3/1/2016 RAP Analysis/RAP Reform • Traditional rule: “What might happen?” (i.e., RAP is applied as of time deed/will took effect; if interest COULD vest too remotely, it is void) • “Wait and see”: interest is invalidated if it actually vests too remotely • Cy pres: court can modify language of deed or will to avoid inadvertent/unintended RAP violation (Abrams v. Templeton) • USRAP: combines both 90‐year wait and see period with cy pres reformation Problem • Suppose you sign a lease for a home being built – Term of lease: 5 years w/option to buy; term to begin upon completion of construction • When house is complete, you refuse to move in and begin paying rent • Can Landlord enforce lease against you? Options and Rights of First Refusal • Under common law RAP, the lease is void! – Lease to commence in the future creates a future interest (executory interest) in the tenant – Interest will vest only when term commences, when construction is complete, but, at time lease signed, construction may never be completed! • Does this result seem sensible? • Result under “wait and see” rule? Cy pres? • In a jurisdiction without RAP reform, how would you “fix” this problem? • Option: a contract which gives the option holder the right to purchase property in the future at a defined price – E.g., “Until December 31, 2035, Grantor and his heirs, successors or assigns, has the option to buy the land herein described for price of $350,000.” • Right of first refusal: a contract which gives its holder the right to “match” an offer if the owner enters a binding sale agreement – E.g., “Until December 31, 2035, Grantor and his heirs, successors or assigns, shall have the first right to purchase, if and when Grantee decides to sell, the land herein described.” 1 3/1/2016 Option Hypothetical RAP Argument • 1950: Rockefeller sold Blueacre to Koch for $50,000 – Deed: “to Grantee [Koch] and his heirs forever, but Grantor retains, for himself and his heirs, an option to buy Blueacre at any future date for a price of $200,000.” • 1990: Rockefeller dies intestate (Maxwell is his heir) • 2015: Maxwell tries to exercise the option to buy Blueacre (which is now worth $250,000) • Is the option valid, or does it violate RAP? • A valid option gives Rockefeller an equitable interest in Blueacre (b/c he would have the right to specific performance of the option contract) Rationale for Applying RAP Counterview • Option with no time limit could substantially burden the transfer, use, future development of the land • If Rockefeller’s transfer to Koch was a sale (and not a gift), then Koch likely paid a “bargain price” to take the land subject to the option – Koch would have little incentive to improve or develop the land, b/c Rockefeller or his successors) could exercise the option at a fixed price ($200,000) [Note 1, p. 329‐330] • Is this persuasive? – Option = equitable executory interest (once exercised, legal title would shift from Koch to Rockefeller) • Problem: that interest does not “vest” until exercised; if option isn’t time‐limited or tied to life of Rockefeller or Koch, it could be exercised too remotely (500 years into the future) – If so, invalidating the option would frustrate the bargain and give Koch an unwarranted windfall (unrestricted title rather than restricted title) • For this reason, USRAP provides that RAP does not apply in commercial (nongift) transactions [note 2, page 330] 2 3/1/2016 Hensley‐O’Neal v. Metropolitan Nat’l Bank • Missouri court ruled that Tanya Hensley’s right of first refusal violated RAP because: – It was not time‐limited as to when she (or her heirs, successors, or assigns) could exercise it, and – It was not personal to her (it could have been exercised by her heirs, successors, or assigns, years after her death) • Does this result make sense? • Result in Hensley‐O’Neal seems dubious as a policy matter – Her right of first refusal does not unreasonably restrain the ability of Greg Hensley (or his successors) to alienate the property – Owner of the affected land could sell whenever he wanted, and at “market price” (thus, ROFR does not limit owner’s ability to sell/develop the land) – Courts in other states have refused to apply RAP to rights of first refusal 3