Anderson v. 50 East 72nd Street Condominium

OPINION OF THE COURT Ellerin, J. Plaintiffs-appellants seek to invalidate a standard "right of first refusal” provision contained in the offering plan declaration and bylaws of the defendant condominium on the ground that it violates the Rule Against Perpetuities as set forth in EPTL 9-1.1 (b). We hold that the rule does not invalidate the preemptive right in question. In the instant case, defendants Victoria and Patrick Murphy are the owners of condominium unit apartment No. 5C at 50 East 72nd Street. The unit was purchased pursuant to a condominium offering plan, and subject to bylaws, which provide that in the event an owner of a unit wishes to sell that unit, the board of managers of the condominium, on behalf of all other unit owners, must first be given an opportunity to purchase the unit, or produce a purchaser who will purchase the unit, at the same price and on the same terms as offered by the proposed purchaser. The board of managers must exercise this right of first refusal within 30 days of notification by the seller. While not referring to any particular provision, the bylaws specifically state that they apply in their entirety to "all present and future owners”, and the deed covering the unit provides that the "terms, conditions, covenants and provisions of the Declaration and of the By — 75 — Laws * * * shall bind any person having at any time any interest or estate in the Unit”. In February 1985, the Murphys entered into a contract to sell their condominium unit to plaintiffs-appellants Thomas B. Anderson and Marc P. Schappell. The buyers, one of whom is engaged in the real estate field, concede that they were aware of the right of first refusal at the time the contract was signed. Indeed, the contract itself expressly states that the seller has advised the buyer that the board of managers has a right of first refusal applicable to the sale and that if "it is exercised, the Down Payment shall be refunded to the Buyer, after which neither party shall have any further rights under this contract”. The sellers subsequently notified the condominium board of managers of the proposed sale, and on May 15, 1985, nine days before the proposed closing with plaintiffs was to take place, the board met and decided to exercise its preemptive right. The instant action was commenced immediately thereafter against the condominium board, the sponsor of the offering plan and its general partners, and the Murphys. While the complaint asserts causes of action for breach of contract (against the Murphys) and for inducing that breach (against all the other defendants), and variously seeks damages, specific performance and injunctive relief, the gravamen of the action is the request for a declaratory judgment "that the right of first refusal contained in The Condominium bylaws is void and unenforceable” by reason of the Rule Against Perpetuities. In this State, the "Rule Against Perpetuities” is statutorily codified in EPTL 9-1.1. Subdivision (a) of that section deals with the limitation upon suspension of the power of alienation of an estate in property, while subdivision (b) codifies the rule prohibiting "remoteness of vesting” of such an estate. The latter subdivision, upon which plaintiffs rely, provides as follows: "(b) No estate in property shall be valid unless it must vest, if at all, not later than twenty-one years after one or more lives in being at the creation of the estate and any period of gestation involved.” It is contended that the "right of first refusal” here at issue violates this rule because it is an interest in property which may vest beyond the permissible period. In denying plaintiffs’ motion for a preliminary injunction, Special Term held that the statutory Rule Against Perpetuities should not operate to — 76 — automatically void the preemptive option in question but, rather, that its validity should be tested by the common-law rule against restraints on alienation whereby the reasonableness of the restraint is the determinative factor (129 Misc 2d 295). We affirm. Plaintiffs, both at Special Term and before this court, strenuously argued that the decision of the Court of Appeals in Buffalo Seminary v McCarthy (58 NY2d 867, affg on opn below 86 AD2d 435) is controlling. In that case, an option which granted the holder or his successors or assigns an unlimited right to buy the owner’s land at any time was held void because it violated the statutory rule against remoteness in vesting. The attempt to extend the holding in Buffalo Seminary, which deals with an unlimited option, to cover the preemptive right of first refusal here at issue is rendered untenable by the markedly different character of such right. While preemptive rights are sometimes labeled or mischaracterized as "options”, they are clearly distinguishable from unlimited options in gross of the type dealt with in Buffalo Seminary (supra). A preemption has been said to differ materially from an ordinary option as follows: "An option creates in the optionee a power to compel the owner of property to sell it at a stipulated price whether or not he be willing to part with ownership. A pre-emption does not give to the pre-emptioner the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the person entitled to the pre-emption, at the stipulated price. Upon receiving such an offer, the pre-emptioner may elect whether he will buy. If he decides not to buy, then the owner of the property may sell to anyone.” (6 American Law of Property § 26.64, at 507 [1952].) This distinction is vitally important when considered in conjunction with the purposes and policy considerations which gave rise to the Rule Against Perpetuities. The rule evolved to prevent real property from being fettered with future interests so remote that the alienability of the land and its marketability would be impaired, preventing its full utilization for the benefit of society at large as well as of its current owners. An option, such as in Buffalo Seminary (supra), impairs the value and use of the land, as it forbids, both by its terms and by the risks involved, the improvement of the land. It also restrains the marketability by requiring any potential buyer of the land to also purchase subject to the option, which may be exercised at any time. A preemptive right, on the other — 77 — hand, especially with respect to a condominium owner, does not impair the value or use of the land so as to restrain its alienability. The owner is not restricted in the use of the property and can never be forced to sell. It is only when the owner freely decides to sell, that the preemptive right may be invoked, and if exercised, the owner-seller will still receive the same price and terms as in the bargain he struck. Moreover, the board cannot hold up the sale, as it must exercise the preemptive right promptly, in this case within 30 days. The significant differences between an option and a preemptive right, both in character and effect, were stressed by the Court of Appeals in its recent decision in Metropolitan Transp. Auth. v Bruken Realty Corp. (125 Misc 2d 497, affd 112 AD2d 809, affd 67 NY2d 156), in which it concluded that a different standard should be used in determining the validity of a preemptive right, or right of first refusal, than applies to options in gross. While the precise holding of the case is fashioned to address the specific facts therein involved — i.e., a preemptive right to buy freight yard lots granted to the holder by a governmental entity — and, thus, is phrased as determining that the rule against remote vesting does not apply to preemptive rights in commercial and governmental transactions, the opinion makes clear that the reach of its determination would extend to a preemptive right of first refusal in a condominium plan such as is here in issue. In his comprehensive and sensitive analysis of the relevant authorities and the important policy considerations involved, Judge Simons approvingly notes that the utility of preemptive rights in modern legal transactions justifies excepting such rights from the operation of the rule against remote vesting. In discussing the cases which have upheld the validity of preemptive rights, note is taken of the fact that: "The holder’s rights have been recognized because enforcement did not violate the underlying purposes of the rule against remote vesting. Quite the contrary, enforcement of the preemptive right in such cases encouraged the holder to develop the property by insuring his opportunity to benefit from development and to recapture his investment in it. For similar reasons recent decisions have held that, because the management of condominium developments has a valid interest not only in securing the occupancy of the units but also in protecting the ownership of the common areas and the underlying fee, its preemptive rights to repurchase units before sale to third parties should be excepted from the operation of the rule (see, — 78 — e.g., Cambridge Co. v East Slope Inv. Corp., 700 P2d 537 [Col]; Anderson v 50 E. 72nd St. Condominium, 129 Misc 2d 295; see generally, Note, Condominiums and the Right of First Refusal, 48 St John’s L Rev 1146, 1149 et seq.).” (67 NY2d, at p 165 [emphasis added].) Other jurisdictions have similarly sustained the validity of preemptive rights, finding them neither a restraint upon alienation nor violative of the policy considerations underlying the Rule Against Perpetuities which "is to avoid fettering real property with future interests dependent upon contingencies unduly remote which isolate the property and exclude it from commerce and development for long periods of time, thus working an indirect restraint upon alienation, which is regarded at common law as a public evil.” Weber v Texas Co., 83 F2d 807, 808, cert denied 299 US 561; Rourke Corp. v Ferrero Constr. Co., 64 Md App 694, 498 A2d 689 [1985]; Robroy Land Co. v Prather, 95 Wn 2d 66, 622 P2d 367 [1980]; Shiver v Benton, 251 Ga 284, 304 SE2d 903 [1983]; see also, Leach, Perpetuities in a Nutshell, 51 Harv L Rev 638, 660; 6 American Law of Property §§ 26.64-26.67; cf. Cortese v Connors, 1 NY2d 265.) In light of the comparatively recent emergence and widespread use of new and creative ownership arrangements of property, such as condominiums and cooperatives, that were uncontemplated in the postfeudal agrarian period in which the then progressive Rule Against Perpetuities had its genesis, this modern trend of holding the "right of first refusal” not to be subject to that rule appears to be more consistent with the realities of contemporary commerce and economics than the authorities holding to the contrary. In that regard, we are aware of the Third Department case of Smith v Smith (116 AD2d 810 [Jan. 2, 1986]) which takes the opposite view. While the peculiar facts of that case involve "restrictive options” granted each to the other by tenants in common of a parcel of real property, it must be noted that that case was decided prior to the decision by the Court of Appeals in Bruken (supra) and to the extent that the Smith decision holds that a right of first refusal is subject to the Rule Against Perpetuities we decline to follow it. In Bruken (supra, p 167), the Court of Appeals delineated the test to be used in determining the validity of a preemptive right under the common-law prohibiting unreasonable restraints on alienation. It is the reasonableness of the restraint, judged by its duration, price and purpose, that is determina — 79 — tive. Significantly, the duration of the restraint is not measured by the life of the preemptive right, but rather by the period during which the right can be exercised once the owner decides to sell. (See, Metropolitan Transp. Auth. v Bruken Realty Corp., supra, p 167, and authorities therein cited.) In this case, the board of the condominium is required to exercise the right within 30 days after notification by the owner of the unit and must close within 45 days of the notice of election. Time limitations of such duration are clearly reasonable. As to price, the board or its designee must purchase at the same price and on the same terms as those agreed to in the proposed sale to the third party. Similar conditions as to duration and price have been upheld as reasonable. (See, Rowlee v Dietrich, 88 AD2d 751; Witt v Disque, 79 AD2d 419; Restatement of Property § 413 [1944].) The purpose of such preemptive right is beneficially related to the peculiar characteristics of condominium ownership, whereby in addition to ownership of the particular unit involved, each owner also has an undivided interest in both the common areas and underlying fee. (See, 4B Powell, Real Property ][ 633.14 [2], at 826.4.) There has been no showing or intimation whatsoever by plaintiffs that the right of first refusal here in issue is designed for any other purpose or has been sought to be used for some improper purpose. On the contrary, the clause is one that is generally used in connection with condominium management and has been held to serve a valid interest. (See, Metropolitan Transp. Auth. v Bruken Realty Corp., supra, p 165; Cambridge Co. v East Slope Inv. Corp., — Col —, 700 P2d 537 [1985].) Accordingly, we hold that the preemptive right of first refusal granted to defendant condominium board to purchase, at the same price and terms, a unit offered for sale by an owner, does not constitute an unreasonable restraint on the alienation of such unit and is not subject to invalidation by the statutory "Rule Against Perpetuities” for remote vesting. The order of the Supreme Court, New York County (Eugene R. Wolin, J.), entered on or about June 28, 1985, which denied the plaintiffs’ motion for a preliminary injunction enjoining the sale of the condominium unit owned by defendants Victoria and Patrick Murphy on that basis, should be affirmed, without costs.