesson learned. The deed is written to keep the deposit in exactly this situation, so there is no realistic prospect of recovering it later. Worse, letting the call option lapse may not even end the deal. Most option deeds give the owner a put option for a short window after the call option expires. The owner may use it to force a contract on you regardless, at the full price, for a site that no longer works.
The second road is to negotiate. You write to the owner, explain the problem, and ask for the deposit back or a reduction in price. The owner has already received the money, has no obligation under the deed to return it, and may reasonably take the view that the government’s plans are not the owner’s problem. Goodwill may produce a conversation. It rarely produces a refund.
The third road is to exercise the option and buy the site anyway, hoping the project can be redesigned around the lost land. For some sites that may be possible. For a tight site where the development depends on every square metre, it may mean committing millions of dollars to a project that no longer stacks up.
Each road is a form of loss. The first and second lose the deposit. The third risks losing far more.
The road that runs through the deal
There is a fourth road, and it is the one most buyers do not see because it points in the wrong direction. The way to get the deposit back may be to commit to the purchase.
The reason lies in the difference between the deed and the contract attached to it. The deed governs the money while it is only an option. It usually says the deposit is released to the owner and stays there unless the owner breaches. The deed rarely gives a buyer any right to walk away because a government authority has done something.
The attached contract is a different document. In Queensland, a standard commercial or residential land contract contains conditions that allow a buyer to terminate before settlement if, at the contract date, the land is affected by certain matters that were not disclosed in the contract. Proposals to alter or locate transport infrastructure are one of those matters. If the buyer terminates under such a condition, the standard conditions provide for the deposit to be refunded.
None of those rights exist while you hold only an option, because there is no contract. They come into existence the moment the option is exercised. On exercise, the deed typically provides that the security deposit becomes the deposit under the contract, and from that point the contract’s refund rules apply to it rather than the deed’s. The court in the 2024 decision described the deed’s security deposit as effectively disappearing on exercise and reappearing as an ordinary contract deposit.
So the road runs through the deal. You exercise the option, a contract is formed, the contract gives you a termination right the deed never did, and you use it. You are allowed out only after you have gone in.
Why going in is not giving up
The natural objection is that a buyer who exercises an option knowing about the problem has accepted it. The owner in the 2024 decision argued exactly that. It said the buyer had elected to proceed with full knowledge, and alternatively that it had waived its right to terminate by signing the contract, continuing with the development application and lodging caveats.
The court rejected both arguments. You cannot give up a contractual right before you have one, and the right to terminate did not exist until the contract did. Entering the contract with knowledge of the problem was therefore not a decision to abandon the right. After that, the buyer had reserved its rights in writing at each step, and the court treated its continued investigation of the project as consistent with deciding whether to terminate rather than a decision to proceed.
Commitment, in other words, was not surrender, because the buyer had said so clearly and kept saying it.
How the road was walked
The buyer in the 2024 decision took the fourth road in a matter of days. Two days before the option expired, its solicitors wrote to the owner pointing out that the road proposal was not disclosed in the attached contract and that any contract, once formed, could be terminated on that ground with the deposit refunded. On the final day of the option period the buyer exercised the call option, nominated a newly formed company as the purchaser and reserved all of its rights. A contract for $2.75 million came into existence that day. The new company repeated its reservation, continued to look into whether the project could survive, lodged caveats to protect its claim to the deposit, and about six weeks later gave notice terminating the contract. The owner refused to repay the deposit. The court declared that the contract had been lawfully terminated and ordered the owner to repay the $275,000 with interest.
The lesson at the crossroads
The buyer recovered its deposit because it understood that the deed and the contract were two different sets of rules, and that the rules it needed lived in the document it had not yet signed. When every visible road leads to a loss, the answer may lie in the road that runs through the deal rather than around it. Whether that road is open in any particular case depends on the words of the deed, the words of the attached contract and the nature of the problem that has surfaced, which is why the attached contract deserves as much attention as the deed on the day both are signed.
How W & G Lawyers can help
Our property and commercial teams advise buyers and landowners on put and call option deeds, including the interaction between the deed and the attached contract, reservation of rights, exercise and nomination notices, caveats and deposit recovery, and our litigation team acts in disputes over deposits and termination. If you are holding an option over a site where something has changed, or you are an owner who wants the deposit protected, we would be pleased to discuss your position.
Reference
- OF Beenleigh Pty Ltd v Khalaf Management Pty Ltd [2024] QSC 96; (2024) 19 QR 743 (Applegarth J)
- Contract for Commercial Land and Buildings approved by the Queensland Law Society and the Real Estate Institute of Queensland, clauses 3.5 and 21.1
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This article is general information only and does not constitute legal advice under Australian law. For advice specific to your situation, please contact W & G Lawyers. For further details, please click here to view our disclaimer.