Daily Development for Friday, October 6, 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

RULE AGAINST PERPETUITIES; OIL AND GAS LEASES; TENANT'S PREEMPTIVE RIGHTS: Rule against perpetuities is not violated where oil and gas lease provides that lessees have right of first refusal to acquire interests of other lessees.

Murphy Exploration & Production Company v. Sun Operating Limited Partnership, 747 So.2d 260 (Miss. 1999).

How about a little excitement over the Rule Against Perpetuities? This is a split decision, 43, with a ringing dissent arguing that the majority's decision not to apply the rule in this case upsets precedent and provides unequal treatment to "big oil."

The original lessees included two oil companies and an individual. The lease provided that if any lessee wanted to assign its interest, it had an obligation to notify the other lessees and give them 10 days to match the purchase price. The provision did not apply to mortgages or intercorporate changes. If both of the other lessees wished to purchase, the right was divided pro rata.

After one year, the single individual in the transaction sold his interest to a corporation after complying with the right of first refusal notice. Hence, thereafter there was no "life in being" against which the Rule Against Perpetuities could be applied. The court does not tell us the length of the lease, but it clearly was more than 21 years, as the instant facts arose in 1995, more than 21 years after the measuring period started to run, when one of the remaining lessees transferred its interest without notifying the others and giving them an opportunity to buy.

Mississippi follows the "wait and see" exception to the Rule Against Perpetuities. So the court will not void an interest at the outset, but will wait to see whether, as things work out, there will be a vesting beyond the measuring period. Thus, the Rule arguably was triggered when a lessee transferred in 1995.

The majority indicated that the common law of Mississippi normally follows Texas precedent, and that Texas had held that rights of refusal among tenants in oil and gas leases did not violate the rule because they were standard commercial devices that not only did not inhibit alienability but in fact enhanced it because such devices made it easier to complete the original leases. The court notes that there is no fixed price here, and no certainty of an option right. Further, the length of the right is not perpetual, but lasts only so long as the lease within which it appears.

The dissent dismisses this discussion as papering over what it sees as a real evil here that oil corporations are being treated differently from everyone else. It says that Mississippi law was clear that the Rule applies to rights of refusal, and that it ought to apply here for the very good reason (in the dissent's view) that alienability of the cotenancy leasehold estate is clearly inhibited.

Comment 1: It is the general rule in America that commercial rights, including purchase options are rights of refusal, that are not contained in leases are subject to the Rule Against Perpetuities.

On the other hand, the Rule traditionally has not been applied in America to purchase options, including first refusal rights, in commercial leases where such rights are part of the lease and last only as long as the lease. See Simes, Law of Future Interests, Sec. 132 (2nd Ed. West 1966) (citing cases in Colorado, Illinois and Maryland.) interests of this sort are not the "target" of the Rule and frequently have the impact of enhancing alienability by making the lease itself more likely to happen. Further, they are part of leasehold estate rights that are created at the time of the grant, and consequently can be viewed as immediately vested.

Note that this authority applies only to the right to acquire the reversion, not to acquire the interests of the other tenants, so it is not directly applicable. But the same policy arguments were raised in the instant case. The technical argument is not as strong, however, because the rights are not rights that the tenant has against the landlord, but rather rights of tenants among themselves, which arguably are not part of the leasehold estate and do vest remotely to the same extent that any other purchase option or refusal right might vest.

Comment 2: Now, what about the modern application of the Rule itself? Good idea or bad? The editor's view is that a general limit on the length of time within which future interests must vest is a good idea. The Rule Against Perpetuities, with its exceptions for interests in the grantor and the use of the "measuring life," seems ill suited to carry out the policy objective for commercial transactions. A statute certainly would be better.

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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