Edward J. Levin
DLA Piper US LLP
Unless you have a fetish for things old, arcane, and draconian, you will be pleased to know that as of October 1 recent legislation has removed some teeth from the common law Rule Against Perpetuities.Substance of House Bill 188
The legislation, House Bill 188 or Chapter 381 of the Laws of Maryland of 2007, will abolish the Rule Against Perpetuities for commercial transactions in Maryland and replace it with a statute that in circumstances involving actual consideration will promote the narrow interests served by the Rule without the notorious mischief caused by unborn widows, fertile octogenarians, lives in being, and actual periods of gestation. House Bill 188 amends Estates and Trust Article Section 11-102, it adds a new ET Section 11-102.1, and it amends Section 2 116(d) of the Real Property Article by adding to it a cross reference to the two Estates and Trust Article sections.
Delegate Sandy Rosenberg introduced House Bill 188 on behalf of the Section of Real Property, Planning and Zoning of the Maryland State Bar Association. The Section tried to have the General Assembly adopt similar legislation in 1989 and 1990, and in each of those years the bills passed the House but died in the Senate. This year, the General Assembly enacted House Bill 188, and the Governor signed it into law.
House Bill 188 will provide a carve-out for commercial transactions from the scope of the common law Rule Against Perpetuities. If there is actual consideration involved in a transaction, then the common law Rule Against Perpetuities will not apply and the new rules under House Bill 188 will. House Bill 188 is applicable to contracts, leases, options, rights of first offer, rights of first refusal, rights of first negotiation, and other preemptive rights.
The most important effect of the new law is that if a contract or preemptive right would violate the Rule Against Perpetuities, the new statute inserts a seven year savings clause so that the document will not be void ab initio. On the other hand, under House Bill 188 if the parties do not want seven years to be the applicable period of time before which contingencies must be satisfied or events must occur, they may include in their documents another time period of up to 60 years. Alternatively, drafters may use the standard Rule Against Perpetuities clause (with slight refinement), that the interests under the contract or right must vest before the death of the last to die of ten identified people plus up to 21 years. If a contract provides for too long a period of time, say 150 years, or too many lives in being, say 20, under House Bill 188 the savings period becomes 60 years.
House Bill 188 will apply only to contracts of sale and rights that become effective on or after October 1, 2007. Unfortunately, commercial lawyers will still have to worry about the possible effect of the Rule Against Perpetuities on documents that became effective before that date.
Listing of Exceptions to the Rule Against Perpetuities
Additionally, House Bill 188 adds to Section 11 102 of the Estates and Trusts Article all of the common law and statutory carve-outs that are applicable to the Rule Against Perpetuities. These include the three common law exceptions that Judge Cathell noted in Selig v. State Highway Administration, 383 Md. 655, 861 A.2d 710 (2004), plus the exception created by the Selig case itself. ET Section 11-102 will provide that the Rule Against Perpetuities does not apply to a tenant’s option to renew a lease, to a tenant’s option to purchase leased premises, to a usufructuary’s option to extend the scope of an easement or profit, or to the State Highway Administration’s obligation to offer land that it does not need back to the prior owner or the municipality or the county in accordance with Section 8-309 of the Transportation Article, which was the subject of the Selig case.
Exception for Business Enterprise Buy/Sell Agreements
While House Bill 188 was making its course through the General Assembly during this past session, members of the MSBA’s Business Law Section recognized that the Rule Against Perpetuities applies to both real property and personal property interests, and they wanted to exclude from it certain buy/sell agreements. They saw a problem if a businessman were permitted to transfer his interests to his children or grandchildren (who would have similar transfer rights), but if any of them desired to convey their interests to anyone else, the interests must first be offered to a particular entity or to a particular person, or to that person’s descendants. The right of first offer in such a buy/sell agreement would violate the Rule Against Perpetuities because it may not vest within the requisite period of time. It would also possibly not vest within any period of time provided for under the new rules of House Bill 188.
In order to avoid the problem in this area, by an amendment to House Bill 188 new Section 11-102(b)(10) of the Estates and Trusts Article carves out buy/sell agreements in connection with business enterprises from application of both the common law Rule Against Perpetuities and the new rules of House Bill 188.
Definition of the Rule Against Perpetuities
The common law Rule Against Perpetuities has been a trap for the unwary for centuries. The Rule, which was designed to promote the productive use of land and prevent its removal from commerce for an indefinite time, traces its lineage to the Duke of Norfolk’s Case in 1681, 3 Ch. Cas. 1, 22 Eng. Rep. 931 (1681). The most cited definition of the Rule Against Perpetuities in the Maryland cases is that from the 1959 case Fitzpatrick v. Mercantile-Safe Deposit & Trust Co., 220 Md. 534, 155 A.2d 702 (1959). There the Court of Appeals quoted Professor Gray who wrote, “[N]o interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” The Court added, “It is a rule of law, not one of construction, and it applies to legal and equitable estates of both realty and personalty. It is not a rule that invalidates interests which last too long, but interests which vest too remotely; in other words, the Rule is not concerned with the duration of estates, but the time of their vesting.”
Numerous real estate and commercial contracts and documents that create preemptive rights in Maryland are technically void because they violate the Rule Against Perpetuities, and they may be set aside if one of the parties to those agreements presses the issue. Moreover, even counsel who are familiar with the common law Rule Against Perpetuities may not be able to determine whether certain contracts violate the Rule Against Perpetuities. This is because Maryland’s appellate courts have guided the Rule Against Perpetuities down a rocky road over the past 20 years.
Twenty Years of Cases
In 1988 the Court of Appeals decided Ferrero Construction Co. v. Dennis Rourke Corp., 311 Md. 560, 536 A.2d 1137 (1988), and held that the Rule Against Perpetuities applies to rights of first refusal, following the majority of other states. Because the parties to the underlying agreement in that case were corporations, which have perpetual life, the right of first refusal might not have been exercised within any set period of time, and therefore the right of first refusal was void ab initio. A year later the Court of Appeals decided Dorado Limited Partnership v. Broadneck Development Corp., 317 Md. 148, 562 A.2d 757 (1989), in which a contract was held to be void as violative of the Rule Against Perpetuities because it provided that the settlement would occur 30 days after the lifting of a sewer moratorium of indefinite duration.
Beginning the next year, in 1990, however, the Maryland courts embarked on a path of keeping contracts alive in the face of challenges under the Rule Against Perpetuities. The courts held that if contingencies were within the control of one of the parties, then a reasonable period of time to satisfy them should be implied. The courts also adopted a liberal view of what was within the control of one of the parties. The cases in this line included Stewart v. Tuli, 82 Md. App. 726, 573 A.2d 109 (1990) (settlement under a contract for real property was contingent upon the seller’s terminating the rights of a third party under a prior contract of sale); Hays v. Coe, 88 Md. App. 491, 505, 595 A.2d 484, 491 (1991) (land sale contract extended the time for settlement until good and marketable title could be transferred); Brown v. Parran, 120 Md.App. 653, 708 A.2d 12 (1998) (sales contract was contingent on obtaining percolation tests and permit approvals); and Kobrine, L.L.C. v. Metzger, 151 Md.App. 260, 824 A.2d 1031 (2003) (no violation of the Rule Against Perpetuities because the developer intended to sell all of the lots involved within a reasonable period of time). Kobrine was reversed by the Court of Appeals for other reasons (see 380 Md. 620, 846 A.2d 403 (2004)), and Judge Wilner noted that the Court of Appeals did not accept the rationale of the Court of Special Appeals.
In the 2004 case Arundel Corp. v. Marie, 383 Md. 489, 860 A.2d 886 (2004), the Court of Appeals declined to adopt and apply a “wait and see” analysis, pursuant to which if the subject interest does vest or is exercised within someone’s lifetime, or within a stated period of time, there is no violation of the Rule Against Perpetuities. The Uniform Statutory Rule Against Perpetuities includes a “wait and see” period of 90 years. The applicable period is 360 years in Florida, 365 years in Nevada, and 1,000 years in Colorado and Utah. Notwithstanding the appeal of the “wait and see” rule, the Maryland Court of Appeals decided to adhere to the traditional interpretation of the Rule Against Perpetuities.
These cases made it very hard to determine whether a contract or preemptive right was void as violative of the Rule Against Perpetuities. And to add insult to injury, Section 11 102(b)(5) of the Estates and Trusts Article has provided since 1998 that if a trust agreement states that the Rule Against Perpetuities does not apply to a trustee’s power to sell or mortgage property, then, the Rule Against Perpetuities does not apply to it.
The underlying point of the Rule Against Perpetuities is that it is bad public policy to tie up interests in property for too long without knowing whether those interests will vest. Although it may be appropriate to continue this policy generally, when a contract or preemptive right is invalidated because it violates the Rule Against Perpetuities, the intentions of the parties are frustrated. Clearly, when they signed the operative documents, the parties desired that there would be a contract between them or a right in favor of one of them that would last for at least for some period of time. House Bill 188 is designed to respect the intentions of parties to contracts having contingencies or that contain rights that do not vest immediately, while also supporting the policy of keeping property from being tied up for too long.
Commercial lawyers given to worry used to wake up at night, concerned that their contracts or prescriptive rights might be void because they forgot to include Rule Against Perpetuities savings clauses. Now when they wake up, they can think about House Bill 188 and go back to a good night’s rest.