Daily Development for Monday, December 17, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

RESTRAINTS ON ALIENATION; OPTIONS: Option that attempts to forfeit title if property under option is sold to identified group of interests within one year of date of option, even following exercise of option, is void as unlawful restraint on alienation.

Grand Circus Development Corp. v. Beldon Construction Co., No. 2119558 (Mich. App. 12/07/2001)

Circus was the owner of certain property located within an area that was about to be acquired for development for the new stadium for the Detroit Tigers. For reasons that are somewhat obscure in the opinion, Circus did not wish to see its property pass into the hands of interests related to the Tigers. It entered into an option to sell its property to a real estate company/brokerage, known as RFP. The option included the following language:

"[RFP] warrants that Optionee is not [identified Tigers-related individuals]; nor is it for the benefit of the family of, or the business interests of these prospects. If it is determined that the Purchaser is for the benefit of these prospects, their families or their business interests, the option rights and claims of the Optionee shall be automatically extinguished, and be null and void. Any option monies, expenses or due diligence work shall be forfeited to Optioner. "

The option went on to provide that the warranties contained in "this Option Agreement shall be deemed to be continuing and shall survive for a period of twelve (12) months after the closing . . ."

Later, guess what! RFP assigned option the property to Belden, a company that (for purposes of this litigation) was not related to the Tigers owners. But Belden thereafter reoptioned the property to the Detroit Economic Development Corporation (a non profit). It closed on the property in January, and the DEDC exercised its option in March, and promptly sold the property to the Tigers related interests. Isn't life crazy? Circus argued that the Tigers folks ended up with the property during the 12 month period following closing on the Option with RFP, and that therefore the condition in its option was triggered. No one was pretending that the involved parties didn't have knowledge of the restraining language. The question was whether it applied at all.

The court first noted that restraints on alienation are to be read as narrowly as possible. It noted that the option technically applied only to transfers of the option. The option was not transferred to the Tigers folks. It was transferred to Belden. At the time that Belden actually bought the property, it was already under option to DEDC, but DEDC was not related directly to the Tigers owners, either. Circus couldn't "collapse" the transaction to show that the Tigers folks were the real parties in interest in the transfers in the chain.

Circus argued that, nonetheless, the one year term that the parties reserved in the original option had the effect of preserving its rights to terminate the transaction. The court was dubious of this proposition. It viewed the purpose of the one year "survival" language to permit Circus to terminate option if it discovered, one year following the closing, that the option itself had been transferred to the prohibited interests. But the court went on to say that, even if it were to conclude that the language of the option was broad enough to permit Circus to forfeit the property if it somehow wound up in the hands of the prohibited interests within one year of the closing of the option to unrelated interests, it would have found such a provision to be an unlawful and unenforceable restraint on alienation.

Comment 1: The editor concurs that the option was poorly drafted to achieve its objective, and that it was easily circumvented, as it properly should have been, by the transactions that occurred. But the court's reasoning goes beyond the drafting problems, and attempts to deal with what probably was the real purpose of the original parties to the option.

Comment 2: Did Circus, as the court maintains, need the one year clause simply to cover the eventuality of its later discovering that the option had been held by the prohibited interests? The Editor doesn't think so. There is no reason to believe that a court inclined to uphold the forfeiture would have denied enforcement simply because the option was actually exercised before Circus found out that a prohibited party had obtained the rights. We are assuming, note, that everyone is aware of the restraint and is acting in the face of it.

Consequently, the court's conclusion that the parties intended the one year survival language to do no more than to preserve the forfeiture right for a prohibited transfer of the option doesn't ring true. That's why the Editor focuses on the court's alternate conclusion - that in any event the restriction was void as a prohibited restraint.

Comment 3: If we get right down the ultimate holding then, that attempts to forfeit title upon transfer of optioned property within one year of closing on the property, we can analyze Michigan's policies in this regard.

It is often said that forfeiture restraints on transfers of the fee are generally void, but may be valid if limited as to duration and as to parties. This was a limited duration restraint related only to a few parties. To say that it effectively resulted in an inhibition on the marketability of the property was absurd. There is no public policy that ought to prohibit parties from restricting a transferee from selling property to six specific individuals within one year of purchase. Presumably, RFP got an economic benefit for agreeing to this restraint, and others got an economic benefit by buying the property subject to the restraint. Why shouldn't it apply?

As indicated, the editor wouldn't have enforced the forfeiture here for other, technical reasons. But if we get down to the fundamental policy considerations, it appears that the Michigan Court of Appeals consists of baseball fans.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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