Opinion ID: 6316646
Heading Depth: 1
Heading Rank: 6

Heading: The Transfer Restriction is invalid

Text: {¶ 60} The threshold question in this case is whether the Transfer Restriction is enforceable. And despite the impression one might get from the lead opinion, that question is easily answered. Under our existing caselaw, the Transfer Restriction is invalid because it is an absolute restraint on alienation of a fee-simple 2. Siltstone Resources, L.L.C., initiated the action and through cross-claims and counter-claims, a variety of other parties claiming an interest in the subsurface mineral rights were brought into the litigation. There are three appellants before us, Siltstone Resources, Eagle Creek Farm Properties, Inc., and American Energy-Utica Minerals, L.L.C. 25 SUPREME COURT OF OHIO estate. And even if we apply the so-called modern approach, the Transfer Restriction is invalid because it is unreasonable. A. Ohio has long followed the common-law rule prohibiting absolute restraints on alienation {¶ 61} The Transfer Restriction prevents any transfer of the property without the consent of the Public Works Commission. The restriction is absolute. It is unlimited in time and scope. And it applies to and all future transferees. As a first-year law student could tell you, such restrictions have historically been considered invalid. See Dukeminier & Krier, Property, 379 (1981) (“An absolute    restraint upon a legal fee simple is almost always held void”). {¶ 62} The prohibition on restraints on alienation dates back to the days of King Edward I and the issuance of the statute Quia Emptores in 1290, stripping feudal lords of the power to block alienations by their tenants. Id. at 358, 378. At common law, absolute restraints on alienation of fee-simple lands were strictly prohibited as “ ‘repugnant to the fee.’ ” Joseph William Singer, The Rule of Reason in Property Law, 46 U.C.Davis L.Rev. 1369, 1410 (2013), quoting Northwest Real Estate Co. v. Serio, 156 Md. 229, 144 A. 245, 246 (1929). Because the power of alienation is an essential characteristic of an estate in fee simple, any attempt to restrain that power was considered void. Such restraints were considered economically destabilizing, preventing land from flowing freely in commerce and being put to its highest and best use. See Dukeminier & Krier at 192. {¶ 63} Ohio, like most states, has long followed the common-law rule. See Hobbs v. Smith, 15 Ohio St. 419, 425-427 (1864); Anderson v. Cary, 36 Ohio St. 506 (1881), paragraph three of the syllabus. As we explained over a century ago, “it is of the very essence of an estate in fee simple absolute, that the owner    may alien[ate] it    at any and all times.” Anderson at 515. Thus, “any attempt to evade or eliminate this element from a fee simple estate, either by deed or by will, must be declared void and of no force.” Id. 26 January Term, 2022 {¶ 64} Not only has this rule long been around, it has also been consistently followed by Ohio courts. E.g., Bragdon v. Carter, 4th Dist. Scioto No. 17CA3791, 2017-Ohio-8257, ¶ 11, quoting Margolis v. Pagano, 39 Ohio Misc.2d 1, 3, 528 N.E.2d 1331 (C.P.1986) (“ ‘The case law of Ohio holds that any attempt by a testator to restrain alienation on a grant of fee simple must be declared void’ ”); Foureman v. Foureman, 79 Ohio App. 351, 354, 70 N.E.2d 780 (2d Dist.1946); Durbin v. Durbin, 106 Ohio App. 155, 159, 153 N.E.2d 706 (3d Dist.1957); Murdock v. Lord, 14 Ohio N.P.(N.S.) 156, 31 Ohio Dec. 593, 602 (C.P.1913); Neidler v. Donaldson, 9 Ohio Misc. 208, 212-213, 224 N.E.2d 404 (P.C.1967). As one Ohio treatise puts it, “[s]ince an estate in fee simple implies the entire property in realty, the power of alienation is necessarily and inseparably incidental to it, and an unlimited, conditional restraint of alienation attached to such an estate is void.” 41 Ohio Jurisprudence 3d, Estates, Powers, and Restraints on Alienation, Section 216 (2021). Ohio’s rule is consistent with the traditional rule of other states. E.g., Serio, 156 Md. at 233-234, 144 A. 245. {¶ 65} “ ‘[T]he rules against restraints on alienation are designed to prevent at least five social “evils”: (a) obstruction of commerce and productivity; (b) concentration of wealth; (c) survival of the least fit; (d) abuse of creditors; and (e) dead hand control.’ ” Neidler at 212, quoting Herbert A. Bernhard, The Minority Doctrine Concerning Direct Restraints on Alienation, 57 Mich.L.Rev. 1173, 1180 (1959). {¶ 66} The rule is not without exceptions. In Ohio Soc. for Crippled Children & Adults, Inc. v. McElroy, 175 Ohio St. 49, 52, 191 N.E.2d 543 (1963), we acknowledged the general rule that “where land is devised upon condition that the devisee shall not sell it, such a restraint is void as repugnant to the devise and contrary to public policy.” But we also recognized that in certain situations a grantor might restrict the alienation of property placed in a charitable trust. We premised our decision on the public interest “in encouraging the creation and the 27 SUPREME COURT OF OHIO continuation of trusts for charitable or public purposes,” as well as “the power of a court of equity to authorize a prohibited sale where necessary   , thereby preventing the trust property from being completely inalienable.” Id. at 52-53. {¶ 67} The Public Works Commission argues that we should make a similar exception here. But this case does not involve a charitable trust and none of the special rules allowing a court to authorize a sale in contravention of the deed’s terms apply. Thus, under the long-followed rules of this state, the Transfer Restriction is void. B. Under the modern reasonableness approach, the Transfer Restriction is invalid {¶ 68} Outside of the charitable trust context, this court has never before given effect to an absolute restraint on alienation of a fee simple. The traditional rule followed in Ohio and most jurisdictions was that restraints on alienation of feesimple interests were presumptively void, whereas restraints on life estates and leaseholds were presumptively valid. Singer, 46 U.C.Davis L.Rev. at 1410; Meier & Ryan, Aggregate Alienability, 60 Vill.L.Rev. 1013, 1015 (2015). Other states, however, have moved away from blanket prohibitions on alienation restrictions and adopted a general reasonableness test. See, e.g., Gale v. York Ctr. Community Coop., Inc., 21 Ill.2d 86, 92-93, 171 N.E.2d 30 (1960). {¶ 69} This reasonableness approach reflects an attempt to reconcile the traditional interests in favor of alienability of property with notions of freedom of contract. The approach is adopted by all three Restatements of Property. Most recently, the Third Restatement of Property has set forth a balancing test that weighs “the utility of the restraint against the injurious consequences of enforcing the restraint.” 1 Restatement of the Law 3d, Property, Servitudes, Section 3.4 (2000). If the injurious consequences outweigh the restraint’s utility, then the restraint is unreasonable and invalid. See id. Under this test, the restraint is examined “in the light of all the circumstances to determine whether the objective 28 January Term, 2022 sought to be accomplished by the restraint is worth attaining at the cost of interfering with the freedom of alienation.” 1 Restatement 3d, Section 3.4, Reporter’s Note. {¶ 70} Applying this reasonableness test gets us to the same place as Ohio’s traditional common-law rule. The Transfer Restriction is invalid as unreasonable because it constitutes a direct and absolute restraint on alienation with little corresponding benefit. 1. The injurious consequences of the restraint {¶ 71} Under the reasonableness approach, the injurious consequences of a restraint are measured based on the form and degree of the restraint and the type of estate subjected to the restraint. See 10 Powell, Real Property, Section 77.01 (2021); see also 1 Restatement 3d, Section 3.4, Comment c. The harmful effects that occur as an incident of inalienability “include impediments to the operation of a free market in land, limiting the prospects for improvement, development, and redevelopment of land, and limiting the mobility of landowners and would-be purchasers.” 1 Restatement 3d, Section 3.4, Comment c. a. The form of the restraint {¶ 72} Transfer restraints generally come in one of three forms: disabling restraints, forfeiture restraints, and promissory restraints. 10 Powell, Real Property, Section 77.01; 4 Restatement of the Law, Property, Section 404 (1944). These three types of restraints can be distinguished based on the results of their violation. Meier & Ryan, Aggregate Alienability, 60 Vill.L.Rev. at 1035. A disabling restraint attempts to prohibit or invalidate transfers by declaring any transfer to be void. Id. A forfeiture restraint causes property to be forfeited to the original grantor or a third party if the grantee tries to subsequently transfer the property in violation of the restraint. Id. With a promissory restraint, a grantee promises not to transfer his interest and is liable in contract through damages or an injunction. 10 Powell, Real Property, Section 77.01. 29 SUPREME COURT OF OHIO {¶ 73} At first blush, the Transfer Restriction looks to be a promissory restraint. See id.; see also Meier & Ryan, Aggregate Alienability, 60 Vill.L.Rev. at 1035. The Development Corporation promises that it will not transfer the property and subjects itself to liquidated damages for violation of the deed restrictions. According to the lead opinion, though, the Public Works Commission’s remedies are not limited to damages but may also include equitable relief, presumably including voiding the transfer. See lead opinion at ¶ 13. Under that view, the Transfer Restriction operates like a disabling restraint preventing any transfer of the property without the Public Works Commission’s consent. See 1 Restatement of the Law 2d, Property, Donative Transfers, Section 4.3, Comment a (1983). The only difference is that in the case of a disabling restraint an attempted transfer is automatically invalid, while in the case of a promissory restraint someone else decides whether the transfer is to be repudiated. Id. {¶ 74} Disabling restraints are almost always invalid because of their harsh effect of making a piece of property unmarketable. Meier & Ryan, The Validity of Restraints on Alienation in an Oil and Gas Lease, 64 Buffalo L.Rev. 305, 342 (2016); see also 4 Restatement 1st, Section 405 (“Disabling restraints, other than those imposed on equitable interests under a trust, are invalid”). Promissory restraints are generally subject to the same standards as forfeiture restraints and are only upheld if found to be reasonable. See 1 Restatement 2d, Sections 4.2 and 4.3. {¶ 75} In considering the form of the restraint, the law also draws a distinction between direct and indirect restraints on alienation. A direct restraint is one that imposes express limitations on the ability to convey property by deed, will, contract, or other legal document. 1 Restatement 3d, Section 3.4, Comment b. An indirect restraint is one that does not directly inhibit the transfer of property but that may affect its value or limit the number of potential transferees. Id. An example of an indirect restraint is a provision in a deed requiring a transferee to pay a penalty if he transfers the property to someone else. See id. 30 January Term, 2022 {¶ 76} Here the restraint is a direct restraint. The deed flatly prohibits any transfer without the Public Work’s Commission’s consent. Because direct restraints “clearly interfere with the process of conveying land and have long been subjected to common-law controls,” they must satisfy a more stringent test than indirect restraints. Id. While the justification for an indirect restraint need only be rational, a direct restraint must satisfy the reasonableness test. Compare id., Section 3.4 with id., Section 3.5. b. The degree of the restraint {¶ 77} The law distinguishes between absolute and partial restrictions on alienation. An absolute restraint on alienation prohibits all transfers, without qualification. In contrast, a partial restraint will be qualified in some way. A partial restraint might prohibit alienation for only a certain time period, or to only a certain group of people, or by limiting the manner of transfer. 10 Powell, Real Property, Section 77.01. Whether a restraint is absolute or partial matters, because any increase in the degree of the restraint coincides with a decrease in a property’s mobility and marketability. {¶ 78} The Transfer Restriction is absolute because it prohibits all transfers to anyone for all time. The lead opinion posits that this Transfer Restriction is not absolute because transfers can occur with the Public Works Commission’s permission. Lead opinion at ¶ 26. But it is always the case that an original transferor who has imposed a restraint may relinquish the restraint or decline to enforce it. {¶ 79} Indeed, the Third Restatement flatly says that a consent-to-transfer requirement, like the one in this case, is “an unreasonable restraint on alienation unless there is strong justification for the prohibition, and, unless the consent can be withheld only for reasons directly related to the justification for the restraint.” 1 Restatement 3d, Section 3.4, Comment d. The Comment notes that if the language of a restriction allows consent to be withheld arbitrarily, as is the case with the 31 SUPREME COURT OF OHIO Transfer Restriction, then the restraint can be reasonable “only if the person withholding consent is obligated to supply a substitute purchaser for the property.” Id. c. The type of estate involved {¶ 80} The third consideration is the type of estate involved. To use the bundle of sticks analogy, generally the greater the portion of the bundle covered by the restraint, the greater the restraint’s toll on a property and thus the greater the restraint’s justifying utility must be. See 1 Restatement 3d, Section 3.4, Comment c (“Permissible restraints on alienation of leaseholds are often greater than on feesimple estates, and greater restraints on alienation of easements, profits, and covenant benefits are often permitted than on leaseholds”). {¶ 81} Here, the Transfer Restriction applies to the entirety of a fee-simple estate. Thus, in this regard, the injurious effects of the restriction are at their most severe. 2. The utility of the restraint {¶ 82} The Transfer Restriction is an absolute and direct restraint on alienation of a fee-simple estate. Although it bears many of the attributes of a promissory restraint, under the lead opinion’s construction it functions like a disabling restraint by giving the Public Works Commission unfettered discretion to void any transfer of the property. In this regard, the Transfer Restriction is on the most severe (or injurious) end of the spectrum of possible restraints on alienation. {¶ 83} Under the reasonableness approach, the injurious consequences of the restraint are to be balanced against the utility of the restraint. 1 Restatement 3d, Section 3.4. There are a few considerations here that weigh on the side of enforcing the restraint. For one thing, this case involves an arms-length transaction rather than a donative transfer. See 61 American Jurisprudence 2d, Perpetuities and Restraints on Alienation, Section 91 (2021). Thus, many of the traditional concerns about dead-hand control of property do not apply. In addition, more severe 32 January Term, 2022 restraints on alienation are generally considered justified when land is held for conservation purposes. 1 Restatement 3d, Section 3.4, Comment c. {¶ 84} The Public Works Commission primarily rests its case on two considerations relating to the utility of the Transfer Restriction. First, the Transfer Restriction is said to protect the public interest in maintaining the property as a green space. Second, the Transfer Restriction protects the public investment made through the Clean Ohio Conservation Fund by ensuring that the property remains in the possession of the original grant recipient. {¶ 85} The problem, though, is that these interests are already protected by the Use Restriction. The Use Restriction prohibits the development of the land in any way that conflicts with use of the land as a “green space” nature conservation, thus fulfilling that purpose. And the public interest behind the Clean Ohio Conservation Fund grant is best understood as relating to the manner in which the property is used, not in ensuring that the property is held by any particular recipient. {¶ 86} Indeed, the Use Restriction seems a far superior means to protect these interests than the Transfer Restriction. The Transfer Restriction is perpetual. The financial circumstances of nonprofit entities, like anyone else, are subject to change over time. One can imagine circumstances under which the Community Development Corporation might not be able to maintain the property as green space and the public interest is better served by allowing the property to be transferred to an entity better able to maintain it. The Transfer Restriction, however, would preclude such a transfer absent the Public Works Commission’s consent. The Use Restriction, on the other hand, protects the property’s use as green space regardless of who owns the property. {¶ 87} Thus, if we apply the reasonableness test—assessing the utility of the restraint against the injurious consequences of enforcing the restraint—the restraint plainly fails. By the traditional measures, the injurious consequences are severe: the Transfer Restriction directly and absolutely restricts the alienation of a 33 SUPREME COURT OF OHIO fee-simple estate. And the Transfer Restriction offers very little in the way of utility: most, if not all, of the purported benefit served by the Transfer Restriction is already accomplished by the Use Restriction. {¶ 88} Whether we apply our traditional rule prohibiting absolute restraints on alienation of a fee-simple estate or adopt the modern reasonableness test, the result is the same: the Transfer Restriction is invalid. I would reverse the court of appeals’ decision to the contrary.