This article was originally published in the New York Law Journal.
By Victor M. Metsch
While many practitioners have either never understood, or (if they did) would prefer to forget, the Rule Against Perpetuities, the ancient doctrine, embodied in EPTL § 9-1. [1] is alive and well, and the subject of considerable pending civil litigation inNew York.
Bleecker Street
Later this Fall, the Court of Appeals will confront the Rule head-on when it hears argument in Bleecker Street Tenants Corp. v. Bleecker Jones LLC, 65 A.D.3d 240, 882 N.Y.S.2d 42 (1st Dept. 2009); lv granted, 14 N.Y.3d 703 (2010).[2]
In Bleecker Street, the First Department “consider[ed] the centuries-old Rule against Perpetuities, specifically, whether the exception to the prohibition against remote vesting of options appurtenant to a lease is applicable to the renewal option clause contained in the parties’ lease.”
The First Department noted that “[t]he rule against remote vesting has been held to be applicable to purchase options contained in leases…as well as to lease renewal options contained in leases…[.]” (citations omitted).
And the Appellate Division concluded, based upon the language of the lease in Bleecker Street, that the option clause violated the remote vesting rule of EPTL § 9-1.1(b); declared that the renewal option clause of the lease was void; and held that the tenant, the subtenants and assignees were therefore month-to-month tenants (whose tenancies, presumably, could be terminated upon proper notice).
Litigating the Rule
Whether the result of coincidence, happenstance or awareness of Bleecker Street, the Rule Against Perpetuities is now being raised, briefed, argued and adjudicated in real property litigation throughout the State.
Example No. 1: 224 Seventh Street Associates LLC. v. AMP Management, Inc., NYLJ, 4/23/10, p. 30, col. 3 (Dist. Ct. Nassau Co. Apr. 23, 2010) [Fairgrieve, J.].
AMP Management, like Bleecker Street, involved an option to renew in a commercial lease. The landlord commenced a summary proceeding to regain possession of the premises; and, in defense, the tenant asserted that it had validly exercised an option to renew.
Based upon EPTL § 9-1.1, Petitioner-landlord asserted that the renewal option was unenforceable because it had no expiration date and could theoretically be exercised after the end of the term of lease.
The District Court rejected the landlord’s argument holding that “[i]t is implied that the renewal must take effect before [the lease termination date] or the lease would expire and no renewal could occur”; and that “[t]he landlord…could not have intended that the option could be exercised at any time [after the lease termination date]”; and concluding that “[t]he renewal language contained in the [option clause] of the lease is valid and it does not violate the rule against perpetuities”.
Example No. 2: Soldiers’ Sailors’, Marines’ & Airmen’s Club, Inc. v. Carlton Regency Corp., 2010 WL 3584403, 2010 N.Y. Slip Op. 20375 (Sup. Ct. N.Y. Co. June 22, 2010) [Ramos, J].
Carlton Regency arose from an “option agreement” signed in connection with a sublease.
The optionee argued that the option violated EPTL § 9-1.1 because the provision purportedly created a right to renew the expired lease in perpetuity.
Supreme Court rejected the argument because the renewal option provision did not contain “an express right” to exercise the renewal option after the end of the lease term; and the option originated in the lease and was incapable of separation from the lease.
Example No. 3: U.S. Grown LLC v. Franck, 2010 WL 3235417, 2010 N.Y. Slip Op. 32133(U) (Sup. Ct. Wayne County 2010).
Franck involved an option to purchase an interest in real property with such option “granted perpetually, and [with] no termination date.”
After recognizing that “[t]he rule against perpetuities has been the cause of many sleepless nights for students taking the bar exam[,]” the Supreme Court found that the subject agreement “clearly states that the option at bar [was] granted perpetually and has no termination date”.
The Court specifically noted that “the option agreement is transferable to related heirs of the [d]efendant” and that “inclusion of terms such as “heirs” indicate that the parties intend the option to be indefinite. “Options that contain such terms as heirs, successors and assigns violate the Rules Against Perpetuities”.
Supreme Court declared that the option was void “as it violates the Rule Against Perpetuities”; and permanently enjoined the defendant from exercising the option.
Example No. 4: Jeffcock v. MCP SO Strategic 56, L.P., 2010 NY Slip Op 32786(U), Sup Ct. N.Y. Co. (2010).
Jeffcock arose out of a contract to purchase a condominium unit at West 56th Street inNew York. Plaintiff-purchaser contended that the agreement violated EPTL § 9-1.1(b) because “the Purchase Agreement does not have a specific closing date, but…allows the Sponsor to set a closing on 30 days notice and that the Offering Plan contemplates that the closing of title for units in the Building was expected to close in March 2009[;]” and that, “since there was no specific closing date in either the Purchase Agreement or the Offering Plan, vesting of title could occur beyond 21 years”; and, therefore, the Purchase Agreement violates EPTL 9-1.1(b) and, hence, “is void”.
The Supreme Court rejected the purchaser’s argument as follows: “The reasonable interpretation of the Purchase Agreement is that the parties intended a sale of the Unit to occur, subject to the contingencies of the construction of the Building being completed by March 1, 2009 or substantially completed by December 31, 2009. Plaintiff’s interpretation that the closing could be delayed indefinitely is unreasonable, since it conflicts with the standard presumption of [EPTL 9-1.3(d)] that ‘it is presumed that an estate is intended by its creator to be valid[.]’”. (citations omitted)
Conclusion
Attorneys beware: the “Rule Against Perpetuities” survives in the EPTL. All time-sensitive provisions in real estate transactional documents must be examined to see if “the Rule” is implicated. And all such provisions should be carefully scrutinized to insure that the subject estate must vest, if at all, within the statutorily-permitted period.[3]
Victor M Metsch is a Senior Litigation/ADR Partner at Hartman & Craven LLP.
[1] EPTL 9-1.1(b) provides, in pertinent part:
No estate in property shall be valid unless it must vest, if at all, not later than twenty-one years after one or more lives in being at the creation of the estate[.]
EPTL 9-1.3 provides, in pertinent part:
(a) Unless a contrary intention appears, the rules of construction…govern with respect to any matter affecting the rule against perpetuities.
(b) It shall be presumed that the creator intended the estate to be valid.
* * *
(d) Where the duration or vesting of an estate is contingent upon…the occurrence of any specified contingency, it shall be presumed that the creator of such estate intended such contingency to occur, if at all, within twenty-one years from the effective date of the instrument creating such estate.
[2] The Court of Appeals addressed the Rule Against Perpetuities almost fifty years ago in Symphony Space, Inc. v. Pergola Properties, Inc., 88 N.Y.2d 466, 669 N.E.2d 799, 646 N.Y.S.2d 641 (1966). In Symphony Space, the Court held that the prohibition against remote vesting applies to options to purchase commercial property; the subject option was not “an option appendant” or “option appurtenant” to the lease; therefore the option was void under Rule Against Perpetuities; and the parties’ misunderstanding as to operation of rule did not warrant rescission of their contract.
[3] In Barnes v. Oceanus Navigation Corporation, Ltd., 21 A.D.3d 975, 801 N.Y.S.2d 368 (2d Dept. 2005), the Appellate Division affirmed the Supreme Court’s decision to permit a party to raise an EPTL § 9-1.1 defense for the first time upon an untimely motion to vacate a judgment after a non-jury trial because the Rule Against Perpetuities defense “raised an issue of public policy”.