Daily Development for
Tuesday, November 25, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

VENDOR/PURCHASER; INSTALLMENT LAND CONTRACTS; RESTRAINTS ON ALIENATION: Covenant giving installment seller right to participate in profits of subsequent sale of the property invalid as an unreasonable restraint on alienation, at least if covenant operative over signficant period of time.

Lafond v. Rumler, L.C. No. 95-071226-CZ (Mich. App. 11/18/97)

Seller and buyer contracted for an installment sale (or contract for deed) of certain property for $60,000. The buyer was to pay $20,000 down. During negotiations, another buyer had offerred seller $80,000 for the property. Seller nevertheless agreed to a contract with the first buyer, as the first buyer was offerring a substantial cash down payment. Nevertheless, seller and buyer included a clause that was designed to permit seller to share the profit if buyer resold the property to the $80,000 buyer thereafter.

The clause provided as follows:

"[If] porperty is sold, bartered, transferred or otherwise disposed of, by the vendee within 15 years from the date of this land contract, it is agreed . . . that any sale over the amount of $60,000 [plus taxes apparently equal to $10,000) . . . shall be divided equally between the vendor and vendee of this land contract.

Sale price will not be arbitrary. Purchaser [sic] must get written permission from sellers or their agent before accepting any offer. Sellers [sic] reserves the right to reject any offer in its entirety, subsequent disputes will be setltled by [here followed an appraisal device].

As an example, if the property should be sold for $100K, the vendor and vendee would equally divide $30,000 or the exess of the $60K plus taxes stated above. This amendment shall be binding on any assigness or beneficiaries of the vendee."

When the first buyer approached the $80,000, that buyer indicated that it also wanted to purchase on an installment land contract. But the original seller rejected this proposal, insisting on an all cash purchase. The first buyer then brought suit to nullify the resale clause quoted above on the grounds that it constituted an unreasonable restraint on alienation. The trial court found that the buyer had knowingly and willingly entered into the contract, but nevertheless found that the resale clause constituted an unreasonable restraint on alienation, and excised it from the contract.

The court reviewed prior Michigan case law upholding forfeiture restraints predicated on resale of the property. It pointed out that more recent authority had been more cautious in evaluating such forfeiture clauses, finding them enforceable only when they served a legtimate interest in protecting seller against "waste or impairment or loss of security."

The court appeared to assume that the covenant in question would have been enforceable if applied to the first projected sale (to the $80,000 buyer.) Although, of course, even here the effect of the covenant would have been to reward the seller with a higher return on the sale, and not to protect against waste or loss of security, the restraint on alienation would have been minimal because the resale would have occurred promptly and in accordance with a preexisting plan. But when, through no fault of the first buyer, the sale fell through, a continued participation right in the seller would lead, the court contended, a significant impairment on the ability of the buyer to sell the property in the future.

Although the buyer could resell the property, she was restricted from reselling at the price she would choose. Instead, if the original seller rejects the proposed price, the acceptability of the sale would be in the hands of appraisers, through a relatively time consuming process. This certainly would "chill" any prospective buyer, leading to a lower ultimate sale price for the property.

The court also pointed out that the buyer was inhibited in improving the property, because part of the benefit of any improvements might redound to the original seller. Although the court included this factor as part of its discussion of the restraint on alienation, it did not point out why it would be relevant to that analysis.

The court pointed out that, although the parties provided that the restriction "ran with the land," the fatal defect is present even when there has been no transfer, even while the property is in the hands of the original buyer.

Comment 1: Note that the trial court here thoughtfully delineated the issue in sharp detail. The contract was entered into "knowingly and willingly." Although the parties had a certain purpose in mind - the $80, 000 buyer - they clearly executed a provision far broader than necessary to deal with that purpose. Further, the court does not make its decision turn on the fact that the original seller (arguably unresonably) rejected the contract from the $80,000 buyer. It simply points out that if the seller had agreed to that contract, there would have been no long term restraint on alienation.

Comment 2: Michigan is America's "installment land sale contract" capital. The device is quite commonly used and liberally enforced in that state, both in commercial and residential transactions, unlike the more cautious treatment given to it elsewhere. Nevertheless, the court here rejects some earlier authority permitting per se restraints on alienation in such contracts and adopts instead a "rule of reason approach." Although the editor is a "freedom of contract" freak, the editor recognizes a necessary protective doctrine when he sees one, and agrees that courts ought to have some power to deny enforcement to anti-contract arrangements such as significant restraints on alienation.

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