Future Interests

Rules Furthering Marketability by Destroying Contingent Future Interests

The Symphony Space, Inc. v. Pergola Properties, Inc.

Court of Appeals of New York, 1996

669 N.E.2d 799
Pages 292-303 Case Book

Facts: Subject of this case is a 2-story building situated on the Broadway block b/w 94 th and 95th Streets
on Manhattans Upper West Side, which housed a theater and commercial space. December 1, 1978
Broadwest Realty owned this building. Broadwest had been operating its properties at a net loss. Later in
1978, Broadwest engaged in a transaction where it sold the entire building to Symphony (P) for $10,010
(lncluding $10 consideration for option to re-buy) (under market value), and leased back the income-
producing commercial property excluding the theater, for $1 per year. Symphony was a non-profit
company devoted to the arts and had previously rented the theater for several one-night engagements.
The agreement gave Symphony a property tax exemption for the entire building, it reduced Broadwests
real estate taxes by $30,000/year and still allowing them to retain the rental income for the commercial
space in the building (trial court found to be $140,000/year). Also, it allowed Broadwest to postpone any
sale until property values in the area increased and until the commercial leases expired. Broadway sold
and assigned its interest under the lease, option agreement, mortgage and mortgage note, as well as its
ownership interest in Pomander Walk and Healy building to Ds nominee (party who holds bare legal title
for the benefit of others or who receives and distributes funds for the benefit of others) for $4.8 million.
The nominee transferred rights to Ds Pergola Properties, Bradford Swett, Casandium Limited, and
Darenth Consultants as tenants in common. Ds intiated a cooperative conversion of Pomander Walk,
which was designated a landmark in 1982, and the value of the properties increased substantially. A 1988
appraisal of the entire blockfront, including the Healy Building, the unused air space and other
development rights available from Pomander Walk, valued the property at $27 million assuming the
enforceability of the option. By contrast, the value of the leasehold interest plus the Healy Building w/o
the option were appraised at $5.5 million. In 1985, Ds notified Symphony that it was exercising its
option under Sec. 3a, with the closing date scheduled for January 5, 1987. Symphony initiated this
declaratory judgment arguing the option violated N.Y. statutory prohibition against remote vesting.

Signed several separate documents, each dated December 31, 1978: (1999 is 21 years)

1. A deed for the property from Broadwest to Symphony

2. A lease from Symphony to Broadwest of the entire building except the theater for rent of $1/year
and for the term January 1, 1979 May 31, 2003, unless terminated earlier;
3. A 25-year, $10,000 mortgage and mortgage note from Symphony as mortgagor to Broadwest as
mortgagee, with full payment due on December 31, 2003.
4. An option agreement by which Broadwest obtained from Symphony the exclusive right to
repurchase all of the property, including the theater.
a. Sec 3: at any time after July 1, 1979, so long as the Notice of Elections specifies that the
Closing is to occur during any of the calendar years 1987, 1993, 1998, and 2003.

Procedural History: Trial court granted Symphonys motion while denying that of Ds.

Issue:
Future Interests
Rules Furthering Marketability by Destroying Contingent Future Interests

Holding: Option Ds seek to enforce violates the statutory prohibition against remote vesting and is
therefore unenforceable.

Reasoning:

Rule Against Perpetuities

Principle: It is socially undesirable for property to be inalienable for an unreasonable period of time.

These rules thus seek to ensure the productive use and development of property by its current
beneficial owners by simplifying ownership, facilitating exchange and freeing property from unknown or
embarrassing impediments to alienability

Professor John Chipman Gray

No 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

Reformation Approaches:

1. Focused on actual rather than possible facts existing at the end of the estate preceding the future
interest in question
2. Designed to avoid purely technical violations by altering the common law conventions in certain
specific circumstances
a. Avoided the fertile octogenarian by stating person over 65 and under 13 is deemed
incapable of having a child
3. Immediate Reformation: Statutes authorizing (or sometimes directing) courts to reform a
disposition in a way that avoid any perpetuity violation while effectuating the transferors intent
as nearly as possible (CY PRES)
4. Wait-and-See: We wait and see whether a contingent interest actually vests within some
permissible vesting period
a. Validating Side (common law Rule): if the unvested future interest is valid under the
common law Rule, that is the end of the matter, and there is no waiting. BUT if the
interest is invalid under the common law Rule, the 2nd step gives the interest a 2nd
chance.
b. The interest is valid if in fact it vests or terminates within the permissible vesting period.
If it is still in existence and not vested at the end of that period, then it is invalid.

N.Y. RAP Statute: (Predicated upon the public policy of the State and constitute non-waivable, legal
prohibitions)

1. (A) Sets forth the suspension of alienation rule and deems void any estate in which the conveying
instrument suspends the absolute power of alienation for longer than lives in being at the creation
of the estate plus 21 years
2. (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

RAP: measured exclusively by the passage of time

Future Interests
Rules Furthering Marketability by Destroying Contingent Future Interests

Common Law: Evaluates the reasonableness of the restraint based on its duration, purpose and
designated method for fixing the purchase price.

Option Under the Lease Agreement: is valid even though the holders interest may vest beyond the
perpetuities period. (This agreement however was within a larger transaction)

Vocab:

1. Nominee: party who holds bare legal title for the benefit of others or who receives and distributes
funds for the benefit of others
2. En ventre sa frigidaire: Belly of the refrigerator
3. Capricious: (of a person) characterized by or guided by unpredictable or impulsive behavior, OR,
(of a decree) contrary to the evidence or established rules of law
4. Preemption Right: privilege to take priority over others in claiming land subject to preemption.
The privilege arises from the holders actual settlement of the land.
a. Does not give the holder the power to compel the owner to sell. It ONLY requires the
owner, if and when she decides to sell, to offer the property first to the holder of the right.

Discussion:

Rigid formula that invalidates any interest that may not vest within the prescribed time period and has
capricious consequences

Creates a disincentive for the landowner to develop the property and hinders its alienability, thereby
defeating the policy objectives underlying the Rule Against Perpetuities

Creation of a general exception to EPTL 9-1.1(b) for all purchase options that are commercial in nature in
nature, as advocated by Ds, would remove an entire class of contingent future interests that the
Legislature intended the statute to cover

Such statutory reformation would require legislative action similar to that undertaken by numerous State
lawmakers

Metropolitan v. Bruken Realty: did not apply to a preemptive right in a commercial and governmental
transaction, unlike options, preemptive rights (or rights of first refusal) only marginally affect
transferability. Preemptive rights actually encouraged the use and development of the land, outweighing
any minor impediments to alienability

Bruken recognized that the Legislature did not intend EPTL 9-1 to apply to those contingent
future interests in real property that encourage the holder to develop the property by insuring an
opportunity to benefit from the improvements and to recapture any investment. Preemptive rights impede
alienability only minimally whereas purchase options vest substantial control over the transferability of
property in the option holder

Sword of Damocles necessarily discourages the property owner from investing in improvements to the
property