Daily Development for Friday, February 26, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

OPTIONS; RIGHTS OF FIRST REFUSAL; RULE AGAINST PERPETUITIES: A right of first refusal purporting to benefit heirs and successors and assigns of optionee and optionor is void due to the Rule Against Perpetuities.

Hensley-O]Neal v. Metropolitan Nat. Bank, 297 S.W. 3d 610 (Mo. App. S.D. 2009)

Once again, the RAP proves a trap for the unwary in a “quasi commercial” transaction.  The optionee and optionor in the original agreement had the same last name, but the court gives no other information about their relationship.  Four years after executing and recording the refusal right the optionor mortgaged the property, and two years later there was a private foreclosure through a trustee..  The Lender bid in what apparently was the whole debt, and thereafter the Trustee tendered the property to the holder of the first refusal right at the same price.  She counteroffered a much lower number, which was refused.

Two years after that, the bank sold the property for a price close to its foreclosure bid, and the holder of the first refusal right demanded to exercise her right.  The Bank, of course, took the position that she’d had one bite of the apple.  We are not told why the holder of the refusal right felt otherwise.  (Foreclosure sales have been held to trigger a right of refusal in other cases.)

When litigation commenced, however, the bank’s lawyers found an easy way to finesse any argument about the continued existence of the right.  They noted that, since the right was stated to continue to bind successors, heirs and assigns into the future, it could be exercised by its terms beyond the period of a life in being plus 21 years and thus was void from the outset.

Court said: “That’s right.”  Missouri has the common law RAP with some statutory adjustment for trusts with a power of sale, but the Rule clearly applies to commercial transactions.  

Comment 1: The objectives of the parties in this case likely could easily have been realized through use of a “perpetuities savings clause,” but it is likely that the lawyers involved didn’t even understand the Rule, much less the clause.  One wonders whether, if they held themselves out as competent to write up this deal, they should be viewed as liable for malpractice.  What about their first year Property professor?  (Since this case is out of Springfield - it might have been me.)

Comment 2: Many other states have statutes that limit the application of the Rule to family wealth transactions and eliminate its coverage for regular property deals. Is it a good idea to permit perpetual refusal options in any event?
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