Daily Development for Tuesday, September 13, 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

SERVITUDES; COVENANTS RUNNING WITH THE LAND; TYING ARRANGEMENTS: A servitude requiring a subdivision lot purchaser to give a builder an option to purchase the property for the original purchase price if the purchaser does not contract with the builder to build on the property within four years is not an unreasonable restraint on alienation or an unlawful tie in.

Vande Guchte v. Kort, 13 Neb. App. 875, 2005 Neb. App. Lexis 214 (9/6/05) ;(related unpublished opinion at  2005 Neb. App. Lexis 206 No. A-03-1345 (9/6/05)

Builder entered into an agreement with a subdivision developer to provide “consultation, suggestions and recommendations” regarding the development of, and final plat for” a residential development of golf course lots.  In consideration for these services, the develpoer appointed Builder the “exclusive builder” of homes on lots sold by developer within two years of the issuance of the final plat and on all townhome lots sold within seven years.    To implement this concept, the developer gave to Builder a nonexclusive option to purchase any lot in the development for the initial price per lot as shown on an attached price sheet. 

The parties later modified and extended the Builder’s rights and established a required contract provision in the sale of every lot that created a binding servitude on each lot sold that gave to Builder an exclusive option to purchase the bound lot for the price paid by the original purchaser from the developer in the event that the lot purchaser failed to enter into a contract with Builder to build on the property within four years of purchaser’s closing on the acquisition of the lot.  The option gave Builder one year to exercise the option following the expiration of the four year period for contracting.

Vande Guchte purchased one of the lots for $145,000 and did not enter into a contract with the Builder during the four year period.  Midway through the fourth year following his closing, Vande Guchte contracted to sell the lot to a third party for $179,000, but the sale fell through when the title company noted the option to purchase held by the builder and purchaser’s lender refused to loan.  Subsequently, the builder tendered to Vande Guchte a contract to purchase the property for $145,000 and Vande Guchte responded with a lawsuit seeking a declaration that the option was void and unenforceable and claiming that Builder had intentionally interfered with Vande Guchte’s contract to sell the property at a favorable price to the third party.    Builder answered and sought specific performance of its tendered purchase agreement.  Vande Guchte also sued his buyer for specific performance. 

The trial court found for Builder on Vande Guchte’s complaint and granted Builder specific performance.  In a separate opinion, it concluded that Vande Guchte’s had no obligation to perform because the option restriction rendered the title unmarketable and because the financing contingency had not been satisfied. 

On appeal: Held: Affirmed (both cases).  The Builder’s option did not constitute an unreasonable restraint on alienation nor an unlawful tying agreement and specific performance was appropriate. 

The specific performance case, which is the only published decision, is particularly noteworthy because the court points out that a higher standard of equity is necessary to support such a remedy.   Here there was no question of lack of clarity in the agreement nor of notice to Vande Guchte.  The sole question was whether the agreement violated some public policy. 

The court held first that there was no unlawful restraint on alienation.  Noting that most servitudes and public land use restrictions make property more difficult to sell, the court concluded that the mere fact that Vande Guchte could not sell for his optimal price did not render the Builder’s restriction an unenforceable restraint on alienation.  The restraint was not a direct prohibition on resale, it noted, because during the four year period prior to the option kicking in, Vande Guchte was free to sell to anyone he wished (subject to the servitude.)  After the option kicked in, Vande Guchte was restrained, but only for one year.  The court didn’t even mention this one year restraint, but clearly the relatively short period was of no concern to it.

As to the argument that there was an unlawful tying arrangement, the court agreed, as Builder conceded, that this agreement clearly tied the sale of the property to the Builder’s construction services.  But not all tying agreements are unlawful.  There must also be“sufficient economic power on the part of the defendant in the tying market to appreciably restrain competition in the tied product market, combined with the sercise of such poer to coerce the purchaser to buy both items.    Further, the amounted of commerce affected must not be insubstantial.  The court commented that these are both the common law (Restatement) standards and the federal antitrust standards.

The court concluded that Vande Guchte had produced not evidence that the developer that sold the lot to Vande Guchte occupied a dominant position in the relevant market - in fact Vande Guchte didn’t even provide evidence of what the relevant market was.  It commented that the “uniqueness” of land by itself does not establish economic power.

Comment 1: Note that, although in the published opinion the court concludes that Vande Guchte was not restrained unreasonably  from selling the property subject to the servitude, it also upheld the trial court’s finding that the servitude rendered his title unmarketable. 

Comment 2: Note also that there is not one word about privity of estate or touch and concern the land requirements, both of which arguably were not satisfied here, as the builder had no interest in the subdivision land or other benefitted land  at the time of the original agreements.  .  Perhaps the reason is that this agreement was structured as an option - the conditional transfer of an interest in land to Builder - rather than a restrictive servitude. 

Comment 3: In the current hot market, many builders and other service providers are attempting to create tie in arrangements.  The Builder had some good lawyers in the development of the scheme here.  The way in which the Builder’s benefit was established gave the Builder a nice fat time within which to bargain with the lot owners but did not tie up the land for so long as to offend the sensibilities of the court.  The use of the option price, rather than some more draconian form of enforcement mechanism, also softened the impact of the restraint.  Others would do well to study the device used here to see whether their clients can accept this device as their tying method. 

Comment 4: Nebraska has always been somewhat conservative (and, in the editor’s view) correct, in its analysis of the restraint on alienation issue.  In the case cited as support for its conclusion here, Occidental Sav. & Loan Assoc. v. Venco Partnership, 293 N.W. 2d 843 (1980), the court resoundingly rejected the argument that the due on sale clause was a restraint on the alienation of property, thus rejecting the Wellenkamp decision in California and leading other courts away from the error of the California decision (which later was mooted by the Garn-St. Germain Act.)  It is an interesting footnote to history that the seminal law review article that Wellenkamp relied upon when it  kicked off the “due on sale” fracas was written by a law professor at the Creighton University in Omaha, Nebraska, ron Vollkmer.

Comment 5:  Vande Guchte attempted to raise on appeal the argument that the servitude was unlawful because it called for a penalty, but the court refused to consider that argument as it had not been raised below.  It is difficult to tell whether the court was exercising commendable restraint in reviewing the case and simply ignored the issue, or whether it might be avoiding deliberately a question it deemed to be more problematic.  From the editor’s standpoint, an option to purchase always has an element of penalty when it calls for sale of the property at a price lower than current market, but that is the nature of the parties’ agreement, and if the optionee is ready willing and able to perform, as here, it is difficult to view the consequence to the optionor as a penalty. 

Here, of course, there’s another twist - the option is a response to the lot purchaser’s failure to enter into a contract to build with Builder.  But note that the lot purchaser has no duty to enter into such a contract - there is merely an option to work with this Builder or else sell back to Builder.  If the court did not find this arrangement violative of public policy on the grounds raised in the suit, it is difficult to conclude that the court would recharacterize the arrangement as a contractual obligation to deal with the Builder backed by a penalty option. 

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