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Symphony Space, Inc. v. Pergola Properties, Inc., 88 N.Y.2d 466 (June 13, 1996).

PROPERTY - COMMERCIAL OPTIONS - RULE AGAINST PERPETUITIES

THE STATUTORY RULE AGAINST PERPETUITIES APPLIES TO COMMERCIAL OPTIONS; NEW YORK COURTS WILL NOT ADOPT THE "WAIT-AND-SEE APPROACH."

[SUMMARY] | [ISSUES & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

In 1979, Plaintiff Symphony Space purchased a property from seller, the Defendants' predecessor-in-interest. As part of this transaction, Defendants obtained a lease on the property and retained an option for the exclusive right to repurchase the property. The option allowed the holder to exercise the option to purchase the property if one of several conditions were met. The conditions generally required the option to be exercised before the year 2003.

In 1985, Plaintiff defaulted upon the mortgage provision of the option and triggered one of the preconditions for exercise of the option by Defendants. Defendants gave Plaintiff notice of their intention to repurchase the property, and Plaintiff instituted this action for a declaratory judgment that the option was invalid under the statutory Rule Against Perpetuities [hereinafter RAP], N.Y. Est. Powers & Trusts Law § 9-1.1 (McKinney 1992). The Plaintiff argued that the option created a property interest which did not necessarily vest within twenty-one years of a specified life in existence in 1979.

The trial court granted Plaintiff's motion for summary judgment, holding both that the RAP applied to commercial options and that the option violated the RAP. The Appellate Division affirmed the ruling, and certified the question to the Court of Appeals to decide whether the trial court's order was properly made.

ISSUES & DISPOSITION

Issues

(1) Whether the New York statutory Rule Against Perpetuities applies to commercial options.

(2) Whether New York courts should adopt a "wait-and-see approach" with respect to the Rule Against Perpetuities.

Disposition

(1) Yes. The statutory Rule Against Perpetuities, which extends to the full limit of the traditional common law RAP, applies to commercial options.

(2) No. The Court continue to reject the "wait-and-see approach."

AUTHORITIES CITED

Cases Cited by the Court

Other Sources Cited by the Court

  • N.Y. Est. Powers & Trusts Law § 9-1.1 (McKinney 1992).
  • Cal. Prob. Code § 21225 (Deering 1995).
  • Fla. Stat. Ann. § 689.225 (West 1990).
  • Ill. Ann. Stat. ch. 765, para. 350/4 (Smith-Hurd 1996).
  • Jesse Dukeminier, A Modern Guide to Perpetuities, 74 Cal. L. Rev. 1867.
  • W. Barton Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives, 73 Harv. L. Rev. 1318 (1960).
  • W. Barton Leach, Perpetuities in Perspective: Ending the Rule's Reign of Terror, 65 Harv. L. Rev. 721 (1952).
  • W. Barton Leach, Perpetuities in a Nutshell, 51 Harv. L. Rev. 638 (1938).
  • 5A Richard R. Powell, Real Property paras. 771[1], 771[3], 827F[1][3] (Patrick J. Rohan ed., 1994).
  • Restatement of Property § 375 (1944)
  • L. Simes, Handbook of the Law of Future Interests § 132 (2d ed. 1966).
  • L. Simes & A. Smith, The Law of Future Interests § 1244 (2d ed. 1956).
  • Lawrence W. Waggoner, Perpetuity Reform, 81 Mich. L. Rev 1718 (1983).

RELATED SOURCES

  • Quarto Mining Co. v. Litman, 42 U.S. 866 (1975).
  • Otter Creek Dev. Co. v. Freisenhahn, 748 S.W.2d 344 (Ark. 1988).
  • Texaco Ref. & Mktg., Inc. v. Samowitz, 570 A.2d 170 (Conn. 1990).
  • Keogh v. Peck, 147 N.E. 266 (Ill. 1925).
  • Singer Co. v. Makad, Inc., 518 P.2d 493 (Kan. 1974).
  • Certified Corp. v. GTE Prods. Corp., 467 N.E.2d 1336 (Mass. 1984).
  • Citgo Petroleum Corp. v. Hopper, 429 S.E.2d 6 (Va. 1993).
  • William Berg Jr., Long-Term Options and the Rule Against Perpetuities, 37 Cal. L. Rev. 21 (1949).
  • 6 American Law of Property § 24, 18 at 56 (A. J. Casner, ed. 1952).
  • Jesse Dukeminier & James E. Krier, Property at 319 (3d ed. 1993).
  • Ellis L. Tudzin, Peggy J. Felder & David E. Harrell, Real Property, 48 SMU L. Rev. 1529.

COMMENTARY

State of the Law Before Symphony Space

Prior to 1965, the New York statutory Rule Against Perpetuities (hereinafter RAP) did not apply to commercial options. In 1965, the RAP was amended to include what is now N.Y. Est. Powers & Trusts Law § 9-1.1. This subsection states that "[n]o estate in property shall be valid unless it must vest not later than twenty-one years after one or more lives in being at the creation of the estate and any period of gestation involved." N.Y. Est. Powers & Trusts Law § 9-1.1(b).

In Buffalo Seminary v. McCarthy, 451 N.Y.S.2d 457 (N.Y. App. Div. 1982), aff'd, 58 N.Y.2d 867 (N.Y. 1983), the Court of Appeals affirmed the lower court's holding that § 9-1.1(b) applies to options. Buffalo Seminary involved an option that was part of a private transaction between neighboring landowners. Symphony Space, however, involves a commercial option. Prior to Symphony Space, neither the Court of Appeals nor the Appellate Division had addressed whether § 9-1.1(b) applies to options in commercial as well as private transactions.

Effect of Symphony Space on Current Law

The Court begins by holding that the Rule Against Perpetuities (RAP) applies to commercial options. Under general common law, options to purchase land are subject to the RAP. The New York rule against remote vesting used to be narrower than at common law, but in the 1965 amendments to the Estates, Powers & Trusts Law, the New York legislature expanded the scope of the statutory RAP to encompass the full extent of the common law RAP. The court in Buffalo Seminary held that this broad statutory RAP applied to private real estate transactions, and the Court of Appeals now further extends the RAP to commercial real estate transactions. Although the Court recognizes strong arguments for not applying the RAP to commercial options, it reasons that carving exceptions to the RAP is a job for the legislature.

The Court enumerates the currently-recognized exceptions to the RAP and distinguishes them from the commercial option in the present case. The archetypal category of property interests not subject to the RAP is that of "appurtenant" or "appendant" options, which are included in and inseparable from a lease agreement. The Court reasons that these options are exempt from the RAP because they do not violate the policy underlying RAP. The rationale for the RAP is to encourage possessors of land to develop it freely. Since appurtenant options guarantee the option holder the benefit of any investment or development in the land, they do not discourage the possessory holder from making such investments. Since the same cannot be said of all commercial options, the Court refuses to extend this exception to the broad category of commercial options generally.

Once the Court holds that the option in this transaction is subject to the RAP, it upholds the Supreme Court's ruling that this option violates the RAP. The option was created with the contract in 1979, and under the terms of the option, Defendants could exercise it as late as July 2003. Because the option could be exercised after the twenty-one year statutory period, the option violates the RAP.

The Court then addresses the Defendants' argument that New York courts should adopt a "wait-and-see approach" to the RAP. Under this approach, a property interest which might be otherwise invalid because by its terms it might not vest until after the twenty-one year statutory period may be saved if it in fact vests before the statutory period. Thus, in the present case, the wait-and-see approach would validate the repurchase option because, even though it need not be exercised until 2003, it was in fact exercised by Defendants in 1985.

Although the Court acknowledges many arguments in favor of adopting a wait-and-see approach, it determines the language of the current New York rule against remote vesting is mandatory. The Court describes New York courts' long history of interpreting the RAP as preventing the wait-and-see approach, and the Court rejects the approach, leaving the issue of whether or not to change the practice to the state legislature.

Unanswered Questions

The Court of Appeals leaves much to the legislature in this case. The prevailing unanswered question is whether the legislature will take action on the issues presented to it by the Court. These issues are: whether the legislature will carve out specific exceptions from the RAP in the statute itself; and whether the legislature will adopt the wait-and-see approach.

The Court gives two reasons for rejecting the proposed commercial option exception to the RAP. First, carving such exceptions is the role of the legislature. Second, such an exception would be inconsistent with the policies behind the RAP.

In most jurisdictions, this first justification is ignored: courts determine the scope of the RAP and the legislatures rarely involve themselves. The fact that the New York legislature has addressed and amended the Estates, Probate, and Trusts Law may explain the Court's hesitancy to create its own exceptions to the RAP and to apply the wait-and-see approach. This hesitancy raises the question of how willing the Court will be to carve out an exception itself when the proposed exception does not violate the policies behind the RAP.

The Court distinguishes between preemptive rights and commercial purchase options and exempts the former because it furthers the policy goals of the Rule Against Perpetuities: free alienability and development of the land by those in possession. The Court would probably be open to other rights that might extend beyond the perpetuities period but still further the goals of the RAP.

Survey of the Law in Other Jurisdictions

Several other states follow the traditional common law approach of voiding any future interest which may possibly vest beyond the twenty-one year perpetuities period. Arkansas applies the common law Rule Against Perpetuities to a commercial option. See, e.g., Otter Creek Dev. Co. v. Freisenhahn, 748 S.W.2d 344 (Ark. 1988). Texas also ostensibly subscribes to the traditional RAP but gives great weight to the common law rule against unreasonable restraint on alienation in deciding the validity of commercial options. See Procter v. Foxmeyer Drug Co., 844 S.W.2d 853, 862 (Tex. Ct. App. 1994); Ellis L. Tudzin, Peggy J. Felder & David E. Harrell, Real Property, 48 S.M.U. L. Rev. 1529 (1995) (discussing Texas property law). Delaware subjects commercial options to the Rule Against Perpetuities but only if the option is unlimited in duration and hence "unreasonable." Pathmark Stores, Inc. v. 3821 Assocs., L.P., 663 A.2d 1189, 1193 (Del. Ch. 1995). However, options limited to a term of years are exempt from the RAP. Id. States which subscribe to the traditional RAP represent the minority. Jesse Dukeminier & James E. Krier, Property 319 (3d ed. 1993).

A majority of states have opted for either a wait-and-see approach or the more recent Uniform Statutory Rule Against Perpetuities [hereinafter USRAP], promulgated in 1986, which calls for a ninety-year waiting period and exempts commercial transactions from the effect of the Rule Against Perpetuities. Fifteen states (including Pennsylvania, Virginia, and Illinois) have adopted the common law wait-and-see approach. Dukeminier & Krier, Property at 320. Twenty states (including California, Florida, Massachusetts, and New Jersey) have adopted USRAP. Id. at 322.

The common law Rule Against Perpetuities provides for an exception in the case of options which are appendant to a long-term commercial lease. William Berg Jr., Long-Term Options and the Rule Against Perpetuities, 37 Calif. L. Rev. 1, 21 (1949).; 6 A. J. Casner, ed., American Law of Property § 24, 18 at 56 (1952). Accordingly, states like N.Y., which follow the strict application of the RAP, still share this position with states following the common law wait-and-see or the USRAP approach. See, e.g., Citgo Petroleum Corp. v. Hopper, 429 S.E.2d 6 (Va. 1993) (holding RAP does not apply to appendant option). Such an option is held to be in harmony with the policy objectives of the RAP because it stimulates improvement of the property and fosters full use of the property thereof, thus benefitting the lessee, the lessor and society at large. Citgo, 429 S.E.2d at 7-8.

The trend in the area of commercial transactions is away from a strict application of the Rule Against Perpetuities. Several states initially applied the RAP to commercial options. See Kentucky-West Virginia Gas Co. v. Martin, 744 S.W.2d 745, 747 (Ct. App. Ken. 1987); Certified Corp. v. GTE Prods. Corp., 467 N.E.2d 1336 (Mass. 1984). Other state case law reflects the courts' role in leading states to adopt changes codified in USRAP. In Connecticut, the court held that the Rule Against Perpetuities did not apply to commercial options prior to the state's adoption of USRAP. Texaco Refining, 570 A.2d at 174. Subsequently the state incorporated these changes into its property code. Similarly Kansas adopted USRAP in 1992 but exempted commercial options from the RAP as early as 1974. See Singer Co. v. Makad, Inc., 518 P.2d 493 (Kan. 1974).

Special thanks to Peter W. Martin, Professor of Law, Cornell Law School, for his assistance in the preparation of this commentary.

Prepared By:

  • Emmy B. Hackett, '98
  • Howard K. Jeruchimowitz, '97
  • Armando Pastrana, Jr., '98
  • Michael A. Peil, '97
  • Spencer F. Robert, '98
  • Christopher W. Sprague, '98
  • Michelle L. Sterling, '97