Cambridge Co. v. East Slope Investment Corp., 83SC261

• Citation: 700 P.2d 537
• Decision Date: 28 May 1985
• Docket Number: No. 83SC261,83SC261
• Parties: The CAMBRIDGE COMPANY, a general partnership, and Thomas M. Hallin and Carl E. Hallin, individually and as general partners of The Cambridge Company, Petitioners, v. EAST SLOPE INVESTMENT CORP., a Colorado corporation, Donald Q. Burgett and Dolores E. Burgett, Respondents.
• Court: Supreme Court of Colorado

Page 537

700 P.2d 537

The CAMBRIDGE COMPANY, a general partnership, and Thomas M Hallin and Carl E. Hallin, individually and as general partners of The Cambridge Company, Petitioners, v. EAST SLOPE INVESTMENT CORP., a Colorado corporation, Donald Q. Burgett and Dolores E. Burgett, Respondents.

No. 83SC261.

Supreme Court of Colorado En Banc.

May 28, 1985.

Donald K. Bain, Boyd N. Boland, Holme Roberts & Owen, Denver, for petitioners.

John A. Criswell, Englewood, for respondents.

DUBOFSKY, Justice.

In Cambridge Company v. East Slope Investment Corporation, 672 P.2d 211 (Colo.App.1983), the Court of Appeals held that a right of preemption contained in a condominium declaration violated the rule against perpetuities. ¹ We granted certiorari and now reverse.

The Tenmile Creek Condominiums, located in Summit County, are operated by the Tenmile Creek Condominium Association (Association), a corporation composed of all condominium unit owners. Ownership of the sixty condominium units in the project is subject to the terms, covenants and conditions contained in the condominium declaration recorded in accordance with section 38-33-105, 16A C.R.S. (1982). Paragraph 29(i) of the declaration creates a "right of preemption" in the unit owners, defined as a first right to purchase, upon the same terms and conditions offered by a third party buyer, any other unit offered for sale:

In the event an owner of a unit desires to sell such unit and receives a bona fide offer for such sale, the unit shall be offered to the remaining owners who shall have a first right to purchase such offered unit for the same terms and conditions as the bona fide offer. Notice of such bona fide offer shall be given to the Tenmile Creek Condominium Association, which shall be responsible to notify the remaining unit owners of such offer by mailing notice to the remaining owners. The remaining unit owners shall have five days from the date of such mailing to accept such offer, and if not accepted, the sale may be made to such third party offeree.

All of the terms, covenants and conditions contained in the declaration are "deemed to run with the land" and are binding on all condominium unit owners and "their grantees, successors, heirs, executors, administrators, devisees or assigns."

East Slope Investment Corporation owned unit 211 of the Tenmile Creek Condominiums. On September 6, 1978, East Slope entered into a contract with Dolores and Donald Burgett for the sale of unit 211; when the contract was signed, the Burgetts gave East Slope a $500 deposit. At the time the Burgetts entered into the contract, they were aware of the preemptive right set forth in paragraph 29(i) of the condominium declaration. Under the terms of the contract, the sale was to be closed on or before September 30, 1978.

On September 8, 1978, East Slope notified the Association of the terms of the proposed sale of unit 211. On September 11, 1978, the Association mailed a "notice of first right" to all condominium unit owners setting forth the terms of the proposed sale, and informing them that they could exercise their preemptive right within five days of the date the notice was mailed. Before the prescribed five day period had elapsed, the Cambridge Company, a condominium unit owner and general partnership formed to purchase and rent real estate, hand-delivered letters to the Association exercising its preemptive right and agreeing to be bound by the terms of sale set forth in the notice of first right. ² Cambridge Company tendered a $500 deposit with the letters.

On September 15, 1978, the Association informed East Slope and the Burgetts that the Cambridge Company had exercised its right of preemption. East Slope nonetheless conveyed unit 211 to the Burgetts, closing the sale on September 27, 1978.

The Cambridge Company instituted an action in the District Court of Summit County against East Slope and the Burgetts (the defendants), requesting that the conveyance of unit 211 to the Burgetts be set aside, that East Slope be ordered to convey the unit to the Cambridge Company, and that the defendants be ordered to pay $50,000 in damages. At trial to the court, the defendants contended that paragraph 29(i) violates the rule against perpetuities. The district court ruled that paragraph 29(i) does not violate the rule and entered a decree of specific performance. ³ The court also denied the Cambridge Company's request for damages because the evidence of damages was too speculative. The Court of Appeals reversed, holding that paragraph 29(i) violates the rule against perpetuities. We disagree.

The rule against perpetuities, incorporated into the Colorado common law, provides that "no interest in real property is valid unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest." Crossroads Shopping Center v. Montgomery Ward and Co., 646 P.2d 330, 332 (Colo.1981). The rule prevents the remote vesting of contingent interests in real property. A right of preemption, like the one in the present case, creates a specifically enforceable right to purchase real property whenever, in the future, the owner desires to sell; such a right traditionally has been viewed as a contingent equitable interest in real property subject to the rule against perpetuities. Kershner v. Hurlburt, 277 S.W.2d 619, 623 (Mo.1955); see Leach, Perpetuities in a Nutshell, 51 Harv.L.Rev. 638, 660 (1938) (hereinafter "Leach"). Therefore, we have held that the rule "applies" to preemptive rights. Perry v. Brundage, 200 Colo. 229, 234, 614 P.2d 362, 366 (1980).

A technical application of the rule against perpetuities in this case would void the preemptive right at issue. By the terms of the declaration, the preemptive right may be exercised by the current condominium unit owners or "their grantees, successors, heirs, executors, administrators, devisees or assigns." It is conceivable that a preemptive right could be exercised more than 21 years beyond the period of all lives in being relevant to the condominium declaration. Because any possibility, however remote, that an interest will vest beyond the period of the rule against perpetuities voids that interest under the rule, VI American Law of Property § 24.21 at 63 (1974), the interest created by the right of preemption in this case would be void under a mechanical application of the rule.

However, the rule against perpetuities is not merely a technical rule to be mechanically applied. The rule was created by judges to serve important considerations of public policy, and should be applied with those policies in mind. See generally Siegel, John Chipman Gray, Legal Formalism, and the Transformation of Perpetuities Law, 36 U. Miami L.Rev. 439 (1982). Courts generally have not favored remotely vesting contingent interests because of the likelihood that the interests will restrain alienation; where title is encumbered with remotely vesting contingent interests, buyers will be reluctant to purchase the property, inasmuch as the extent and duration of the title they are taking are uncertain. IV Restatement of Property, Introductory Note at 2129-31 (1944); 3 Simes and Smith, The Law of Future Interests, § 1117 at 11 (1956); Boyer and Spiegel, Land Use Control: Preemptions, Perpetuities and Similar Restraints, 20 U. Miami L.Rev. 148, 157 (1965). Indirect restraints on the alienability of property may lower its market value and deter the present owner from making valuable improvements. Id. The rule against perpetuities prevents indirect restraints upon alienation from continuing indefinitely and enhances the alienability and beneficial use of property. Atchison v. City of Englewood, 170 Colo. 295, 305, 463 P.2d 297, 301 (1970); Barry v. Newton, 130 Colo. 106, 114-15, 273 P.2d 735, 740 (1954); Weber v. Texas Co., 83 F.2d 807, 808 (5th Cir.1936), cert. denied 299 U.S. 561, 57 S.Ct. 23, 81 L.Ed. 413 (1936); VI American Law of Property § 26.2 at 411.

Courts have not applied the rule mechanically where its purposes will not be served. For example, an option in a lessee to purchase the leased premises within the term of the lease is exempt from the operation of the rule against perpetuities. Crossroads Shopping Center, 646 P.2d at 332; IV Restatement of Property § 395, Comment a; Leach at 661. The rationale for the exception is that an option to purchase contained in a lease encourages the lessee to improve the property; invalidation of such an option under the rule against perpetuities would defeat one of the purposes of the rule. Id. In addition, courts may refuse to apply the rule against perpetuities where the presence of remotely vesting contingent interests serves public policies that outweigh the policies promoted by the rule. E.g., Southeastern Pennsylvania Transportation Auth. v. Philadelphia Transportation Co., 426 Pa. 377, 233 A.2d 15 (1967), cert. denied 390 U.S. 1011, 88 S.Ct. 1259, 20 L.Ed.2d 161 (1968) (option in city to purchase transportation system promotes public welfare and will not be invalidated under the rule against perpetuities).

In the past we have considered the interrelationship between a preemptive right and the policies underlying the rule against perpetuities. In Atchison, the plaintiffs, their heirs and assigns possessed a first right to purchase a parcel of land upon the same terms and conditions as the owner was willing to accept from any third party. Noting first that the purpose of the rule against perpetuities is to keep property freely alienable, this court stated that an option to purchase for a fixed price normally would violate the rule because "with such an option outstanding the owner dare not place substantial improvements on the land, and the likelihood of anyone purchasing it is remote." 170 Colo. at 305, 463 P.2d at 301. However, the court suggested, this reasoning does not apply to a preemption to purchase at an offer price received from a third party, and it...