• The Rule Against Perpetuities in Commercial Transactions
  • July 1, 2003 | Author: Alan G. Dexter
  • Law Firm: Parker Poe Adams & Bernstein LLP - Charlotte Office
  • In Rich, Rich & Nance v. Carolina Construction Corporation, 548 S.E.2d 541, 2001 N.C. App. Lexis 416, the rule against perpetuities found an unlikely victim: a land seller who deferred his receipt of sales proceeds until the land had been subdivided and sold as lots. The Court of Appeals used the rule to invalidate the land seller's contractual right to the deferred sales price.

    The Facts of Rich

    In 1994, a landowner sold approximately 12 acres to LFM Properties, with the understanding that LFM would resell the land to a developer. An addendum to the contract stated that the third party developer would pay the landowner a $600 per lot fee as the developer sold each lot. The developer signed the addendum, thereby acknowledging his obligation to pay the deferred fees.

    LFM transferred the land to the developer, who subdivided it and began selling lots. When the developer refused to pay the per lot fees to the original landowner, the landowner sued for specific performance of the addendum. The Court of Appeals found that the interest created by the addendum was a nonvested interest, and thus subject to the common law rule against perpetuities. In determining whether the interest was valid under the rule, the court looked at the time of the interest's creation to determine whether the interest would vest or terminate within twenty-one years of a life in being. Because the court could not tell whether the interest would vest or fail within that period (since the developer theoretically could have waited twenty-two years before subdividing and selling lots), the court held that the interest was invalid. The dissent argued that the rule against perpetuities should not apply because (1) the addendum did not violate the underlying policies of the rule by restricting alienation or decreasing marketability of the property and (2) it would be inequitable to allow the developer to sell property acquired by an agreement while avoiding an essential term of that agreement.

    The Impact of Rich on Commercial Transactions

    The good news for practitioners is that the outcome in Rich should not affect instruments executed after North Carolina's adoption in 1995 of the Uniform Statutory Rule Against Perpetuities, N.C. Gen. Stat. §41-15 (2001). First, the Statutory Rule applies a wait and see approach to determine whether an interest vests or terminates. The statute creates a 90 year waiting period, during which the interest is given time to vest or terminate. The common law rule made the vesting determination as of the date the interest was created. N.C. Gen. Stat. §41-22 specifies that the Statutory Rule supersedes the common law rule.

    Further, N.C. Gen. Stat. §41-18(1) excludes nonvested property interests created by non-donative transfers from the Statutory Rule. The Comment to N.C. Gen. Stat. §41-18 acknowledges that this exclusion is contrary to the judicial precedents that have applied the common law rule to options, rights of first refusal, leases to commence in the future, and nonvested easements. The Comment justifies the exclusion by maintaining that the social policies behind the rule against perpetuities are inappropriate in commercial transactions, a rationale that echoes the concerns of the Rich dissent. Thus, when drafting commercial (i.e. non-donative) instruments creating nonvested interests, North Carolina practitioners arguably need not worry about the Statutory Rule.

    Caution for Commercial Agreements

    Although it may be tempting to ignore the Statutory Rule when drafting commercial instruments creating nonvested interests, practitioners should exercise caution. A court could deem the statutory exemption not applicable to commercial transactions between related parties, where there is less than arms length consideration, or if there is other evidence of "donative" intent. To protect a nonvested interest from invalidation by the Statutory Rule, practitioners may want to include in any documents creating nonvested interests a savings clause similar to the following:

    The parties have created this interest by a non-donative transfer and intend that the interest be exempt from the Statutory Rule Against Perpetuities under N.C. Gen. Stat. §41-18. Nevertheless, if a court of competent jurisdiction holds that the Statutory Rule Against Perpetuities applies to this interest, then this interest shall terminate on the last day of the period allowed for vesting under the Rule, such that the interest shall thereby be deemed valid under the Rule.

    The above savings clause gives a termination date for the interest if the Statutory Rule would apply, and therefore should protect a nonvested interest from suffering invalidation under the Rule.

    Side Note: Another Future Interest Trap

    Fee Simple Determinable, sometimes referred to as a Fee on Condition Subsequent or a Possibility of Reverter, is a form of real estate conveyance sometimes used in an attempt to keep control over the future use of land.

    Typical Granting Language: To City, for so long as the land is used for a park.

    Problem: In North Carolina (unlike most states), the above granting language is inadequate for the Grantor to retain a reversionary interest. The conveyance must contain express and unambiguous language of reversion, not just a condition on use. To make the above language effective to grant a reverter, add "If the land ceases to be used for a park, then title to the land shall automatically revert to Grantor." Without such express reversionary language, an unqualified fee is transferred to the Grantee. See Station Associates, Inc. v. Dare County, 350 N.C. 367, 513 S.E.2d 789 (1999) (containing a thorough discussion of the law and history of reverters in North Carolina).

    Under North Carolina common law, reverters generally were exempt from the Rule Against Perpetuities. Under a statute adopted by North Carolina in 1995, however, a possibility of reverter becomes invalid if the reversion does not vest within 60 years after its creation. See N.C.G.S § 41-32(a). The result of such an invalidation would be a fee simple absolute interest in the grantee. The only exceptions are for reversionary interests held by charities or governmental units, and petroleum and mineral rights. See N.C.G.S § 41-32(b).