Anderson v. 50 East 72nd Street Condominium

Asch, J. P.

(dissenting). The majority has taken the position that the "right of first refusal” involved in this appeal is valid. *80I disagree. I read the cases in New York as supporting my view. It is quite clear, however, that the final legal answer must come from the Court of Appeals or the Legislature. Since I believe that there are significant public policy considerations which support the position I have taken, I dissent.

By its ruling in Metropolitan Transp. Auth. v Bruken Realty Corp. (67 NY2d 165), the Court of Appeals has described the circumstances under which it chooses not to invalidate a right of first refusal as violative of the Rule Against Perpetuities and its associated doctrines. In explicitly circumscribed language, the court has carefully refrained from declaring that the perpetuities restriction never has application to a right of first refusal.

The final dispositive paragraphs of Bruken (supra, p 168) state clearly:

"Finally, as we have stated, the preemptive right in this case clearly served a beneficial purpose and given its reasonableness in terms of duration and price, it should be enforced.
"In sum, we hold that the rule against remote vesting does not apply to preemptive rights in commercial and governmental transactions, that their validity is to be judged by applying the rule against unreasonable restraints and that the preemptive right granted Delbay by the State was under all the circumstances a reasonable restriction on the alienability of the freight yard lots.”

That case involved the purchase of the stock of the Long Island Railroad from the Pennsylvania Railroad for $65 million. As part of the consideration, it gave a subsidiary corporation of the railroad an "option agreement” to buy 12 lots in the freight yard if the MTA decided that it did not need the property. The "option” expired if it was not exercised within 99 years. The court stated (67 NY2d, at p 160) that the issue presented by the appeal was whether the "option agreement”, which it characterized as a preemptive right, "violated the prohibition against remote vesting stated in New York’s Rule against Perpetuities (see, EPTL 9-1.1 [b]).” The Court of Appeals decided that the preemptive right involved in the case before them was valid. It explained the essential basis for its ruling, as follows: "Application of the rule against remote vesting here would defeat the policies underlying the rule because it would invalidate an agreement which promoted the use and development of the property while, at the same time, imposing only a minor impediment to free transferability.” (67 *81NY2d, at p 166.) Then, the Court of Appeals asserted that the validity of the preemptive right must be assessed by applying the common-law rule prohibiting unreasonable restraints.

In Bruken (supra), the Court of Appeals relaxed the traditional rules to permit certain commercial and governmental land transactions, in effect seeking to bolster the underlying purposes of the perpetuity doctrines. However, to water down the application of the perpetuity doctrines in the case before us would be counterproductive, giving judicial sanction to a device for perpetuating discrimination in private housing. Judged by such a standard it is my belief that the right of first refusal, which is the subject of the appeal before us, should be invalidated.

The Rule Against Perpetuities is frequently viewed as a regressive relic of the dim and distant past, a principle to be avoided or evaded, if at all possible. This is unfortunate because the rule was a necessary response, after the Statute of Uses in 1535 and the Statute of Wills in 1540, to the attempt by those owning property to restrict future ownership and distribution of land. Property interests could be created which would cause uncertainty for hundreds of years after their creation, restricting the transferability of the property, reducing its ability to be sold, preventing its complete utility to present owners and to the public. The Duke of Norfolk’s case (Howard v Norfolk, 22 ER 931 [1682]) in which the Rule Against Perpetuities, a progressive doctrine, was at last formulated, was designed to strike a balance between the needs of future generations to shape their property rather than be bound by the "dead hand” of past generations. We are living today in a period when new property interests are emerging and these interests should not be limited by the restrictive condition imposed by prior owners. The Rule Against Perpetuities protects present and future generations from the restraints sought to be imposed by past owners. In my view, its application should not be discouraged under the present circumstances.

This appeal raises two basic questions. The first is whether the Rule Against Perpetuities applies to the right of first refusal given to the board of a condominium association. The second question, assuming that the Rulé Against Perpetuities applies, is whether the period of time for which the right of first refusal could be exercised violated the rule or whether it constitutes an unreasonable restraint on alienation.

*82What is sometimes forgotten is that the Rule Against Perpetuities is different from a restraint on alienation. In the matter before us, we are concerned with both.

Many cases are based upon a misapprehension of the applicable law. "The tying up of property, the taking it out of commerce, can be accomplished either, first, by restraining the alienation of interest in it, or, secondly, by postponing to a remote period the arising of future interest. To guard effectually against this evil, as the law considered it, both these methods had to be provided against. The law provided against the first by the doctrine that all interests should be alienable; it provided against the second by the doctrine that all interests must arise within certain limits, — that is, by the Rule Against Perpetuities. These two doctrines, though having originally a common purpose, have had a separate development. The attempts to combine them have led to much confusion.” (Gray, The Rule Against Perpetuities § 119, at 114 [4th ed].)

The Court of Appeals, in Metropolitan Transp. Auth. v Bruken Realty Corp. (supra) has sought to dispel the miasma of misunderstanding surrounding the rule. The court has pointed out that two of the rules prohibiting control over the transferability of property for too long a period of time are incorporated in EPTL 9-1.1 as the Rule Against Perpetuities. The court has termed this the "statutory rule”. Additionally, there is a third rule which invalidates those conveyances which impose unreasonable restraints on alienation, which is referred to as the "common-law rule”. "While the statutory rule is inflexible, measured solely by the passage of time, the common law rule is applied by considering the reasonableness of the restraint. Whether a restraint on the disposition of property is unreasonable is a question of fact depending upon its purpose, duration and, where applicable, the designated method for fixing the purchase price”. (Metropolitan Transp. Auth. v Bruken Realty Corp., supra, pp 161-162.)

The New York Rule Against Perpetuities, codified in 1965, is embodied in EPTL 9-1.1 (b) and provides, in pertinent part, as follows: "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 and any period of ge station involved.”

The case of Smith v Smith (116 AD2d 810), decided by the Appellate Division, Third Department, on January 2, 1986,

*83and cited in Bruken (supra), is closely analogous. In that case, the court held (p 811) that an agreement containing a perpetual "right of first refusal” was "in violation of the rule against perpetuities” and, therefore, void.

This court, in Anasae Realty Corp. v Firestone (103 AD2d 707) reversed the lower court’s declaration that a right of preemption was void under the rule on the grounds that it appeared that the preemption would be exercised within the period of the applicable measuring lives. Thus, sub silentio, this court recognized that preemptions are subject to the rule.

Special Term, in its decision herein (129 Mise 2d 295), at several points conceded that a strict application of the Rule Against Perpetuities would render the right of first refusal at issue invalid, but nevertheless chose to apply a "reasonableness” test, as did the Court of Appeals in Bruken (supra), with respect to preemptive rights in commercial and governmental transactions.

If public policy dictates that the Rule Against Perpetuities should not apply to restrictions on the sale of condominiums, perhaps such determination should be made by the Legislature, and not the court. As the Court of Appeals recently recognized in Matter of Walker (64 NY2d 354) certain rules limiting the disposition of property must be enforced as an expression of State public policy, despite the court’s subjective view of the soundness of such policy. Thus, the court stated that "the law permits a person * * * to dispose of property to any person in any manner and for any object or purpose so long as such disposition is not illegal or against public policy” but that "the courts will not enforce legacies and devises when enforcement would violate legal rules on the disposition of property such as the rule against perpetuities” (Matter of Walker, supra, at pp 357, 359). The court noted (pp 358-359): "Notwithstanding testator’s intent, the legacy may not be given effect because we conclude that to do so would be contrary to the public policy of New York. We do not make that determination out of any personal sense of what is right for these litigants or of what satisfies the general public interest. The courts have no power to invalidate legacies or contracts because of their subjective view of what is sound policy or good policy.”

Like the option involved in Buffalo Seminary v McCarthy (86 AD2d 435, affd 58 NY2d 867) the right of first refusal in the instant action contains no limitation on duration nor *84words suggesting that the parties intended the extent of its life to be anything other than indefinite. In fact, footnote 6 on pages 442 and 443 of Justice Hancock, Jr.’s decision in Buffalo Seminary, adopted by the Court of Appeals, expressly disapproved a lower court’s ruling which had refused to apply the Rule Against Perpetuities to a right of first refusal: "The court in Izzo v Brooks (106 Misc 2d 743, 751-754), while stating that an option which creates a contingent equitable interest would be within the rule against remote vesting, interpreted the pre-emptive option there as creating a vested interest subject to defeasance, thereby avoiding application of the statute. Options are generally regarded as creating contingent equitable interests and we find no support for the court’s construction (see Ann., 66 ALR3d 1294, 1299; Simes, Future Interests [2d ed], § 132, p 281; § 138, p 304; compare cases cited in Ann., 40 ALR3d 920, § 3, [b], pp 929-931, considering conveyances upon conditions subsequent involving pre-emptive options). The rule against perpetuities applies not to the immediate contractual right to exercise the option but to the future interest which may vest if and when the option is exercised.” (Emphasis added; see also, discussion in Metropolitan Transp. Auth. v Bruken Realty Corp., supra, at p 164.)

The form and prerequisites of ownership may seem inviolate and unchanging to us. However, even a superficial examination of Anglo-American legal history since 1066 exhibits an incredible volatility in the law of property. The feudal agricultural system based on the rendition of goods and services in return for the use of land, the separation of naked title from beneficial enjoyment of property which came in the wake of the Statute of Uses, the acceleration of this division as a consequence of the commercial and then industrial revolutions, the control of corporate property by the management group instead of shareholders, all evidence some of the changes in the characteristics of property. These changes have reflected a shift in the power of different economic groups at different times as well as the pressures of emerging social and economic needs. Of course, the inventiveness of lawyers has kept pace by coming up with the concepts and institutions to deal with the new social situations. The need to keep the control and the character of property fluid was never more important than it is today. Ecological demands, the increase in population, the finite nature of available land, all dictate that private ownership and land use increasingly must yield to public requirements. The stake of the public in maximum *85land utilization is increasingly being recognized in the law in such fields as eminent domain, zoning, etc. (see, e.g., McMinn v Town of Oyster Bay, 66 NY2d 544). This is expressly recognized by the Court of Appeals by both the holding and the rationale in Bruken (supra).

This turmoil in our concept of property is reflected in the constitutional protection of all sorts of "statutory entitlements” and is very much evident in the fields of landlord and tenant or co-ops and condominiums. The enforcement of a private agreement to restrict the group of persons who may acquire or use residential apartments seems to come in conflict with present or future communal needs. Hence, a strict application of the Rule Against Perpetuities, it seems to me, would encourage the availability of residential space for more people.

There is another public policy factor which strongly argues against upholding this provision in the bylaws. Since Shelley v Kraemer (334 US 1) the Supreme Court, as well as the other agencies of government, has refused to support, by law, covenants which foster discrimination. Certainly, what the insiders seek to do by their covenant is to legalize a "gentlemen’s agreement”, and thus their right to discriminate in perpetuity. This court should not support that endeavor.

It may be asserted that the sundry and assorted "human rights” statutes can be invoked to counter specific sorts of discrimination in housing. But this argument does not convince me that we should give judicial vindication to an institutional device which has as its primary objective the exclusion of all persons deemed "undesirables” by the small control group. This seems to run directly counter to the public policy rationale expressed in Bruken (supra).

As part of its discussion in the Bruken case, the court stated (supra, p 164) that: "Commentators, and this Court as well * * * have urged that the courts might better concede that although preemptive rights offend the basic policy of the rule against remote vesting, the offense is properly offset by their utility in modern legal transactions and that usefulness justifies excepting them from the operation of the rule”. The opinion goes on to reason (p 165): "The courts have reached this conclusion in a number of circumstances involving options and preemptive rights * * * The holder’s rights have been recognized because enforcement did not violate the underlying purposes of the rule against remote vesting. Quite *86the contrary, enforcement of the preemptive right in such cases encouraged the holder to develop the property by insuring his opportunity to benefit from development and to recapture his investment in it. For similar reasons recent decisions have held that, because the management of condominium developments has a valid interest not only in securing the occupancy of the units but also in protecting the ownership of the common areas and the underlying fee, its preemptive rights to repurchase units before sale to third parties should be excepted from the operation of the rule (see, e.g., Cambridge Co. v East Slope Inv. Corp., 700 P2d 537 [Col]; Anderson v 50 E. 72nd St. Condominium, 129 Misc 2d 295; see generally, Note, Condominiums and the Right of First Refusal, 48 St John’s L Rev 1146, 1149 et seq.). ”

The Bruken court expressly holds that the rule against remote vesting does not apply to preemptive rights in commercial and government transactions, "that their validity is to be judged by applying the rule against unreasonable restraints” (supra, p 168). It also cites as a basis for its holding that "the preemptive right in this case clearly served a beneficial purpose and given its reasonableness in terms of duration and price, it should be enforced” (supra, p 168).

The test of whether the Rule Against Perpetuities should be applied, therefore, depends upon whether the right of first refusal is reasonable or in furtherance of desirable public policy. Judged by such a standard, it seems difficult to justify in the situation before us a rejection of the established rule of 400 years which has served to prevent the tying up of the widest control and enjoyment of land. The need to prevent unnecessary restrictions on land was never more pressing than today, when residential property is becoming scarcer and scarcer. A decision as to the social value of a condominium fettered by a right of first refusal, as compared to one without such restriction, or a decision that it is more socially desirable to encourage condominiums as compared with keeping residential apartments more available for rental, are questions which perhaps should be better left to the Legislature.

If the justification for a judicial exception to the rule against remote vesting is that it establishes a good financial base for condominiums, certainly this objective can be attained by a financial check of prospective purchasers or guarantees by them. If the rationale is that condominiums could be sold easier if the prospective purchasers were screened by *87the "in” group, it certainly seems to raise a question of social utility insufficient to warrant such judicial activism.

It seems noteworthy that the deviation from the Rule Against Perpetuities in Bruken (supra) was to be applied on a case-by-case analysis in the future. If there is an exception made in the case before us, it will validate every "right of first refusal”.

The precise issue presented to us by this appeal is whether a right of first refusal, unlimited in duration, violates the Rule Against Perpetuities, or any of its associated doctrines, when applied to a residential condominium. Ultimately, the issue may be resolved by the Court of Appeals or the Legislature. Meanwhile, in light of the authorities in New York at the present time and especially on the basis of the public policy considerations expressed herein, the order of Special Term should be reversed, and plaintiffs’ motion for a preliminary injunction granted.

Fein, Milonas and Kassal, JJ., concur with Ellerin, J; Asch, J. P., dissents in an opinion.

Order, Supreme Court, New York County, entered on or about June 28, 1985, affirmed, without costs and without disbursements.