Opinion ID: 2091985
Heading Depth: 1
Heading Rank: 3

Heading: validity of the option agreement

Text: Defendants proffer three grounds for upholding the option: that the statutory prohibition against remote vesting does not apply to commercial options; that the option here cannot be exercised beyond the statutory period; and that this Court should adopt the wait and see approach to the Rule against Perpetuities. We consider each in turn.
Under the common law, options to purchase land are subject to the rule against remote vesting ( see , Simes, Future Interests § 132 [2d ed 1966]; Simes and Smith, Future Interests § 1244 [2d ed]; Leach, Perpetuities in a Nutshell , 51 Harv L Rev 638, 660; see also , London & S. W. Ry. Co. v Gomm , 20 Ch D 562). Such options are specifically enforceable and give the option holder a contingent, equitable interest in the land (Dukeminier, A Modern Guide to Perpetuities , 74 Cal L Rev 1867, 1908; Leach, Perpetuities in Perspective: Ending the Rule's Reign of Terror , 65 Harv L Rev 721, 736-737). This creates a disincentive for the landowner to develop the property and hinders its alienability, thereby defeating the policy objectives underlying the Rule against Perpetuities ( see , Dukeminier, A Modern Guide to Perpetuities , 74 Cal L Rev 1908; 5A Powell, Real Property ¶ 771 [1]). Typically, however, options to purchase are part of a commercial transaction. For this reason, subjecting them to the Rule against Perpetuities has been deemed a step of doubtful wisdom (Leach, Perpetuities in Perspective: Ending the Rule's Reign of Terror , 65 Harv L Rev 737; see also , Dukeminier, A Modern Guide to Perpetuities , 74 Cal L Rev 1908; Note, Options and the Rule Against Perpetuities , 13 U Fla L Rev 214, 214-215). As one vocal critic, Professor W. Barton Leach, has explained, [t]he Rule grew up as a limitation on family dispositions; and the period of lives in being plus twenty-one years is adapted to these gift transactions. The pressures which created the Rule do not exist with reference to arms-length contractual transactions, and neither lives in being nor twenty-one years are periods which are relevant to business men and their affairs (Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives , 73 Harv L Rev 1318, 1321-1322). Professor Leach, however, went on to acknowledge that, under common law, due to an overemphasis on concepts derived from the nineteenth century, we are stuck with the application of the Rule to options to purchase, urging that this should not be extended to other commercial transactions ( id. , at 1322; see also , Simes and Smith, Future Interests § 1244). It is now settled in New York that, generally, EPTL 9-1.1 (b) applies to options. In Buffalo Seminary v McCarthy (86 AD2d 435, supra ), the court held that an unlimited option in gross to purchase real property was void under the statutory rule against remote vesting, and we affirmed the Appellate Division decision on the opinion of then-Justice Hancock (58 N.Y.2d 867). Since then, we have reiterated that options in real estate are subject to the statutory rule ( see, e.g. , Wildenstein & Co. v Wallis , 79 NY2d at 648, supra ). Although the particular option at issue in Buffalo Seminary was part of a private transaction between neighboring landowners, the reasoning employed in that case establishes that EPTL 9-1.1 (b) applies equally to commercial purchase options. In reaching its conclusion in Buffalo Seminary , the court explained that, prior to 1965, New York's narrow statutory rule against remote vesting did not encompass options (86 AD2d at 443). A review of the history of the broad provision enacted in 1965, however, established that the Legislature specifically intended to incorporate the American common-law rules governing perpetuities into the New York statute ( id. , at 441-442). Because the common-law rule against remote vesting encompasses purchase options that might vest beyond the permissible period, the court concluded that EPTL 9-1.1 (b) necessarily encompasses such options ( id. , at 443). Inasmuch as the common-law prohibition against remote vesting applies to both commercial and noncommercial options, it likewise follows that the Legislature intended EPTL 9-1.1 (b) to apply to commercial purchase options as well. Consequently, creation of a general exception to EPTL 9-1.1 (b) for all purchase options that are commercial in nature, as advocated by defendants, would remove an entire class of contingent future interests that the Legislature intended the statute to cover. While defendants offer compelling policy reasons  echoing those voiced by Professor Leach  for refusing to apply the traditional rule against remote vesting to these commercial option contracts, such statutory reformation would require legislative action similar to that undertaken by numerous other State lawmakers ( see, e.g. , Cal Prob Code § 21225; Fla Stat Annot ch 689.225; Ill Stat Annot ch 765, para 305/4). Our decision in Metropolitan Transp. Auth. v Bruken Realty Corp. (67 N.Y.2d 156, supra ) is not to the contrary. In Bruken , we held that EPTL 9-1.1 (b) did not apply to a preemptive right in a commercial and governmental transaction that lasted beyond the statutory perpetuities period. In doing so, we explained that, unlike options , preemptive rights (or rights of first refusal) only marginally affect transferability: An option grants to the holder the power to compel the owner of property to sell it whether the owner is willing to part with ownership or not. A preemptive right, or right of first refusal, does not give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method ( id. , at 163). Enforcement of the preemptive right in the context of the governmental and commercial transaction, moreover, actually encouraged the use and development of the land, outweighing any minor impediment to alienability ( id. , at 165-166). Bruken merely recognized that the Legislature did not intend EPTL 9-1.1 (b) to apply to those contingent future interests in real property that encourage the holder to develop the property by insuring an opportunity to benefit from the improvements and to recapture any investment ( see Metropolitan Transp. Auth. v Bruken Realty Corp. , 67 NY2d at 165; Morrison v Piper , 77 N.Y.2d 165, 170). In these limited circumstances, enforcement would promote the purposes underlying the rule. Bruken , then, did not create a sweeping exception to EPTL 9-1.1 (b) for commercial purchase options. Indeed, we have since emphasized that options to purchase are to be treated differently than preemptive rights, underscoring that preemptive rights impede alienability only minimally whereas purchase options vest substantial control over the transferability of property in the option holder ( see , Wildenstein & Co. v Wallis , 79 NY2d at 648, supra ; Morrison v Piper , 77 NY2d at 169-170, supra ). We have also clarified that even preemptive rights are ordinarily subject to the statutory rule against remote vesting ( see , Morrison v Piper , 77 N.Y.2d 165, supra ). Only where the right arises in a governmental or commercial agreement is the minor restraint on transferability created by the preemptive right offset by the holder's incentive to improve the property. Here, the option agreement creates precisely the sort of control over future disposition of the property that we have previously associated with purchase options and that the common-law rule against remote vesting  and thus EPTL 9-1.1 (b)  seeks to prevent. As the Appellate Division explained, the option grants its holder absolute power to purchase the property at the holder's whim and at a token price set far below market value. This Sword of Damocles necessarily discourages the property owner from investing in improvements to the property. Furthermore, the option's existence significantly impedes the owner's ability to sell the property to a third party, as a practical matter rendering it inalienable. That defendants, the holder of this option, are also the lessees of a portion of the premises does not lead to a different conclusion here. Generally, an option to purchase land that originates in one of the lease provisions, is not exercisable after lease expiration, and is incapable of separation from the lease is valid even though the holder's interest may vest beyond the perpetuities period ( see , Berg, Long-Term Options and the Rule Against Perpetuities , 37 Cal L Rev 1, 21; Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives , 73 Harv L Rev 1320; Simes and Smith, Future Interests § 1244). Such options  known as options appendant or appurtenant to leases  encourage the possessory holder to invest in maintaining and developing the property by guaranteeing the option holder the ultimate benefit of any such investment. Options appurtenant thus further the policy objectives underlying the rule against remote vesting and are not contemplated by EPTL 9-1.1 (b) ( see , Metropolitan Transp. Auth. v Bruken Realty Corp. , 67 NY2d at 165, supra ; see also , Buffalo Seminary v McCarthy , 86 AD2d at 441, n 5, supra ). To be sure, the option here arose within a larger transaction that included a lease. Nevertheless, not all of the property subject to the purchase option here is even occupied by defendants. The option encompasses the entire building  both the commercial space and the theater  yet defendants are leasing only the commercial space. With regard to the theater space, a disincentive exists for Symphony to improve the property, since it will eventually be claimed by the option holder at the predetermined purchase price. Furthermore, the option is not contained in the lease itself, but in a separate agreement. Indeed, section 5 of the option agreement specifies that the right to exercise the option is wholly independent from the lease, stating that it shall not be in any way affected or impaired by    performance or nonperformance, actual or asserted, of any obligation to be performed under the Lease or any other agreement. The duration of the option, moreover, exceeds the term of the lease. Consequently, defendants could compel Symphony to sell them the property even after they have ceased possession as lessee. Put simply, the option here cannot qualify as an option appurtenant and significantly deters development of the property. If the option is exercisable beyond the statutory perpetuities period, refusing to enforce it would thus further the purpose and rationale underlying the statutory prohibition against remote vesting.

Defendants alternatively claim that section 3 (a) of the agreement does not permit exercise of the option after expiration of the statutory perpetuities period. According to defendants, only the possible closing dates fall outside the permissible time frame. Where, as here, the parties to a transaction are corporations and no measuring lives are stated in the instruments, the perpetuities period is simply 21 years ( see , Metropolitan Transp. Auth. v Bruken Realty Corp. , 67 NY2d at 161, supra ). Section 1 of the parties' agreement allows the option holder to exercise the option at any time during any Exercise Period set forth in section three. Section 3 (a), moreover, expressly provides that the option may be exercised  at any time after July 1, 1979, so long as the closing date is scheduled during 1987, 1993, 1998 or 2003. Even factoring in the requisite notice, then, the option could potentially be exercised as late as July 2003  more than 24 years after its creation in December 1978. Defendants' contention that section 3 (a) does not permit exercise of the option beyond the 21-year period is thus contradicted by the plain language of the instrument. Nor can EPTL 9-1.3  the saving statute  be invoked to shorten the duration of the exercise period under section 3 (a) of the agreement. That statute mandates that, [u]nless a contrary intention appears, certain rules of construction govern with respect to any matter affecting the Rule against Perpetuities (EPTL 9-1.3 [a]). The specified canons of construction include that [i]t shall be presumed that the creator intended the estate to be valid (EPTL 9-1.3 [b]) and [w]here the duration or vesting of an estate is contingent upon    the occurrence of any specified contingency, it shall be presumed that the creator of such estate intended such contingency to occur, if at all, within twenty-one years from the effective date of the instrument creating such estate (EPTL 9-1.3 [d]). By presuming that the creator intended the estate to be valid, the statute seeks to avoid annulling dispositions due to inadvertent violations of the Rule against Perpetuities. The provisions of EPTL 9-1.3, however, are merely rules of construction. While the statute obligates reviewing courts, where possible, to avoid constructions that frustrate the parties' intended purposes ( see , Morrison v Piper , 77 N.Y.2d 165, 173-174, supra ), it does not authorize courts to rewrite instruments that unequivocally allow interests to vest outside the perpetuities period ( compare , EPTL 9-1.2 [reducing age contingency to 21 years, where interest is invalid because contingent on a person reaching an age in excess of 21 years]). Indeed, by their terms, the rules of construction in EPTL 9-1.3 apply only if a contrary intention does not appear in the instrument. Thus, as the Practice Commentary explains, [t]he court cannot validate an unambiguous disposition on the basis of the grantor's probable intent, but where construction is needed [subd (b)] will be useful in helping to establish the creator's intent (Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 9-1.3, at 543). For example, where a deed contains contradictory phrases, one of which is valid under the Rule ( see , Morrison v Piper , 77 N.Y.2d 165, 173-174, supra ), or where one of two possible interpretations of a term in an agreement would comply with the Rule ( see , Payne v Palisades Interstate Park Commn. , 204 AD2d 787), the court will adopt the construction validating the disposition ( see also , Restatement of Property § 375 [1944]). By contrast, an option containing no limitation in duration demonstrates the parties' intent that it last indefinitely, and EPTL 9-1.3 does not permit an extensive rewriting of the option agreement    so as to make it conform to the permissible period ( see , Buffalo Seminary v McCarthy , 86 AD2d at 446, supra ). The unambiguous language of the agreement here expresses the parties' intent that the option be exercisable at any time during a 24-year period pursuant to section 3 (a). The section thus does not permit a construction that the parties intended the option to last only 21 years. Given the contrary intention manifested in the instrument itself, the saving statute is simply inapplicable.
Section 3 (b), (c) and (d) of the agreement also allow the option to be exercised after the 21-year perpetuities period, which would expire in December 1999. Section 3 (b) authorizes the option to be exercised at any time following the maturity of the mortgage note. The only limit on duration is found in section 4, which designates December 31, 2003, to be the latest possible closing date. The option could thus be exercised until October 2003 pursuant to section 3 (b). Section 3 (c) and (d) each permits exercise of the option for a defined period following a specified contingency. Section 3 (c) is contingent upon termination of the lease; section 3 (d) is contingent upon Symphony's default on the mortgage. Neither the lease nor the mortgage, however, expires until a date in 2003. The lease could therefore be terminated, or Symphony could default on the mortgage, some time prior to 2003 but after the 21-year period lapses in December 1999. Defendants, in turn, could potentially exercise the option during this interval. Defendants urge that, under EPTL 9-1.3 (b), (d), we must presume the parties expected these contingencies to occur, if at all, within the 21-year period. A contrary intention, however, appears in the agreement itself. By specifying in section 4 that the closing date could be scheduled as late as December 31, 2003, the parties manifested their expectation that the contingency might occur and the option might be exercised as late as October 2003, well beyond December 1999. Again, EPTL 9-1.3 (b), (d) cannot save these provisions.
Defendants next urge that we adopt the wait and see approach to the Rule against Perpetuities: an interest is valid if it actually vests during the perpetuities period, irrespective of what might have happened ( see , Dukeminier, A Modern Guide to Perpetuities , 74 Cal L Rev 1867, 1880). The option here would survive under the wait and see approach since it was exercised by 1987, well within the 21-year limitation. This Court, however, has long refused to wait and see whether a perpetuities violation in fact occurs. As explained in Matter of Fischer (307 N.Y. 149, 157), [i]t is settled beyond dispute that in determining whether a will has illegally suspended the power of alienation, the courts will look to what might have happened under the terms of the will rather than to what has actually happened since the death of the testator ( see also , Matter of Roe , 281 N.Y. 541, 547-548). The very language of EPTL 9-1.1, moreover, precludes us from determining the validity of an interest based upon what actually occurs during the perpetuities period. Under the statutory rule against remote vesting, an interest is invalid unless it must vest, if at all, not later than twenty-one years after one or more lives in being (EPTL 9-1.1 [b] [emphasis added]). That is, an interest is void from the outset if it may vest too remotely ( see , Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 9-1.1, at 481; see also , Metropolitan Transp. Auth. v Bruken Realty Corp. , 67 NY2d at 163, supra [(t)he validity of the provision must be judged by the circumstances existing at the time of the grant]). Because the option here could have vested after expiration of the 21-year perpetuities period, it offends the Rule. We note that the desirability of the wait and see doctrine has been widely debated ( see , 5A Powell, Real Property ¶ 827F [1], [3]; see also , Waggoner, Perpetuity Reform , 81 Mich L Rev 1718 [describing wait and see as (t)he most controversial of the reform methods]). Its incorporation into EPTL 9-1.1, in any event, must be accomplished by the Legislature, not the courts. We therefore conclude that the option agreement is invalid under EPTL 9-1.1 (b). In light of this conclusion, we need not decide whether the option violated Symphony's equitable right to redeem the mortgage.