Daily Development for Monday, October 1, 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: Purchase option for unlimited period with cap on purchase price constituted unreasonable restraint on alienation.

Sander v. Ball, 781 So.2d 527 (Fla.App. 5 Dist. 2001).

This case was one for slander of title and declaratory relief to void a purchase option executed by a land owner for admitted consideration.

The option established a certain per acre price for the property in question, but provided that the option price would be adjusted based upon the proceeds received by the optionor for the condemnation of certain property owned by optionor for a highway right of way. These proceeds would be credited to the option price, and thus reduce the price to be paid.

The case is fuzzy on the point, but it appears that the right of way land was within the parcel that was the subject of the option. Because the state had not yet decided when to proceed with the planned condemnation the parties came up with a device to defer exercise of the option until the details of the condemnation became clear.

Unfortunately, there was no outside limit placed upon the effectiveness of the option. Under its terms, if the State did not exercise its condemnation power within a near term, the option would continue to be a potential cloud on the title indefinitely.

The optionor first attacked the option as a violation of the Rule Against Perpetuities, since it was an "open" option (not a part of a lease) and might vest beyond the measuring period of the Rule. But the court ruled that, despite some earlier uncertainty, it now was clear that the Florida Legislature had enacted statutes that abolished the Rule in cases of open options.

The court went on, however, to conclude that the option nevertheless was void because of the doctrine against unreasonable restraints on alienation. The problem is, of course, that a long term option ties up the development potential of the land. The property has not yet been sold to the optionee, but the optionor can neither dispose of it nor borrow against it. The court cites the Restatement of Property Sec. 413 for the proposition that this interference with development potential of the land is acceptable *if reasonable.* The device is not a direct restraint on alienation, but only an indirect one, and will be analyzed for its reasonableness.

The Restatement states that an option restraint is reasonable and valid if the option price is at a market or appraised value, irrespective of the duration of the option.

In this case, however, the option price, while not set in stone, was capped. It would be no less than an agreed price per acre, but would be lower depending upon the application of the condemnation proceeds.

This tied up the property in a manner that potentially operated unreasonably for the optionor as time passed and the market value of the property increased. Obviously, such a result might be acceptable anyway, if the option were for a fixed period, but, as indicated there was ambiguity in the option as to whether it had any period other than the vague limit based upon the State's exercise of its condemnation authority.

The optionee attempted to get reformation of the option to establish a five year outside limit. This corresponded with his understanding of the deal, since it was anticipated that the State would carry out the condemnation within five years. There was evidence that the optionee had in fact made inquiries of the State at the time of the option and established this time frame. Unfortunately, the optionor testified that it was his understanding that the option was valid for only one year, and, by his own testimony, the optionee admitted that he and the optionor had never expressly discussed the time frame, each apparently reaching different conclusions. This admitted ambiguity in the parties' agreement killed any possibility of reformation, which requires evidence of an actual agreement that happened not to be the one in the instruments..

Comment 1: This is not earthshaking new law, but a good practice tip.

Often in the heat of negotiations, it is easy to lose track of the fact that events that will happen at some uncertain future time might not happen at all. If the Rule Against Perpetuities had applied (as in does to options in many states), the option would have been dead even if it provided for a market price. After you make your deal, state an arbitrary outside limit for its operation.

Comment 2: Remember as well that, despite the Restatement language, quoted above, that an option price set at "appraised or market" value would fly, there is authority that narrows the opportunities here. In the DD of 8/1/01, Pettigrew v. Collins, 246 Ga. App. 207 (Ga. Ct. App. 2000) the court rule that an option contract to purchase real property was unenforceable due to indefiniteness of consideration, where the contract stated the price would be "appraised value" at a specified time, and the parties could not agree upon purchase price.

In his comments on Pettigrew, the editor railed that "appraised value"

was not so vague as to defy interpretation, and really was no different insofar as clarity of meaning was concerned from the term "market value," which has been recognized as acceptable by the courts. The editor was soundly beaten up by various DIRT responders for this viewpoint, particularly by appraisers who argued that there was a great difference between the two concepts.

The editor stands by his own view that the two concepts are no more or less ambiguous. But clearly the point is subject to debate, and drafters should take that issue into account.

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

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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