Daily Development for Friday, April 2, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

RULE AGAINST PERPETUITIES; OPTIONS: Although an option contract is an interest in real estate and falls within the ambit of the Rule Against Perpetuities, before applying the Rule, a court must first interpret the option contract, and if the court concludes that option contains only conditions that must be satisfied within a "reasonable" period of time, and that time is less than the Perpetuities period, then the option is valid under the Rule.

Coulter & Smith, Ltd. v. Russell, 966 P.2d 852 (Utah 1998).

Developer planned to develop a subdivision on its property and property adjacent thereto, owned by Russell. Developer and Russell entered into a Letter Agreement giving Developer an option to purchase Russell's property upon certain terms. Developer's option would terminate two years from the date of completion of the subdivision. However, Developer never completed the subdivision, and Russell proceeded to enter into an agreement with another developer.

Developer thereafter filed suit for breach of the option contract. The trial court granted summary judgment for Russell on the ground that the option contract violated the Rule Against Perpetuities. On appeal, the court of appeals affirmed the trial court on that issue.

The Supreme Court of Utah held that an option contract on real property was an interest in real estate and was therefore subject to the Rule Against Perpetuities. The court noted that a number of commentators and courts have been hostile toward application the Rule Against Perpetuities to commercial real estate contracts. Nevertheless, the court acknowledged that such application has been the law of Utah, and declined the present opportunity to reverse that law.

Nevertheless, the court noted a long tradition in Utah to seek to interpret a contract so that it can be performed without violation of the Rule. A common tactic is to interpret certain performance requirements as containing an implied provision that the performance be rendered within a "reasonable time." Here, the Letter Agreement used language of expediency it stated that the developer would proceed "posthaste." The court found an intent of the parties to complete the development and exercise the option within a reasonable time. It did not go so far as to conclude that a "reasonable time" was in fact less than 21 years, but remanded to the trial court for a determination on that score.

Comment 1: This case, Urquhart v. Teller, 958 P.2d 714 (Mont. 1998), the DD for January 11, 1999, and Brown v. Parran, 120 Md.App. 653, 708 A.2d 12 (Md.App. 1998) the DD for March 4, 1999, are good examples of judicial hostility to the Rule that can result in judicial efforts to reinterpret contractual intent in ways that may provide poor precedent for cases that do not involve the Rule.

Here, for example, what constitutes a reasonable time for *completion* of development, as opposed to commencement of development, is very uncertain. A major real estate development can take years, and delays are endemic to the process. Further, Developer in this case argued that the primary reason he did not complete the project was that Ross interfered. Thus, it might be quite possible that the contract should be read to permit the exorcise of the option beyond 21 years (although creative use of the "life in being" provision might still extend the perpetuities period).

The parties did not stipulate that the option would expire if it did not become effective within a reasonable period. Is it appropriate for the courts to do so? What is a "reasonable period" anyway under these circumstances?

Comment 2: The editor wholeheartedly endorses the court's view that the Rule Against Perpetuities is a senseless way to limit the vesting of interests in commercial real estate projects. Its measuring period obviously is designed to operate on family wealth transactions, and the Rule is needlessly confusing when applied outside of that context.

But the editor is not yet ready to conclude that there should be no limit on the vesting of remote future interests. And once one concludes that some limit is appropriate, it is always best to have something that both fits the situation and is reasonably predictable in application. It is difficult to invent such a standard, and in the meantime we have the ancient rules. It may be that we continue to have the Rule Against Perpetuities in this area because no one has been able to fashion an acceptable substitute. As someone once said about democracy: "It's the worst system of government in the world, except for all the others."

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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