Daily Development for Friday, February 25, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

RULE AGAINST PERPETUITIES; RIGHT OF FIRST REFUSAL:  Rule Against Perpetuities (the "Rule") does not apply to a right of first refusal clause in a contract and deed dealing with property acquired for public purposes by the Highway Commission when the language in the right of first refusal is mandated by statute.  .

Selig v. State Highway Administration, et al, 2004 WL 2583953 (Ct. of App. of Md. 2004).

Petitioner Helene Selig ("Petitioner"), executrix of the estate of her deceased husband, Milton E. Selig ("Mr. Selig"), brought suit to enforce a right of first refusal contained in a July 6, 1978 contract (the "Contract") and an October 20, 1978 deed (the "Deed") in which Mr. Selig conveyed to the State Highway Administration ("SHA") a 4.7165 acre parcel of land in exchange for a purchase price of $700,000.00.  Both the Contract and Deed contained the following right of first refusal clause:

IT IS HEREBY UNDERSTOOD AND AGREED BETWEEN THE PARTIES HERETO THAT if the highway project for which the subject property is being acquired is abandoned and the Maryland Secretary of Transportation determines that the property is no longer needed for any transportation purpose, the Grantor herein or his successor in interest will have the first right to reacquire the property on payment of an amount equal to the consideration that the Administration has paid to the Grantor herein.

This clause tracked the language of Md. Code (1977, 1977 Supp.), § 8-309 of the Transportation Article (the "Statute"), which governed the sale of land not needed for public purposes.  The Statute stated that if the property acquired by SHA was no longer needed for transportation purposes, then "the person from whom the land was acquired or the successor in interest of that person ha[d] the first right to reacquire the land, on payment of any amount equal to the consideration that the Administration or Commission originally paid for the land."  § 8-309 (b)(2).

SHA acquired Mr. Selig's property for the stated purpose of making improvements to the Baltimore-Washington parkway in Prince George's County.  Instead, however, SHA utilized only 0.6375 acres of the property for the extension of Maryland Route 193 and for future expansion of the Capital Beltway.  Accordingly, SHA left 4.074 acres of the property unused.  In February 2003, SHA sought to sell the unused 4.074 acres by public auction.  Petitioner notified SHA of her desire to exercise the estate's right to reacquire the property on payment of an amount equal to the consideration SHA paid to Mr. Selig and Petitioner tendered a check for $700,000.00.  SHA, however, notified Petitioner that she had no right to reacquire the property and conducted the auction as scheduled.  Petitioner then filed a three-count complaint against SHA, who responded with a motion to dismiss Petitioner's complaint.

The Circuit Court for Prince George's County granted SHA's motion to dismiss, holding that the right of first refusal clause contained in the Contract and Deed violated the Rule because the parties to the Contract "did not know and could not determine if the land would be used or abandoned within a life in being plus 21 years from the implementation of the Contract."

Petitioner appealed the circuit court's decision to the Maryland Court of Appeals.  The issue before the court was two-fold: 1.) Whether the right of first refusal clause violated the Rule, and 2.)  Whether SHA's use of a portion of the conveyed property for transportation purposes nullified Petitioner's right of reacquisition.

The court began its analysis by explaining that the Rule "remains firmly imbedded in Maryland's common law, and generally may be overcome only by a statutory exception, or by one of the very few common-law exceptions." (citations omitted).  The court stated that the purpose of the Rule is to protect the free alienation of property and, because the right of first refusal restrains the alienability of property, such right is subject to the Rule.  However, the Court concluded that the Statute created a statutory exception to the Rule and that by inserting "almost verbatim statutory language into the [C]ontract and [D]eed, the parties created a contract term that tracked the statutory provisions and that contractually ensured the preservation of a then—statutory right—a statutory exemption to the Rule."

SHA argued that Petitioner's contractual rights were not preserved because later revisions of the Statute granted a county or municipality a priority of acquisition superior to that of the original owner and changed the payment required of the original owner to reacquire the land.  SHA argued that the statutory revisions eliminated the Petitioner's statutory claim to reacquire the property at the 1978 purchase price.  The court responded by stating that the applicability of the Rule is always determined at the time the provision is created and subsequent statutes cannot render those contracts void.

The court held that Petitioner was entitled to exercise the estate's right to reacquire the property despite the fact that SHA had used a portion of the property for transportation purposes.  The court concluded that to hold otherwise would allow the State to avoid any reconveyance by "selling a mere square foot of the property to a third party, or use of a square foot."  The court concluded that giving the State such option would render a right of first refusal obsolete.

In dissent, Judge Raker argued that because the "plain language" of § 8-309 did not expressly permit SHA and private parties to create "perpetual contingent interests," the statute did not abrogate the Rule by direct conflict.  Further, Judge Raker argued the Rule should not be abrogated by implication.

Comment: As with many Rule Against Perpetuities cases, we get a relatively rare set of facts and issues.  But the court got it right.  Where the statutes require the creation of a certain legal structure, how can the common law invalidate it?

And, as the court points out, the structure, once committed to contract, cannot Constitutionally be abrogated by subsequent legislation.

Note that the exercise of the option by the estate is clearly within the measuring period of a life in being plus 21 years.  Thus, in a “wait and see” state this exercise would have been valid.  Even in a traditional state like Maryland, it might have be possible to imply into the statute a time limit for exercise of the buy back right, the way some courts read in “reasonable periods to exercise” rights in order to save them from the Rule. But this might have been inconsistent with the intent of the drafters.

The reporter for this item was Mort Fisher of the Ballard Spahr office in Baltimore.

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