Monday, May 21, 2007

Rights of First Refusal and the Rule Against Perpetuities

"A restriction in the deed reserved to the grantor's heirs, executors, administrators, and assigns, a preemptive right to purchase the property on the same terms and conditions contained in any bona fide offer received by, and acceptable to, the grantee, his heirs, executors, administrators, and assigns. The restrictive covenant ... was not limited to a term of years, but was of unlimited duration. "

The plaintiff sought to invalidate the right of first refusal as a violation of the (dreaded) Rule Against Perpetuities.

The SJC found that a right of first refusal to purchase real estate like that in this case is a mere de minimis restraint on the alienation of property. The restraint arises only "when a property owner receives, and is prepared to accept, a bona fide offer and, if the holder of the right chooses not to purchase the property, the owner remains free to sell to the third party. The right involves neither a fixed price, nor a long period during which the holder of the right can choose to purchase. Either of the latter limitations would burden the property by discouraging bona fide offers or, alternatively, making an owner unwilling to sell. Unlike an option to purchase at a fixed price, the owner is assured of receiving market value for his property (and thus will not be deterred from improving it or offering it for sale). Nor will potential buyers, knowing that the market value of the property will remain intact, be deterred from purchasing the property."

This pulls Massachusetts in line with the ALI position that the common-law rule against perpetuities does not apply to a right of first refusal to purchase land. See Restatement (Third) of Property (Servitudes),

The court did point out that an option to purchase real estate at a fixed price falls within the common-law rule against perpetuities. See Certified Corp. v. GTE Prods. Corp. 392 Mass. 821 (1984)

Borlotti v. Hayden Supreme Judicial Court May, 2007

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