Daily Development for
Monday, January 11, 1999

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

OPTIONS; RESTRAINTS ON ALIENATION: Option to purchase parcel at a fixed price upon seller's sale or transfer the parcel, or at the latest upon seller's death, is unenforceable as an unreasonable restraint on alienation.

Urquhart v. Teller, 958 P.2d 714 (Mont. 1998). 

In 1979, Teller sold 270 acres to Urquhart under a contract for deed (installment land contract)  and reserved ten acres for himself.  The contract for that transaction gave Urquhart a preemptive right to purchase Teller's ten acres for $10,000 if Teller died or attempted to convey that property.

Ten years later, after paying off the contract and receiving the final deed, Urquhart built on his property and sold off several parcels to third parties, who also constructed improvements on their parcels.  Teller never objected to any of the construction. 

Urquhart recorded his contract with Teller at the time he sold off the first parcel from his property.  In 1993, Teller conveyed his ten (10) acre parcel to a nonprofit conservation group as a charitable gift.  The appraised value of his parcel had risen to approximately $400,000. Urquhart sued Teller and the nonprofit to enforce his option to purchase the ten acres for $10,000. 

Teller and the nonprofit counterclaimed against Urquhart and the parties to whom he had sold parcels of his property, seeking enforcement of the covenants against construction on those parcels.  The trial court granted summary judgment on both claims, holding that the option was unenforceable, and that Teller and the nonprofit were precluded from enforcing the restrictive covenants because of the statute of limitations and laches.  Both sides appealed.

The Montana Supreme Court affirmed the trial court's judgment.  The option to Urquhart was void as an unreasonable restraint on alienation because it served no legitimate purpose, could be construed as being of perpetual duration, and decreased the value of Teller's interest in the property.  The restrictive covenants were deemed to have merged into the deed given by Teller to Urquhart, which did not contain those covenants, and therefore were unenforceable.

Urquhart argued that the obvious purpose of the option was to give Urquhart the possibility of "completing" the parcel when Teller no longer had use for it.  But the court pointed out that Urquhart had not divided the parcel among others, and no longer had any of the original 270 acres. To permit Urquhart to acquire the 10 acres at the option price would give Urquhart, in the view of the court "the bargain purchase of the century."

Comment 1: If the option had been exerciseable only upon Teller's sale or transfer of the ten acres, then the court's analysis can be appreciated. But the fact is that the option became absolute upon Teller's death.  To the extent that the court invalidates the option under those circumstances, the opinion is a pretty scary precedent. 

It seems apparent that Urquhart wanted to buy the other ten acres, and that Teller refused to sell because Teller had a personal interest to remain in control of those acres, but as an inducement to Urquhart to buy the other 270 acres Teller agreed to sell the last ten to Urquhart if his feelings about owning them ever changed or, at the latest, when he died. 

This is no more or less than a option to purchase with the consideration for the option being the Urquart's entering into a contract to buy a substantially larger parcel.  It may absolutely be exercised upon Teller's death, with a preemptive right sooner.   Why is this an unreasonable and unenforceable arrangement? 

The editor acknowledges that restraints on alienation are disfavored. This option was triggered specifically upon alienation, and thus tended to inhibit alienation.  Under these circumstances, however,  the length of time of time that the restraint applied was  relatively short, and its existence basically just moved forward the vesting of an option that already existed. The editor would still uphold the option, as a reasonable commercial agreement that tended to inhibit, but did not prohibit, alienation, and did so only for a limited period of time and for a valid commercial reason.

But a separate part of the option became absolute upon Teller's death. Furthermore, that aspect of the option that became effective upon Teller's death clearly was not triggered by alienation, and should have been preserved even if the balance of the option was disallowed.

The court also looked to the fact that Urquhart no longer owned the 270 acres he originally purchased.  In the context of the option right, this is relevant, as the option provides that the option "shall be nonassignable unless coupled with the assignment of this contract and the sale of the said premises and this option as a unit . . ."  It would be appropriate to conclude that the option was forfeited according to the original design of the parties when Urquahart subdivided the land.  But the court did not do that, perhaps because this would have given effect to a partial restraint on the alienation of the 270 acres.  In avoiding that result, however, the court concocts and opinion that leaves Montana precedent a bit more tangled and uncertain than before.

OPTIONS; RULE AGAINST PERPETUTIES: Option to purchase parcel upon notification of death of owner does not violate the Rule Against Perpetuities, even though it is uncertain when such notice of death will be given. 

Urquhart v. Teller, 958 P.2d 714 (Mont. 1998). 

The overall facts of this case are set forth in a report under the heading "Options; Restraints on Alienation."  The option to purchase that the court considered was only for the duration of Teller's life.  But it provided that Urquhart had six months to exercise the option upon being informed of Teller's death.  The trial court had held that this little feature rendered the option void under the Rule Against Perpetuities, since it was uncertain when Teller's heirs or representatives would inform Urquhart of Teller's death. 

The appeals court, however, citing Kansas authority, held that the notice of death had to be given a reasonable time after Teller's death.  If they failed to do so within such reasonable time, one assumes the court intends to suggest that the option would be exerciseable within six month's time even if formal notice had not been provided.  Therefore the court held that the interest passed the test of the Rule Against Perpetuities.

Comment: Because the court held the option void on other grounds, the court fails to resolve expressly the hanging uncertainty of what would happen if Teller's heirs did not give notice within a "reasonable" time. One assumes that the option would be exerciseable, as suggested.  But what if, because of the failure to notify, the optionee never became aware of Teller's death?  Is the optionee barred from exercising the option six months after the expiration of a "reasonable notice period?"  This does not seem right, since the optionee is relying upon the notice of death to trigger his rights, and has no reason to keep up with Teller's mortality independently. 

Thus, although, if no notice were ever given,  technically the option could become exerciseable within six months following a "reasonable notice time" after Teller died, and this would be within twentyone years, it is virtually certain that it would continue to be exerciseable until six months following the time the optionee actually received, or should have received, notice of Teller's death. This notice might not have been received until after twenty one years had run from the time of Teller's death.  Why didn't this make the option violate the Rule?

SERVITUDES; CONTRACTS FOR DEED: Covenants contained in a contract for deed, even one that provides that the covenants shall run with the land and bind successors and assigns of the parties, are merged out of existence if they do not appear on the deed that is delivered following satisfaction of the payment called for in the contract. 

Urquhart v. Teller, 958 P.2d 714 (Mont. 1998). 

The overall facts of this case are set forth in a report under the heading "Options; Restraints on Alienation."    The contract for deed from Teller to Urquhart  contained restrictive covenants preventing Urquhart from improving or subdividing his 270 acres.  The contract provided that the covenants ran with the land and were binding upon successors and assigns of both parties and that Teller did not waive the right to enforce the covenants by his choosing not to enforce at any particular time.

Following satisfaction of the contract and delivery of the deed, which did not contain these covenants, Urquhart improved the land and subdivided it.  Teller claimed a breach of the covenants, and Urquhart defended that he had been told verbally that the purpose of the covenants was to protect Teller's security interest in the contract for deed and that the covenants would last only so long as the contract was unpaid.

The court, with a dissenter, held that the covenants were subject to the merger doctrine and disappeared when they were not included in the final deed.  The court held that the covenants were not collateral to the contract of transfer and it was appropriate to expect that the grantor would include them in the deed. 

Comment: Although the court cites the general rule of merger, it also articulates the concept that "the parties did not intend that the promises be collateral."  If this is a statement that the court believe Urqurhart with respect to the true intent of the parties, then the court is on solid ground. But a covenant not to build on a 270 acre parcel is certainly not a "standard" protection of security device.  The purpose is to protect the seller's retained parcel from development of the neighboring property, and would appear to be relevant both before and after the contract was completed. 

Furthermore, this covenant has nothing to do with the quality of the title or quantity of the land.  It certainly operates as an encumbrance on title, but it is difficult to believe under the circumstances that the execution of a deed in satisfaction of a contract for deed that contained this covenant demonstrated that the parties were intending to abandon the covenant. 

The modern merger doctrine has meaning only when it reflects the probable intent of the parties.  The editor does not believe that that is the case with respect to this covenant, and agrees with the dissent on this point.

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