Case Title: LAMAR ADVERTISING, a South Dakota corporation, authorized to do business in Wyoming v. LARRY and VICKIE NICHOLLS, L.L.C., a Wyoming limited liability company

Citation: 

Docket Number: S-08-0188

State: wyoming

Court: Wyoming Supreme Court

Date: 2009-08-11T00:00:00Z

Document:
LAMAR ADVERTISING,  a South Dakota corporation, authorized to do business in Wyoming v. LARRY and VICKIE NICHOLLS,  L.L.C., a Wyoming limited liability company2009 WY 96213 P.3d 641Case Number: No. S-08-0188Decided: 08/11/2009
APRIL 
TERM, A.D. 2009

 
 

LAMAR 
ADVERTISING, a South Dakota corporation, authorized to do business in 
Wyoming,Appellant(Defendant),v.LARRY and VICKIE 
NICHOLLS, L.L.C., a Wyoming limited liability 
company,Appellee(Plaintiff).

 
 

Appeal 
from the District Court of Sweetwater County

The 
Honorable Jere A. Ryckman, Judge

 
 
Representing 
Appellant:

Timothy 
M. Stubson and Orintha E. Karns of Brown, Drew & Massey, LLP, Casper, 
Wyoming.  Argument by Ms. 
Karns.

 
 
Representing 
Appellee:

Frank 
R. Chapman of Chapman Valdez, Casper, Wyoming.

 
 
Before 
VOIGT, C.J., and GOLDEN, HILL, KITE, and BURKE, JJ.

 
 
KITE, 
Justice.

 
 
[¶1]      Lamar Advertising 
(Lamar) appeals from the district court's order granting summary judgment in 
favor of Larry and Vickie Nicholls, LLC (Nicholls).  The district court ruled that a lease 
allowing Lamar to maintain a billboard on Nicholls' property was void as an 
unreasonable restraint on alienation.  
We conclude that the district court applied the wrong legal test when it 
considered the reasonableness of the restraint.  The correct test requires only a showing 
of a rational justification for the lease.  
Applying that test to the undisputed facts, we conclude, as a matter of 
law, the lease did not constitute an improper restraint on alienation.  Consequently, we 
reverse.

 
 
ISSUE

 
 
[¶2]      Lamar states the 
issue on appeal as:

 
 
            
Whether the District Court erred by applying the test for a direct 
restraint on alienation to determine whether a lease between these parties is an 
unreasonable restraint on alienation.

 
 
Nicholls 
phrases the issue as:

 
 
            
Whether the District Court was correct in applying a reasonableness test 
to determine the validity of a Lease which created a restraint on 
alienability.

 
 
FACTS

 
 
[¶3]      The 
underlying facts of this case are essentially undisputed.  Effective March 1, 1990, Frontier 
Outdoor Advertising (Frontier) entered into a lease with Cyril Rahonce allowing 
Frontier to maintain a billboard on Mr. Rahonce's property in Rock Springs, 
Wyoming.  The lease provided that 
the initial term would be fifteen years, with a provision for automatic renewal 
if neither party gave notice of its intent to terminate thirty days prior to the 
end of term.  In exchange for 
allowing Frontier to use his property, Mr. Rahonce was to receive an annual 
payment of $400.  The lease provided 
it was subject to assignment and its terms would apply to the parties' 
successors.  The lease was not 
recorded.    

 
 
[¶4]      Over the years, 
ownership of the property changed several times.  In 1993, Mr. Rahonce conveyed the 
property to High Country Landscaping, and Frontier paid the annual lease payment 
to the new owner.  In 1997, Larry 
and Vickie Nicholls purchased the property from High Country Landscaping.  The disputed property was subsequently 
transferred to the plaintiff limited liability company, Larry and Vickie 
Nicholls, LLC.  Plains Tire and 
Battery (Plains Tire) was located adjacent to the disputed property, and Mr. and 
Mrs. Nicholls owned the company that was the majority shareholder of Plains 
Tire.  Plains Tire used the property 
for parking.    

 
 
[¶5]      The lessee also 
changed after the lease was executed.  
In 1998, Lamar purchased Frontier and acquired its interest in the lease 
at issue here.   During the 
time that Nicholls owned the property, Lamar tendered the annual lease payments 
to Plains Tire and the payments were accepted until 2006.    

 
 
[¶6]      On July 26, 2005, 
Nicholls notified Lamar that the lease had expired and would not be 
renewed.  Lamar claimed the lease 
had renewed automatically because Nicholls did not give notice of its intent to 
terminate thirty days prior to the end of the first term.  Nicholls filed a complaint in the 
district court, seeking a declaratory judgment that Lamar's lease was not valid 
and requesting an order quieting title to the disputed property to 
Nicholls.    

 
 
[¶7]      After answering 
the complaint and generally denying Nicholls' allegations, Lamar filed a motion 
for summary judgment seeking a ruling that the lease was effective.  Nicholls filed an opposing summary 
judgment motion, arguing it was a bona fide purchaser and the lease was not 
binding upon it because it was not notified of the lease when it purchased the 
property.  Nicholls also claimed the 
lease was void as an unreasonable restraint on alienation.1  The district court ruled that Nicholls 
had inquiry notice of the lease, but granted summary judgment to Nicholls on the 
basis that the lease was void as an unreasonable restraint on alienation.  Lamar appealed to this Court.    

 
 
STANDARD 
OF REVIEW

 
 
[¶8]      A district 
court's summary judgment ruling is reviewed de novo, using the same materials and 
following the same standards as the district court.  Alloway v. RT Capital, Inc., 2008 WY 
123, ¶¶ 5-6, 193 P.3d 713, 715 (Wyo. 2008).  Summary judgments are governed by 
W.R.C.P. 56(c):

 
 
The 
judgment sought shall be rendered forthwith if the pleadings, depositions, 
answers to interrogatories, and admissions on file, together with the 
affidavits, if any, show that there is no genuine issue as to any material fact 
and that the moving party is entitled to a judgment as a matter of 
law.

 
 
[¶9]      In reviewing a 
summary judgment motion, the facts are considered from the vantage point most 
favorable to the party opposing the motion, and we give that party the benefit 
of all favorable inferences that may fairly be drawn from the record.  Metz v. Laramie County School Dist. No. 1, 
2007 WY 166, ¶ 17, 173 P.3d 334, 
339 (Wyo. 2007); Cook v. Shoshone First 
Bank, 2006 WY 13, ¶ 11, 126 P.3d 886, 889 (Wyo. 2006).

 
 
DISCUSSION

 
 
[¶10]   The district court determined that 
our decision in Hartnett v. Jones, 629 P.2d 1357 (Wyo. 
1981) governed in this case.  In Hartnett, three parties owned a tract of 
land and they agreed that each party would have the right to purchase the 
interests of the others if they decided to sell.  This right was described as a 
"preemptive right," but it also could be termed a right of first refusal.  Hartnett sued Jones and Whitlock because 
his preemptive right was not honored when Whitlock sold his interest to 
Jones.  Id. at 1359-60.  Jones and Whitlock defended on a number 
of bases, including arguing that the preemptive right was an unreasonable 
restraint on alienation.  We applied 
a reasonableness standard to determine whether the preemptive right was an 
invalid restraint on alienation.  
The factors we considered were:  
"(1) the purpose for which the restraint is imposed; (2) the duration of 
the restraint; and (3) the method of determining the price."  We held the restraint was reasonable and 
did not violate the rule against unreasonable restraints on alienation.  Id. at 1363.    

  

[¶11]   The district court applied the 
"reasonableness" test from Hartnett 
and determined the lease at issue in this case was an unreasonable restraint 
on alienation.  It 
ruled:

 
 
In 
the current case, the circumstances surrounding the lease reveal an unreasonable 
restraint on alienation.  Because 
the lease automatically renewed in 2005, due to [Nicholls'] failure to terminate 
the lease at the end of the term, [Nicholls'] only means of circumventing the 
lease would be to improve the property by "erecting thereon a permanent 
industrial[,] commercial or residential building as evidenced by a building 
permit."  According to the Parties' 
arguments heard by this Court on April 23, 2008 on motions for summary judgment, 
a Rock Springs City ordinance prevents [Nicholls] from ever obtaining a building 
permit while [Lamar's] billboard is erected on the property.  Though the "purpose for which the 
restraint is imposed" may be to protect [Lamar's] leasehold interest, the 
consequence of the restraint inhibits the marketability of the property.  The "duration of the restraint" may be 
only fifteen years under the terms of the lease, but the inability to improve 
the property due to the presence of [Lamar's] sign is indefinite.  Finally, the "method of determining 
price" is fixed by the lease at $400.00 per year.  The fixed price leaves little incentive 
for [Lamar] to accommodate improvements to the property.

 
 
In 
the current case, the benefits of the purpose behind the restraint are few, but 
the extent that alienability would be hindered is great.  This Court finds that the handicap upon 
the marketability of the property represents an unreasonable restraint on 
alienation.  Consequently, the lease 
is void. 

 
 
(citations 
omitted).    

 
 
[¶12]   Lamar claims that, although the 
reasonableness test was appropriate in Hartnett because the preemptive right 
was a direct restraint on alienation, that test should not have been applied to 
the lease at issue here because it is only an indirect restraint on 
alienation.  According to Lamar, the 
Restatement of Property directs that servitudes that impose indirect restraints 
on alienation should not be tested for reasonableness but, instead, should be 
found invalid only if they lack a rational justification.  Lamar maintains that the record clearly 
establishes a rational justification for the lease.  

 
 
[¶13]   Restatement (First) of Property § 
404 (1944) defines a direct restraint on alienation as:

 
 
(1)  A restraint on alienation, as that 
phrase as used in this Restatement, is an attempt by an otherwise effective 
conveyance or contract to cause a later conveyance  

 
 
            
(a)       
to be void; or

 
 
            
(b)       
to impose contractual liability on the one who makes the later conveyance 
when such liability results from a breach of an agreement not to convey; 
or

 
 
            
(c)        to 
terminate or subject to termination all or part of the property interest 
conveyed.

 
 

See 
also, 
Smith v. Osguthorpe, 58 P.3d 854, 860 
(Utah Ct. App. 2002).   Phrased 
another way, a "direct restraint on alienation is a provision in a deed, will, 
contract, or other instrument which, by its express terms, or by implication of 
fact, purports to prohibit or penalize the exercise of the power of 
alienation."  Spanish Oaks, Inc. v. Hy-Vee, Inc., 655 N.W.2d 390, 399 (Neb. 2003).  Direct 
restraints on alienation include such things as "prohibitions on transfer 
without the consent of another, prohibitions on transfer to particular persons, 
requirements of transfer to particular persons, options to purchase land, and 
rights of first refusal."  
Restatement (Third) of Property: Servitudes § 3.4 cmt. b (2000).  

 
 
[¶14]   Restatement (Third) of Property: 
Servitudes § 3.4 states that the test for determining whether a direct restraint 
on alienation imposed by a servitude is enforceable is the "reasonableness" 
test:

 
 
            
A servitude that imposes a direct restraint on alienation of the burdened 
estate is invalid if the restraint is unreasonable.  Reasonableness is determined by weighing 
the utility of the restraint against the injurious consequences of enforcing the 
restraint. 

 

[¶15]   Unlike a direct restraint, an 
indirect restraint does not place express limitations on the owner's right to 
convey the property.  An indirect 
restraint on alienation "arises when an attempt is made to accomplish some 
purpose other than the restraint of alienability, but with the incidental result 
that the instrument, if valid, would restrain practical alienability.'"  Smith, 58 P.3d  at 860, quoting Redd v. Western Savings & Loan Co., 
646 P.2d 761, 764 (Utah 1982).  
See also, Spanish Oaks, 655 N.W.2d  at 399.  Restatement (Third) of Property: 
Servitudes § 3.5 (2000) pertains to indirect restraints on alienation created by 
servitudes:

 
 
(1) 
      An 
otherwise valid servitude is valid even if it indirectly restrains alienation by 
limiting the use that can be made of property, by reducing the amount realizable 
by the owner on sale or other transfer of the property, or by otherwise reducing 
the value of the property.  

 
 
(2)       A servitude 
that lacks a rational justification is invalid. 

 
 
[¶16]   "Section 3.5 drops the requirement 
that an indirect restraint be reasonable, requiring only a rational 
justification for the restraint."  
Smith, 58 P.3d  at 861, citing 
Restatement (Third) of Property: Servitudes § 3.5 cmt. a.  Comment a of Restatement § 3.5 explains 
the logic underlying the "rational justification" 
requirement:

 
 
            
Many servitudes indirectly affect the alienability of property by 
limiting the numbers of potential buyers or by reducing the amount the owner 
might otherwise realize on a sale of the property. If the servitude . . . is not 
otherwise invalid . . ., the fact that the servitude results in some diminution 
in return to the owner, or some reduction in the potential market for the 
property, is not sufficient justification for refusing to give effect to the 
intent of the parties to create the servitude. . . . The parties are usually in 
a better position than judges to decide the economic trade-offs that will enable 
a transaction to go forward and enhance their overall value. . . 
.

 
 
            
Unlike direct restraints 
on alienation, which directly 
interfere with the process of conveying land, and have long been understood and 
constrained by the common law, indirect restraints may have no overall 
negative effects on the wealth of a society overall or more narrowly, on the 
value of its land resources. On the contrary, they may result in an overall 
increase in wealth. Therefore, this section adopts the position that a servitude 
is not invalid simply because it reduces the value of a particular piece of land 
or reduces the amount the owner will realize on sale of the land. Unlike direct 
restraints, where courts can and 
should weigh the harm that will be caused by limiting alienation of a particular piece of 
property against the good that will be accomplished by the restriction, courts 
should not attempt to weigh the harm caused by an indirect restraint against the overall value of 
the transaction in which the servitude played a part. There are too many 
potential variables, and private decision making is more likely than judicial 
decision making to increase overall wealth and well-being.

 
 
            
The purpose of this section is to reject the rule that a servitude must 
be reasonable. If the servitude is not otherwise invalid because it is illegal, 
unconstitutional, or against public policy, it need not be reasonable. The only 
requirement is that there be a rational justification for creating it as a 
servitude. The fact that the servitude limits the market for property by 
limiting its use or reducing its value . . . is irrelevant in determining its 
validity, so long as there is some rational justification for creation of the 
servitude. The fact that there may be a rational justification for the 
obligation is not sufficient; there must be a rational justification for 
imposing the obligation as a servitude that runs with the land. If there is no 
rational justification for the servitude, it should not be enforced because 
there is no real trade-off for the resulting decrease in the value of the land, 
and the legal system should not be used to enforce irrational arrangements 
against unwilling participants.

  

[¶17]   Nicholls argues that we adopted the 
reasonableness standard for both direct and indirect restraints in Hartnett.  We disagree.  The preemptive right at issue in Hartnett was clearly a direct restraint 
on alienation.  Section 3.4 cmt. 
b.  We did not consider in that case 
whether the reasonableness test applied to indirect restraints.  Although some jurisdictions apply a 
reasonableness test to both direct and indirect restraints, see, e.g., Redd, 646 P.2d  at 764; Peavey v. Reynolds, 946 So. 2d 1125 (Fla. 
Ct. App. 2006), we are not convinced that is the correct approach.  As explained in comments a and b to § 
3.5, the economic principles that make direct restraints on alienation suspect 
do not apply in the context of indirect restraints imposed by servitudes, 
especially in the commercial context.  
Instead, parties should be free to decide upon their own contractual 
terms and it is not the role of the courts to second guess their decision 
making, so long as there is a rational justification for the servitude.  

 
 
[¶18]   Lamar's lease specifically 
recognized the possibility that title to the property could be transferred 
during the lease term by requiring that notice of the change of ownership be 
given to the lessee and the new owner be informed of the lease.  Moreover, as our recitation of the facts 
makes clear, ownership of the property transferred several times during the 
lease term.  The lease clearly did 
not amount to a direct restraint on alienation, and Nicholls concedes as 
much.    

 
 
[¶19]   Lamar's lease was simply a 
servitude that had the potential effect of restraining alienation by limiting 
the value or use of the property.  
As such, it amounted to an indirect restraint on alienation.  The rational justification test set out 
in § 3.5 for indirect restraints, rather than the reasonableness test, should 
have been applied to determine whether the lease was invalid.  In reviewing a summary judgment, we 
apply the same analysis as the district court, and, in the interest of judicial 
economy, we will apply the "rational justification" test to determine whether 
Lamar's lease is an improper restraint on alienation.  See generally, Wells Fargo Bank Wyoming, N.A. v. Hodder, 
2006 WY 128, ¶ 32, 144 P.3d 401, 412 (Wyo. 2006) (applying the correct legal 
analysis to the facts in the record following a bench trial).  

 
 
[¶20]   The lease at issue here was 
commercial in nature.  Comment b to 
§ 3.5 states that "[s]ervitudes created in commercial transactions seldom lack 
rational justification."  Lamar's 
general manager, Dave Butterfield, had worked for Frontier before it was 
acquired by Lamar and had personal knowledge of the companies' leasing practices 
and the lease with Mr. Rahonce.  Mr. 
Butterfield explained the rationale for such an approach in leasing billboard 
sites, including the fifteen year term and the automatic renewal, in his summary 
judgment affidavit.  He averred: 

 
 
            
4.         Lamar 
typically enters into leases with landowners that call for a fifteen or twenty 
year time period.  Because it 
usually takes years to re-coup the costs of the initial infrastructure, rental 
payments, and sign up-keep, Lamar has found only leases of these time periods 
allow Lamar to remain profitable given the relatively small margins of 
profit.

 
 
            
5.         
The leases Lamar executes typically require the Lessor to provide at 
least a thirty (30) day and no more than a ninety (90) day notice period prior 
to automatic roll-over as it takes a significant amount of time to find new 
locations, execute new leases with the land owners and rent the space. 

            

As 
recognized by Mr. Butterfield, the lease could be cancelled without penalty if 
the lessor gave notice thirty days prior to the end of the lease term that it 
did not wish to renew the lease.  
Nicholls presented no evidence refuting Mr. Butterfield's statements, and 
those statements provide valid business reasons for the lease terms.  As a matter of law, Mr. Butterfield's 
explanation establishes a rational justification for the servitude. 

 
 
[¶21]   In addition, even if the 
reasonableness test applied, we note that the lease included a provision that 
allowed Nicholls to terminate the leasehold if it obtained a permit to construct 
a building on the site.  The 
district court's conclusion that the lease unreasonably diminished the value of 
the property because Nicholls was not free to improve it by building a structure 
was apparently based solely upon Nicholls' representation that a Rock Springs 
city ordinance prohibited it from obtaining a building permit while the sign was 
located on the property.  However, 
the record does not contain the ordinance or any testimony that an application 
for a building permit was denied. 

 
 
[¶22]   Applying the correct legal 
standard, we conclude the servitude did not pose an improper restraint on 
alienation and the lease was valid.  

 
 
[¶23]   Reversed.

 
 
FOOTNOTES

 
 

1Nicholls apparently abandoned its claim that the lease did not renew 
automatically.