Rich v. Carolina Constr. Corp. - 355 N.C. 190, 558 S.E.2d 77 (2002)

Rule:

The North Carolina common law rule against perpetuities does not exclude commercial interests from its application. However, the rule under the common law does not apply in all cases involving commercial transactions. Commercial transactions that do not violate the underlying policies behind the rule against perpetuities, as well as those involving mere contract provisions or present vested interests, do not fit under the umbrella of the common law rule.

Facts:

Rich, Rich and Nance (“RR&N”), a North Carolina general partnership, owned an 11.89-acre parcel of land known as "Walking Horse Subdivision" in Elizabeth City, North Carolina. On 29 August 1994, RR&N entered into a contract with LFM Properties to sell this parcel. Based upon their previous negotiations, it anticipated that at some date in the future LFM Properties would convey its interest in the property under the contract to defendant Carolina Construction Corp. (“CCC”), which would ultimately subdivide and develop the property into thirty-seven single-family residential lots. Also, on 29 August 1994, LFM Properties and RR&N executed an addendum to the contract which provided that LFM/CCC would pay RR&N $600 per lot as an availability fee. RR&N thus anticipated a total payment from CCC of $ 97,200: $ 75,000 at the closing and, based on the addendum agreement, $ 22,200 over time as the lots in the subdivision were sold. On 28 April 1995, the sale of the proposed Walking Horse Subdivision closed, and the deed was recorded. RR&N sold only 9.38 acres to CCC, but the price and terms of the agreement remained the same. Apparently, RR&N retained 2.51 acres of the original tract because of its need for an additional drainage area servicing its adjacent development project. Also, at the closing, the parties added a second clause to the addendum that called for inclusion of the availability fee in future restrictive covenants. The parties jointly referred to the deferred money as an "availability fee." However, RR&N characterized the money owed from the addendum as a deferred portion of the purchase price, an accommodation to the buyer and an interest- free loan until the lots were sold. There were no foreclosure or default terms or acceleration clauses in the addendum with regard to nonpayment. 

On 30 May 1997, as anticipated by the parties, CCC took title to the property upon delivery of a general warranty deed from LFM Properties, which deed was recorded. There were no exceptions to or restrictions upon this title. CCC began to develop the property and prepared and recorded restrictive covenants. These covenants did not make reference to the availability fee. The availability fee or deferred payment arrangement mentioned in the first part of the addendum was never recorded. CCC renamed the development "Carolina Village" and redesigned the subdivision to include thirty-eight lots, instead of the original thirty-seven. CCC sold the first lot in Carolina Village on 22 April 1998 and did not pay the fee allegedly owed to RR&N. Thus, RR&N brought suit for breach of contract and sought $ 600 in damages, alleging anticipatory repudiation and asking for the balance due of $ 22,200. RR&N also sought to require CCC to reference the availability fee in the restrictive covenants and to create a judicial lien on the remaining lots in the subdivision. The trial court entered judgment for RR&N for monetary damages in the amount of $ 5,400 based only on CCC’s breach of contract in failing to pay the $ 600 for each of the nine lots then sold. The trial court also provided in its judgment that the $ 16,800 balance was due in $ 600 increments as each of the twenty-eight possible remaining lots was sold and, if the undeveloped part of the tract was sold, the entire balance would then be due. In essence, the trial court viewed the availability fee as a deferred portion of the contract price and did not consider the rule against perpetuities applicable. On appeal, the Court of Appeals held that the trial court's ruling was error, concluding that the rule against perpetuities prevented the enforcement of the addendum. The court ruled that the purported "lien" was not a vested interest, and thus the rule applied.

Issue:

Did the rule against perpetuities prevent RR&N from enforcing against CCC the contractual rights found in the addendum?

Answer:

No.

Conclusion:

The addendum to the real estate sales contract in the instant case was merely a contractual attempt at creative financing, and it did not involve the kinds of nonvested future interests for which the rule is intended. Specifically, this contractual arrangement for the future payment of money did not relate in terms of title to any existing, underlying property. There was no property to which any "interest" may vest, and thus there can be no "devise or grant of a future interest" which will affect "the title thereto." RR&N alleged only that it was owed additional monetary compensation when the parcel of land was sold. RR&N could not claim any interest, present or future, in the land itself, but held only a continuing contractual right to money already owed for the land, if and when it was sold by CCC. Furthermore, the land underlying the dispute was clearly vested in CCC, and it was not subject to defeasance. Any past or future sale of the lots was not tied to the payment of the availability fee, and because the arrangement was never recorded, title to the land was not encumbered as security for the debt. CCC’s default at the time of each sale would not give rise to any foreclosure proceedings or specific performance remedies which would affect the title to the land as a whole or as to any of the subdivided lots. As evidenced by their testimony, the principals for both RR&N and CCC intended the "availability fee" of the addendum to be a means of deferred compensation for RR&N. A partner from RR&N testified that he intended the fee to be an interest-free loan to CCC. CCC’s president admitted at trial that he felt obligated to pay the fee at the time of the making of the contract. Furthermore, the parties came to a negotiated, arms-length deal, evidenced by the sales contract and the twice-signed addendum. The designation in the contract for portions of the sale price to be paid as the originally planned thirty-seven lots were sold was merely a convenient way for both parties to allocate payment of the loan.

RR&N could not restrict or prohibit the sale of the lots or land. CCC was free to sell or hold the tract as it sees fit. Such a contractual agreement hardly seemed commensurate with the types of restraint on alienation contemplated by the rule. CCC’s subsequent redesign of the planned subdivision, and its addition or subtraction of residential lots, demonstrated that it was free to develop and market the land as it sees fit. The payment obligation was not tied to a specific part of the property. If the contract was found to be valid, the total amount owed would not change based on the number of lots eventually created and sold. CCC has not demonstrated that the payment arrangement provided for in the addendum, and based on the subsequent sale of the land, hindered its ability to market or alienate the property in any way. CCC has, in fact, sold nine lots in Carolina Village. RR&N had no claim on these lots and now sought only money from CCC. The policy concerned underlying the rule was not present here. If anything, the addendum had the opposite effect, aiding the original alienation or sale of the land and allowing CCC to purchase the parcel at a lower initial price by utilizing, in effect, an interest-free loan. The contract was thus not objectionable as a perpetuity and was therefore not subject to the rule.