Dennis Rourke Corp. v. Ferrero Const. Co., 651

• Decision Date: 01 September 1985
• Docket Number: No. 651,651
• Citation: 498 A.2d 689,64 Md.App. 694
• Parties: DENNIS ROURKE CORPORATION v. FERRERO CONSTRUCTION COMPANY. ,
• Court: Court of Special Appeals of Maryland

Page 694

64 Md.App. 694

498 A.2d 689

DENNIS ROURKE CORPORATION v. FERRERO CONSTRUCTION COMPANY.

No. 651, Sept. Term, 1985.

Court of Special Appeals of Maryland.

Oct. 9, 1985.

Thomas J. Walker, Jr., Rockville (Marilyn J. Brasier, Rockville, on brief), for appellant.

Robert C. Park, Jr., Silver Spring (Linowes and Blocher, Silver Spring, on brief), for appellee.

Argued before BLOOM, ROSALYN B. BELL and KARWACKI, JJ.

ROSALYN B. BELL, Judge.

We are asked to decide whether the rule against perpetuities applies to a right of first refusal granted by one corporation to another, when no termination date is provided. Our response is that it does not apply to this right of first refusal. We will explore that right.

Dennis Rourke Corporation, a Maryland Corporation, (appellant) purchased two lots from Ferrero Construction Company, a Maryland Corporation (appellee). The contract contained what is known as a pre-emptive right or right of first refusal and provided that

"[i]n consideration of this contract, the Seller [Ferrero] hereby agrees to extend to the Purchaser, [Rourke] a first right of refusal on the future sale of any of the seven remaining lots on Mercy Court."

Pursuant to the contract language, Ferrero submitted to Rourke a letter communicating an offer by a third party to purchase Lot 21. Rourke declined. Ferrero subsequently wrote an identical letter to Rourke notifying it of a third party offer to purchase Lot 27 and affording Rourke the opportunity to exercise its right of first refusal. That letter read as follows:

"We have in hand an acceptable contract for the sale of Lot 27, Block 2, McCauley [sic] Park. The essential data is as follows:

                Deposit:  $5,000.00
                Settlement:  30 days
                Contract amount:  $70,000.00
                Terms:  All cash
                

"Please let us know whether you intend to submit a contract on this parcel. If you do submit a contract, it must be in our hands by March 21, 1984 in order to be considered."

Rourke responded in a letter which stated:

"Pursuant to your notification of March 12, 1984, please be advised of my intent to exercise my 'first right of refusal' on Lot 27, Block 2 of McAuley Park Subdivision. As I have indicated from the beginning, it has always been my intention to build out the balance of Mercy Court.

"If you would be kind enough to provide me with a copy of your Contract on Lot 27 I will prepare my Contract with exactly the same terms and conditions as the offer you now have."

After further communications, Ferrero provided Rourke with a copy of the contract from the third party for Lot 27. The following day, Rourke prepared and submitted to Ferrero a contract for the purchase of Lot 27. The essential terms of the contract were in complete conformity with the third party offer. Three weeks later, Rourke notified Ferrero of its willingness to go to settlement.

A week after this notification, Ferrero informed Rourke that it had decided to reject both contracts submitted for Lot 27. Ferrero returned both contracts unsigned. Thereafter, Rourke filed suit in the Circuit Court for Montgomery County seeking specific performance of the sale of Lot 27. Ferrero filed a counterclaim for a declaratory judgment.

The trial proceeded on a two county complaint and counterclaim. Count I alleged that under its right of first refusal Rourke was entitled to the conveyance of Lot 27. The second count alleged that the parties had entered into a contract for the sale of Lot 27. The counterclaim sought a declaration that the contract was void. At the conclusion of Rourke's case, the court granted Ferrero's motion for judgment on Count I because Rourke's right of first refusal violated the rule against perpetuities. At the close of all the evidence, the court entered judgment for Ferrero on Count II after finding Rourke's offers for Lot 27 had been made on the mutual mistake that the right of first refusal was valid under the rule against perpetuities; and, the court further found that no independent contract had been formed between the parties. Judgment was also entered for Ferrero on its counterclaim for declaratory judgment.

Rourke has appealed claiming "[t]he trial court erred in its determination that the right of first refusal violated the rule against perpetuities." He further asserts that, in any event, the trial court erred because an independent contract had been formed.

I. RIGHT OF FIRST REFUSAL AND RULE AGAINST PERPETUITIES Pre-Emptive Rights

A pre-emptive right, or right of first refusal, is an exclusive right to have the first opportunity to purchase upon specified terms, or meet any other offer, but only if the seller chooses to sell. VI American Law of Property § 26.64 (A.J. Casner ed. 1952). This latter characteristic distinguishes the pre-emptive right from an option to purchase, and, as we will discuss infra, dictates a different result than we would have reached had we been presented with an option contract.

Pre-emptive rights have been the subject of considerable attention by the courts. They have been challenged in many jurisdictions as an unreasonable restraint against alienation on the ground that they severely limit the right to sell and transfer property. The Restatement of Property views a restraint on the sale of land as valid only if

"(a) the restraint is a promissory restraint or a forfeiture restraint, and

"(b) the restraint is qualified so as to permit alienation to some though not all possible alienees, and

"(c) the restraint is reasonable under the circumstances, and

"(d) if the restraint is a forfeiture restraint, the requirements of the rule against perpetuities are satisfied."

4 Restatement of the Law of Property § 406 (1944).

Whenever the question has been raised in this context courts agree with the Restatement on the proper method for testing the validity of a restraint. As we will discuss infra, there is disagreement among the jurisdictions on the application of the rule against perpetuities to pre-emptive agreements where the price and terms are tied to the acceptable offer.

In this jurisdiction where price and terms of the sale are not at issue and the right is solely the right to buy before any other, the validity of the pre-emptive right has been upheld. Westpark, Inc. v. Seaton Land Company, 225 Md. 433, 171 A.2d 736 (1961); Iglehart v. Jenifer, 35 Md.App. 450, 371 A.2d 453 (1977) cert. denied, 280 Md. 732 (1977).

Rule Against Perpetuities

The rule against perpetuities provides that "[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." Commonwealth Realty Corp. v. Bowers, 261 Md. 285, 296, 274 A.2d 353 (1971), quoting Fitzpatrick v. Mercantile-Safe Deposit & Trust Co., 220 Md. 534, 541, 155 A.2d 702 (1959).

It is a rule of law, not of construction, and applies to legal and equitable estates of realty and personalty. Id.; 2 H. Tiffany, The Law of Real Property § 393 (B. Jones ed. 3d ed. 1939). It does not invalidate interests which last too long, but only those which vest too remotely. Commonwealth Realty Corp. v. Bowers, supra; 2 H. Tiffany, § 397, supra. The purpose of the rule

"appears to be the desire to facilitate the alienation of property, by prohibiting the clogging of the title for any considerable length of time by a provision for a possible or certain change of ownership in the future. In case there is such a provision, the property can be alienated as a whole only by the consent of the person or persons who have the interest which is liable to be divested in the future, and also of the person or persons in favor of whom the divesting clause is to operate, and since the value of each of these interests is ordinarily, by reason of the uncertainty of the future event named, or of the time of its occurrence, a matter of pure conjecture, the property is in effect to that extent withdrawn from commerce. Moreover, the possibility or probability of a change of ownership in the future, without the volition or consent of the present owner, is calculated to affect adversely his readiness or ability to make the most effective use of the property, or to improve it as it is to the public interest that property should be improved. This condition of uncertainty of the title, with its attendant disadvantages, is, by the rule referred to, restricted to what the courts have regarded as a reasonable period from the time of its creation." (footnotes omitted).

2 H. Tiffany § 392, at 152-53, supra.

The Rule and the Restatement Test

There are two distinct views on whether the rule against perpetuities applies to a preferential right which otherwise meets the Restatement test. 4 Restatement of the Law of Property § 406, supra.

The Restatement embraces the view that

"A promissory restraint or forfeiture restraint on the alienation of a legal estate in land which is in the form of a provision that the owner of the estate shall not sell the same without first offering to a designated person the opportunity to meet, with reasonable expedition, any offer received, is valid, unless it violates the rule against perpetuities."

Restatement § 413, at 2441, supra.

The majority of jurisdictions follow the Restatement agreeing that if the pre-emptive right is of unlimited duration, it violates the rule against perpetuities, and is not enforceable. Estate of Johnson v. Carr, 286 Ark. 369, 691 S.W.2d 161 (1985); Watergate Corporation v. Reagan, 321 So.2d 133 (Fla.1975); Martin v. Prairie Rod and Gun Club, 39 Ill.App.3d 33, 348 N.E.2d 306 (1976); Atchison v. City of Englewood, 170 Colo. 295, 463 P.2d 297 (1970) aff'd, 30 Colo.App. 207, 492 P.2d 885 (1972); Smerchek v. Hamilton, 4 Kan.App.2d 346, 606 P.2d 491 (1980); Ross v. Ponemon, 109 N.J.Super. 363, 263 A.2d 195 (1970); Peele v. Wilson County Bd. of Ed., 56 N.C.App. 555, 289 S.E.2d 890, cert. denied, 306 N.C. 386, 294 S.E.2d 210 (1982); Smith v VanVoorhis, 296 S.E.2d 851 (W.Va.1982) Neustadt v. Pearce, 145 Conn....