Otter Creek Development Co. v. Friesenhahn

• Decision Date: 02 May 1988
• Docket Number: No. 87-290,87-290
• Citation: 748 S.W.2d 344,295 Ark. 318
• Parties: OTTER CREEK DEVELOPMENT COMPANY, an Arkansas Limited Partnership, Appellant, v. Vernon C. FRIESENHAHN d/b/a Friesenhahn Development Company, Appellee.
• Court: Arkansas Supreme Court

Page 344

748 S.W.2d 344

295 Ark. 318

OTTER CREEK DEVELOPMENT COMPANY, an Arkansas Limited Partnership, Appellant, v. Vernon C. FRIESENHAHN d/b/a Friesenhahn Development Company, Appellee.

No. 87-290.

Supreme Court of Arkansas.

May 2, 1988.

Jack A. McNulty, Pine Bluff, Robert V. Light, Little Rock, for appellant.

Griffin Smith, Little Rock, Homer Tanner, No. Little Rock, for appellee.

DUDLEY, Justice.

The only issue we need to decide is whether an option to purchase real estate violates the rule against perpetuities.

In 1971, the appellant, Otter Creek Development Company, a domestic limited partnership, was formed for the purpose of investing in and developing a tract of land at the then proposed junction of Interstate Highway 30 and Interstate Highway 430 in south Pulaski County. Otter Creek acquired a large tract of land and, on March 23, 1981, gave an option to purchase six of the acres to appellee Vernon C. Friesenhahn d/b/a/ Friesenhahn Development Company. The option grants appellee one year in which to purchase the six acres, and the option is renewable annually by payment of a specified sum. There is no limit on the number of years the option can be renewed. The option further provides that it is binding on the heirs, successors, and assigns of the parties. The option provides that it will be terminated automatically if not exercised within 90 days from the date that appellee Friesenhahn receives notice from Otter Creek that a building permit is available from the City of Little Rock. The appellee has renewed the option each year and filed a declaratory judgment proceeding asking that his option be declared valid. The trial court declared the option valid. We reverse because the option violated the rule against perpetuities.

We have held that a repurchase option contained in a deed is subject to the rule against perpetuities, Broach v. City of Hampton, 283 Ark. 496, 677 S.W.2d 851 (1984), but we have never before decided whether an independent option to purchase is subject to the rule. We now hold that an independent option to purchase real estate is subject to the rule against perpetuities. Our reason for the holding is that we look upon independent options to purchase real estate as creating future interests depending on the contingency of the exercise of the option. This position has been taken by all but one of the courts which considered the issue. See Annotation, Independent Option to Purchase Real Estate as Violating Rule Against Perpetuities or Restraints on Alienation, 66 A.L.R.3d 1294 (1975), and J. Gray, The Rule Against Perpetuities § 330 (4th ed. 1942).

The issue then becomes whether this independent option violates the rule against perpetuities. The Constitution of Arkansas forbids "perpetuities," but it does not describe them. Ark. Const. art. 2, § 19. The description comes from common law. Broach v. City of Hampton, 283 Ark. 496, 677 S.W.2d 851 (1984). Common law describes the rule against perpetuities as a rule which prohibits the creation of future interests or estates which by possibility may not become vested within the life or lives in being at the time of the effective date of the instrument and 21 years thereafter. Id. The agreement now before us provides that the appellee, the optionee, or his heirs or assigns can exercise the option over an unlimited number of years, subject only to automatic termination if the option is not exercised within 90 days of the availability of a building permit, if ever that condition occurs. It is clear that on the date the instrument was signed there existed a distinct possibility that the specified contingency might not occur until after expiration of the life or lives in being plus 21 years.

By quoting one sentence from a federal district court case, the appellee argues that the rule is not violated when the contingency, as in this case, is capable of vesting in lives in being plus 21 years. The argument is clearly contrary to our settled law. In Comstock v. Smith, 255 Ark. 564, 566, 501 S.W.2d 617, 618 (1973), we wrote, "The interest must vest within the time allowed by the rule. If there is any possibility that the contingent event may happen beyond the limits of the rule, the transaction is void." In the case before us the contingent event may happen beyond the limits of the rule. Therefore, the option is void. The dissenting opinion would retroactively overrule Comstock v. Smith and decide this case on a basis neither pleaded nor asked below or in this Court. Comstock v. Smith was decided in 1973 and has now become a rule of property. This Court should rarely overrule an earlier decision when the decision has become a rule of property. Gibson v. Talley, 206 Ark. 1, 174 S.W.2d 551 (1943); Fisher v. Cowan, 205 Ark. 722, 170 S.W.2d 603 (1943); Town of Pocahontas v. Central Power & Light Co., 152 Ark. 276, 239 S.W. 1 and 244 S.W. 712, appeal dismissed, 260 U.S. 755, 43 S.Ct. 94, 67 L.Ed. 498 (1922). Even if we should decide to overrule a rule of property, we could not do it retroactively, but could only give a caveat for the future. O'Brien v. Atlas Finance Co., 223 Ark. 176, 264 S.W.2d 839 (1954). We choose not to overrule the rule of property.

Reversed and remanded for entry of a decree consistent with this opinion.

HICKMAN and HAYS, JJ., dissent.

PURTLE, J., not participating.

HAYS, Justice.

While I am tempted to join the majority and avoid the labyrinth of the Rule Against Perpetuities, I think it is a mistake to mechanically apply the Rule on the basis of a perfunctory examination of the option agreement to see if the magic words are there, i.e., "the interest will vest within a life or lives in being plus twenty-one years." By so doing, the majority opinion ignores pronounced equities present in the case and misses the opportunity to review current trends in the law and, if warranted, adopt improvements to a Rule that has produced considerable criticism. ¹

Why should we think ourselves powerless to do that? As the majority concedes, we are not faced with a specific precedent. Nor are we bound by statutory restraints. The Rule was created by judges and judges have shaped it. Our legislature has never acted on perpetuities. It has been left to the judicial branch to mold the law of perpetuities within the framework of Article 2, § 19 of our Constitution: "Perpetuities ... are contrary to the genius of a republic, and shall not be allowed...." Thus we are free to apply it literally or modify it as common sense and justice dictate. We did exactly that in Broach v. City of Hampton, 283 Ark. 496, 677 S.W.2d 851 (1984), to which I will refer in a moment.

While there is, I concede, an aura surrounding the Rule Against Perpetuities that seems to render it immune from all but rigid application, it is not as though it has not come under fire, particularly in cases where it is applied blindly and irrespective of the equities. In Haggerty v. City of Oakland, 161 Cal.App.2d 407, 326 P.2d 957 (Cal.App.1958), for example, a ten year lease to commence upon completion of a building on the premises was declared void under the Rule. The lessor, the City of Oakland, covenanted to proceed immediately with construction and the lease was to commence on the first day of the second month after completion of the building. The court held that completion of the building was uncertain and could conceivably occur later than twenty-one years after a life in being. Professor Barton Leach characterizes the decision as "absurd." "This result will be considered a reflection on the practical wisdom of courts by all laymen and also by lawyers whose thinking is not dominated by the mystique of the Rule." ² Editorialists of the California Law Review termed the decision "a startling precedent." ³

We are not dealing here with a contingent interest arising gratuitously from a bequest or a testamentary trust, or as a rider to a conveyance of some kind. The option in this case was negotiated at arm's length between knowledgeable and experienced real estate developers. Both had the benefit of competent legal counsel. More importantly, the appellant corporation, which, by this decision, is now freed of its obligations under the option, sought out the appellee to bargain for the agreement. The appellee, we are told, had an option from Kerr Properties on six acres on U.S. Highway I-30, a quarter of a mile from the tract now involved, with a major bank as lead tenant for part of that development. The appellant, in order to develop its own holdings adjacent to I-30, needed to acquire the tract held by the appellee to meet certain requirements of the Arkansas Highway Department for the construction of an exit ramp, essential to the plans of the appellant. Appellant's general partner approached appellee to release the Kerr option in exchange for the option now before us. Appellee agreed after considerable negotiations and the option agreement was signed by the appellee and the appellant. It called for a purchase price of as much as $40,000 per acre, depending on when the option was exercised. ⁴ In addition to the surrender of the Kerr option, appellee has paid appellant a total of $20,000 ($5,000 annually for 1981, 1982, 1983 and 1984) and $100 for 1985. The $100 due for 1986 was refused by appellant and appellee filed this suit for declaratory judgment and specific performance.

The agreement provides that the option would terminate if not exercised within ninety days after receipt of notice from the appellant that a building permit was available from the City of Little Rock. It is clear these parties assumed the conditions of the option would occur within a reasonable time. Neither had any other thought in mind, and some indication of the immediacy with which both sides regarded the agreement is evidenced by the...