Daily Development for
Tuesday, January 27, 1998

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

RULE AGAINST PERPETUITIES; RIGHT OF FIRST REFUSAL: Right of first refusal is subject to Rule Against Perpetuities, and Florida "cy pres" statute will not apply retroactively to save it.

Fallschase Development Corp. v. Blakey, 696 So.2d 833 (Fla.App. 1 Dist. 1997).

Grantor sold a large tract to a Developer corporation and retained an interest in a smaller adjacent tract. The sale agreement contained the following provision:

"Should the Seller later determine to sell all of the property retained by her as above-described, then the Buyer shall have first right of refusal to purchase said property."

A later provision of the agreement, apparently relating to the entire agreement, stated that "[t]his agreement shall be binding upon the parties hereto, their heirs, successors and assigns." Twenty years later, Grantor died without ever having attempted to sell the property. Her successor in interest, her nephew, brought suit to declare that the right of first refusal was not effective.

Nephew's first claim was that the terms of the right of first refusal were express that the right lasted only for the life of the original Grantor. It was triggered only when "Seller" determined to sell, not when any successor made that determination. The court elected not to read the provision in the way argued for by Nephew, without indicating why.

Reading the clause as permitting the exercise of the right after the death of the original Grantor, the court proceeded to find the right of first refusal void as violative of Florida's Rule Against Perpetuities.

In 1995, Florida has adopted new provision relating to the Rule, adding a cy pres feature. This statute indicated that where the Rule invalidated an interest, a court would attempt to "reform the disposition in the manner that most closely approximates the transferor's manifested plan of distribution." The court held that this statute altered substantive rights and should not be applied retroactively. Since the right of first refusal had been void since its inception in 1975, the application here would have altered property rights long since settled. The court then certified the case to the Florida Supreme Court for resolution of the issue of retroactive application of the statute.

A dissenter would have applied the 1995 amendment, commenting that it was difficult for him to see how a grantor could object to application of a statute that did nothing more than conform the terms of the grant to the grantor's intent (that is - to make the grant valid notwithstanding the Rule Against Perpetuities.)

Comment 1: The court's conclusion to read the contract as extending the right of first refusal beyond the life of the original grantor is itself an exceptional bit of interpretation that the editor hopes was intended to raise the Rule Against Perpetuities issue above, rather than to provide precedent for future similar cases. To hold that the parties intended that the right of first refusal would apply to "successors and assigns" proves far, far too much, as it would render every successor in interest bound, giving the holders of the right to invoke it on each and every sale into perpetuity. This surely was not the original intent of the parties.

The "successors and assigns" language surely was intended to apply to other provisions of the sale agreement including, for instance, the obligation of a successor of the Grantor to be bound if the Grantor had triggered the right of first refusal but then died before the holder of the right had been able to complete the process of following through on it. There is no reason to read it as intended to extend the right of first refusal itself beyond the life of the Grantor.

Of course, the holders of the right could also argue that it would continue to apply to donative transferees of the original Grantor, and then expire after the property was once sold. The problem with this interpretation is that it flies in the face of the specific language of the agreement. Unless there is grounds for reformation or estoppel, the terms of the agreement ought to control the interpretation of the rights created. Although there is slight support in the contract language for an interpretation that the right bound all successors and assigns forever, there is no support for the notion that it bound only the Grantor and her donative successors.

The Developer had argued that it had transferred over $700,000 to the Grantor "in reliance upon" the existence of the right, but we are not given sufficient information to know exactly what the Developer bought with that money. Unless the parties reformed the contract, or invoked some kind of promissory estoppel, there was no reason to read the language of the contract as creating in Developer an expectation that the first refusal right would not be exercised if the Developer invested money in the property.

Comment 2: As suggested, the court may have interpreted the Grantor's intent more broadly here in order to reach the question of the Rule Against Perpetuities and then the application of the statute retroactively. But if the statute were to be applied retroactively here, isn't the only sensible reworking of the Grantor's intent to be that the right of first refusal applied only during her lifetime?

The Florida statute is not a "wait and see" approach. It requires reworking of the grantor's intent to insure compliance with the statute at the time the challenged interest was created. At that time, the Grantor had no way of knowing whether her successors in interest after her death would be "lives in being," thus making the grant void under the Rule. Therefore the most likely "saving" construction would have been to make the right of first refusal limited to her own lifetime.

Another possibility might have been her lifetime plus 21 years, or simply 21 years, but neither of these is likely to have been more consistent with her probable intent.

In short, although the court's interpretation of the interest preserves the issue on appeal, it really is unlikely to help the holder of the right very much in the final analysis.

Comment 3: Perhaps the most difficult part of the opinion is the dissent, which comes right out and argues for a retroactive application of the statute, indicating that the statute would do nothing more than give effect to the intent of the grantors originally in such cases.

This argument is seriously flawed. Under the Rule Against Perpetuities, interests created that violate the Rule are void from their inception. Consequently, as of the time of the attempted transfer, the future interest is void. This does not usually mean that the property would remain with the grantor in derogation of the grantor's transfer. In most cases, the grantor of the challenged interest will have died, since most violations of the Rule are contained in wills. Consequently, property will have been distributed to parties other than the takers under the void interest. In Florida, the editor is given to understand, a Rule defect in a will often voids the whole will, which would mean that in many cases either intestate distribution will have occurred or some compromise will have been reached among parties benefitting under the will to distribute the property in light of the problem with the Rule. A retroactive application of the Statute would disturb the legitimate expectations of parties who had received property under such arrangements.

Even where the grantee has not died as yet, or where the problem has not yet been identified, the fact remains that actual property interests alternative to those that the void provision established will have arisen, and retroactive application of the statute will undo those actual interests, known or unknown.

Further, the benefit argued for by the dissenter - that the grantor only will have seen the original intent realized, is incorrect. The issue only arises when the intent of the grantor manifestly cannot be carried out. The Rule is in the way. Thus the statute does not direct the fulfillment of the grantor's intent, but only the judge's approximation, often decades later, of what the grantor might have intended had the grantor known of the problem. Although it may make sense to invoke such an approach as to future applications, such as for instance, the interpretation of wills of decedents dying after the 1995 enactment of the statute, the notion that the statute is doing no more than carrying out the grantor's intent is an incorrect premise, and retroactive application of the statute would impose a potentially heavy price on title expectations in exchange for what is at best a "good guess" at carrying out the transfer in a manner close to the original design. Not a good trade.

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 Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.