>Daily Development for Tuesday, August 5, 2008
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>dirt@umkc.edu                  
>
>VENDOR/PURCHASER; SUBDIVISIONS; SELLER “BUY BACK:” Seller’s  buy-back right in an agreement of sale that does not set forth the terms or timing for reconveyance is an option, rather than creating a fee on condition subsequent, and therefore violates the Rule Against Perpetuities and is unenforceable. 

>
>Welsh v. Heritage Homes of DeLaWarr, Inc., C.A. No. 1901-VCN, 2008 Westlaw 442549 (Del. Ch. 2/19/08)
>
>Plaintiff Buyers sought relief from a contractual provision that obligated them to re-convey property they acquired from defendant Heritage Homes of DeLaWarr, Inc. (“Seller”), and Seller counterclaimed for specific performance. 

>
>Buyers and Seller entered into an Agreement of Sale and Construction Agreement,) for a lot in a community of Colonial-style homes.  The Agreement contained a buy-back provision in the event Buyers did not construct a residence on property, however, no time limitation was imposed for construction and the Seller was not obligated to re-acquire the property. 

>
>“Buyer agreed [sic] that in the event Buyer is unable to commence construction for any reason not attributed to Seller, Buyer agrees to re-convey the subject lot at the same price as sold to Buyer, within 30 days of receipt of Seller's request to re-convey.”

>
>The court noted that there is no time set for construction (although there was some evidence supporting the notion that the parties contemplated three years, which the court noted was “a reasonable period”) and that Buyer did not have the right to require Seller to repurchase.  The right ran only one way.  Further, and critically,  there was no time limit within which Seller may exercise the right to repurchase.

>
>The Agreement also contained a provision that Seller was to be the builder, but the essential terms of the construction of the residence were not included.  The deed was silent as to the buy-back and builder tie-in provisions. 

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>The property was further subject to a Declaration of Restrictions that required architectural review of all construction in the development. 

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>Since the Seller and Buyers could not agree on a home for construction on the property, Buyers located another builder and had plans drawn up.  Seller, who was the Declarant and architectural review committee under the Declaration, rejected Buyers’ proposed plans citing several reasons, including that Heritage Homes was the only authorized builder in the community.  Seller, shortly thereafter, sought to exercise its right to re-purchase the property and Buyers filed suit. 

>
>The Court found that the buy-back provision of the Agreement does not create a fee simple determinable estate since it didn’t operate automatically.  But it spent more time with the distinction between construing the interest as an option as opposed to the creation of an estate subject to a condition subsequent.  It concluded that a right of reentry under a condition subsequent does not typically require payment of consideration, while of course an option does.  Indulging the statutory preference against construing a deed as creating a conditional estate [note that the deed was silent in any event about the condition] the court concluded that the right in question was an option.

>
>The court went on to conclude that , because the option was unlimited in duration, it was void for failing to comply with the Rule Against Perpetuities.  

>
>Perhaps more importantly, the court also struck down the developer’s right to require the Buyers to use it as the builder.  Here was the language about that in the agreement:

>
>“The parties agree that Seller shall build and construct and furnish all labor and materials for a single family residence to be erected in accordance with the plans and specifications to be provided as soon as practical, which plans and specifications shall be incorporated herein. It is further agreed:

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>“1. a. A detailed construction agreement shall be executed at a later time, as a soon as practical, and shall be incorporated herein as part of this agreement.

>    
>b. The price for the construction of the residence shall be $ TBD, to be paid out in accordance with the construction agreement, and/or the construction loan agreement, to be incorporated herein.”

>
>There was also a financing contingency for the construction loan.  The preamble to the agreement also provided that the developer’s intent was that it build all the homes in the subdivision, but the court pointed to other language in the architectural review provisions that appeared to contemplate that other builders might also be building homes there.  The court concluded that many of the terms in the purported construction agreement were vague, most notably the price.  Consequently, the agreement was not enforceable.  The court enjoined enforcement.

>
>In a footnote, the court commented that not all agreements to agree or letters of intent are unenforceable.  The agreement here it concluded, was just too vague. Even though there was some evidence that Buyers knew quite a lot about basic issues, such as materials, styles and even price of various models, there were no specifics in the agreement as to price, time for completion, or any detailed. specifications.  The court noted that Seller did not allege that Buyers’ failure to agree with it on a construction plan resulted from bad faith.  It also noted some argument that the now discredited  “buy-back” was an exclusive remedy, rendering the construction tie in now unenforceable by any means.

>
>Comment 1: Yes, apparently that’s how the developer chose to spell its name.  Maybe it’s historical.
>
>Comment 2: The court confessed that Delaware had been somewhat lenient on clearly defined commercial agreements vs. the Rule.  Note that if Seller had been an individual, the Rule would have been satisfied (“life in being”) and Delaware authority has upheld 30 year rights created in corporations.  But, as the court noted, the right to buy here had no time limit at all. 

>
>Comment 3: Seller had already lost a very similar case several years earlier involving the “tie in.” Heritage Homes of De La Warr v. Alexander, 2005 WL 2173992 (Del. Ch. Sep. 1, 2005), aff'd, 900 A.2d 100 (2006) Here, apparently, it felt that the construction choices available to the Buyers were more clear, so it decided to pursue its case again this time.  It may be that the developer, faced with a very weak market, has quite a few of these provisions attached to properties it has sold, and had no choice but to go for it.  Didn’t work. 

>
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