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.”
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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]
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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
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