Ferrero Const. Co. v. Dennis Rourke Corp.

• Citation: 311 Md. 560,536 A.2d 1137
• Decision Date: 01 September 1985
• Docket Number: No. 139,139
• Parties: , 56 USLW 2478 FERRERO CONSTRUCTION COMPANY v. DENNIS ROURKE CORPORATION ,
• Court: Maryland Court of Appeals

Page 560

311 Md. 560

536 A.2d 1137, 56 USLW 2478

FERRERO CONSTRUCTION COMPANY v. DENNIS ROURKE CORPORATION

No. 139, Sept. Term, 1985.

Court of Appeals of Maryland.

Feb. 10, 1988.

Motion for Reconsideration Denied March 24, 1988.

Robert C. Park, Jr. (Michael J. Gugerty and Linowes & Blocher, on the brief), Silver Spring, for appellant.

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

Before MURPHY, C.J., and SMITH ^*, ELDRIDGE, COLE, RODOWSKY, COUCH ^* and McAULIFFE, JJ.

ELDRIDGE, Judge.

The principal question in this case is whether the Rule Against Perpetuities applies to a right of first refusal to purchase an interest in property.

The pertinent facts are as follows. On April 27, 1981, the plaintiff Dennis Rourke Corp. and the defendant Ferrero Construction Co. entered into a contract for the purchase of two lots on Mercy Court in Montgomery County, Maryland. This contract contained the following clause:

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

Rourke never recorded this contract. Settlement under the contract apparently occurred in May 1981.

On March 12, 1984, Ferrero notified Rourke by mail of a third party offer to purchase Lot 27, one of the remaining lots on Mercy Court. ¹ The letter contained the terms of the third party's offer and afforded Rourke the opportunity "to submit a contract" by March 21, 1984, for it "to be considered." ² Rourke immediately stated that it was exercising its right of first refusal and requested that Ferrero provide a copy of the third party's offer so that Rourke could prepare a contract with identical terms and conditions. ³ On March 21, 1984, Rourke received a copy of the third party's offer. The next day, Rourke submitted a contract that in its essential terms conformed to the third party's offer. Subsequently, Rourke stated that it was prepared to settle on April 24, 1984. Ferrero responded that it had decided to reject both offers and that it would not appear at settlement. Ferrero in fact did not appear at the settlement and, on April 26, 1984, returned both offers, unsigned.

Rourke brought this action for specific performance in the Circuit Court for Montgomery County. In the first count of its amended complaint, Rourke claimed that it was entitled to a conveyance of Lot 27 by virtue of its exercise of the right of first refusal. In the second count, Rourke alleged that, independent of the exercise of the right of first refusal, Ferrero and Rourke had agreed upon a contract for the purchase and sale of Lot 27.

At trial, after the conclusion of Rourke's case, the trial court granted Ferrero's motion for judgment on count one, ruling that Rourke's right of first refusal violated the Rule Against Perpetuities and was, consequently, void. As to the second count, after the presentation of all of the evidence, the trial court held that Ferrero's letter of March 12, 1984, constituted an offer and that Rourke accepted the offer by stating its intent to exercise the right of first refusal. Nevertheless, the court ruled that Ferrero's offer was premised on the parties' mistaken belief that the right of first refusal was valid. Consequently, the court concluded that the parties had not formed a contract, as both had proceeded under a mutual mistake of law.

The Court of Special Appeals reversed on the ground that the Rule Against Perpetuties was inapplicable and that the right of first refusal was valid. Dennis Rourke Corp. v. Ferrero Constr. Co., 64 Md.App. 694, 498 A.2d 689 (1985). Although in Iglehart v. Jenifer, 35 Md.App. 450, 452-453, 371 A.2d 453 (1977), the Court of Special Appeals had assumed that the Rule Against Perpetuities applied to rights of first refusal, the court in this case expressly held the Rule inapplicable to such rights. The intermediate appellate court also indicated its view that the parties had entered into an independent contract for the purchase and sale of Lot 27. Thereafter, we granted Ferrero's petition for a writ of certiorari. ⁴

I.

Subject to a few statutory exceptions, the common law Rule Against Perpetuities remains in effect in Maryland. Maryland Code (1974), § 11-102 to -103 of the Estates and Trusts Article. See also Code (1974), § 4-409 of the Estates and Trusts Article. In Fitzpatrick v. Mer.-Safe, Etc. Co., 220 Md. 534, 541, 155 A.2d 702, 705 (1959), this Court adopted Professor Gray's formulation of the Rule Against Perpetuities: " '[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.' " Gray, The Rule Against Perpetuities, § 201 (4th ed. 1942). The Fitzpatrick Court described the Rule Against Perpetuities as follows (220 Md. at 541, 155 A.2d 702):

"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."

A.

The vast majority of courts and commentators have held that rights of first refusal, which are more commonly known as "preemptive rights," are interests in property and not merely contract rights. 5A Powell on Real Property, p 771 (1987). See also Westpark Inc. v. Seaton Land Co., 225 Md. 433, 449-450, 171 A.2d 736, 743 (1961). This is so because, if the property owner attempts to sell to someone other than the owner of the right of first refusal ("the preemptioner"), the latter may have a court of equity enter a decree of specific performance ordering that the property be conveyed to him. 5A Powell on Real Property, supra, p 711, n. 9. Thus, the preemptioner acquires an equitable interest, which will vest only when the property owner decides to sell. See Note, Real Property--Pre-emptive Right or Right of Refusal--Violative of The Rule Against Perpetuities?, 40 Mo.L.Rev. 389, 391-392 (1975) (a right of first refusal "is in the nature of a springing executory interest").

As rights of first refusal are interests in property, the great majority of American jurisdictions have applied the Rule Against Perpetuities to such rights. See, e.g., Estate of Johnson v. Carr, 286 Ark. 369, 691 S.W.2d 161 (1985); Taormina Theosophical Community, Inc. v. Silver, 140 Cal.App.3d 964, 977, 190 Cal.Rptr. 38, 46 (1983); Atchison v. City of Englewood, 170 Colo. 295, 307-308, 463 P.2d 297, 303 (1970); Neustadt v. Pearce, 145 Conn. 403, 143 A.2d 437 (1958); Watergate Corp. v. Reagan, 321 So.2d 133 (Fla.App.1975); Martin v. Prairie Rod & Gun Club, 39 Ill.App.3d 33, 348 N.E.2d 306 (1976); Weitzmann v. Weitzmann, 87 Ind.App. 236, 242, 161 N.E. 385, 387 (1928); Henderson v. Millis, 373 N.W.2d 497, 505 (Iowa 1985); Barnhart v. McKinney, 235 Kan. 511, 682 P.2d 112 (1984); Three Rivers Rock Co. v. Reed Crushed Stone Co., 530 S.W.2d 202, 208 (Ky.1975); Old Mission Peninsula School Dist. v. French, 362 Mich. 546, 549, 107 N.W.2d 758, 759 (1961); Beets v. Tyler, 365 Mo. 895, 903, 290 S.W.2d 76, 82 (1956); Davies v. McDowell, 549 S.W.2d 619 (Mo.App.1977); North Bay Council Inc. v. Grinnell, 123 N.H. 321, 461 A.2d 114 (1983); Ross v. Ponemon, 109 N.J.Super. 363, 370, 263 A.2d 195, 199 (1970); Peele v. Wilson Co. Bd. of Educ., 56 N.C.App. 555, 560-561, 289 S.E.2d 890, 893-894, petition denied, 306 N.C. 386, 294 S.E.2d 210 (1982); Melcher v. Camp, 435 P.2d 107 (Okla.1967); Hale v. Scanlon, 88 Pa.D. & C. 506, 508 (1953); Clark v. Shelton, 584 P.2d 875, 876-877 (Utah 1978); Skeen v. Clinchfield Coal Corp., 137 Va. 397, 402, 119 S.E. 89, 90 (1923); Smith v. VanVoorhis, 296 S.E.2d 851, 853-854 (W.Va.1982). Cf. Hall v. Crocker, 192 Tenn. 506, 510, 241 S.W.2d 548, 549-560 (1951) (option on condition precedent to repurchase if grantee either died or wished to sell held subject to Rule Against Perpetuities); Smith v. Mitchell, 301 N.C. 58, 66, 269 S.E.2d 608, 613 (1980) (whether a right of first refusal constitutes an unreasonable restraint on alienation depends, inter alia, on whether the duration of the right is greater than the period of the Rule Against Perpetuities).

In addition, the Restatement has adopted the majority position. IV Restatement of Property § 413 comment e (1944). See also Iglehart v. Jenifer, supra, 35 Md.App. at 452-453, 371 A.2d 453; Note, Real Property--Preemptive Right or Right of First Refusal--Violative of the Rule Against Perpetuities?, supra, 40 Mo.L.Rev. at 391-392; 5A Powell on Real Property, supra, p 771 ("Options to purchase or to repurchase land, unconnected with a lease, commonly denominated options in gross, have generally been held bad under the common law rule against perpetuities, when not restricted in duration so as to comply with the permissible period under that rule") (collecting right of first refusal cases); 4A Thompson on Real Property, § 2020, at 655 (1979 Repl. Vol.); L. Simes & A. Smith, The Law of Future Interests, § 1154, at 61 (2d ed. 1956) (rights of first refusal are "normally subject to the rule against perpetuities").

In light of this widespread acceptance of the majority view, we should hesitate before attempting to fashion an exception to the Rule Against Perpetuities for rights of first refusal. In this area of property law, vested rights and settled expectations are at stake. A departure from settled law might introduce doubt as to the value of vested rights. Moreover, the contours of an exception for rights of first refusal might prove difficult to define. Consequently, the policies favoring certainty and stability strongly support our following the majority of courts and applying the Rule Against Perpetuities to rights of first refusal.

A right of first refusal is a type of option. IV Restatement of Property, supra, § 413 comment b (rights...