Symphony Space v. Pergola Props - 214 A.D.2d 66, 631 N.Y.S.2d 136 (App. Div. 1st Dept. 1995)

Rule:

Options, in distinction to preemptive rights, are subject to the Rule against Perpetuities and when carving out a limited exception for preemptive rights of first refusal it has done so only in carefully circumscribed circumstances where the upholding of the right would promote the use and development of the property.

Facts:

In 1978, representatives of plaintiff, The Symphony Space, Inc. (Symphony), a not-for-profit corporation engaged in presenting educational and artistic programs to the public and providing instruction and opportunities for emerging artists, approached Broadwest Realty Corporation (Broadwest) and expressed an interest in the use of a theater which was owned by Broadwest and which Symphony had previously rented for several one-night engagements. After negotiations, the parties agreed to a multipronged transaction involving the execution of several separate agreements, all dated December 31, 1978. These included a contract of sale whereby Symphony purchased the entire two-story building containing the theater for a purchase price of $ 10,000 by way of a purchase-money mortgage and note due on December 31, 2003. As part of the transaction, Symphony also entered into a separate lease and agreement whereby it leased back all of the remaining commercial space  [*69]  to Broadwest for $ 1 per year plus the amount of the real estate taxes attributable to the commercial space. The lease was to extend until May 31, 2003, unless terminated earlier, and Broadwest was to continue to sublet that space to those lessees already in place in the stores, the longest of whose leases ran until 1987. Notably, essential to Broadwest's participation in the transaction, was the fact that in consideration of $ 10,000, the parties contemporaneously entered into the separate option agreement which is the subject of this appeal. Paragraph 3 of that agreement provided that Broadwest, or its successors and assigns, would have an option to buy back the property. Paragraph 4 of the option agreement set forth the price at which the property could be repurchased, varying from $ 15,000 in 1987 to $ 28,000 in 2003. It was also agreed that, if and when the option were exercised, Symphony would have a right of first refusal as to any lease or sale of the premises and that Broadwest would use its best efforts to include Symphony as a tenant in any structure built in place of the theater. However, rather than waiting for expiration of the commercial leases, Broadwest, in the summer of 1981, transferred its entire interest in the mortgage, note, lease and option agreement, along with its ownership interests in the adjacent residential and commercial property, for the purchase price of $ 4,800,000, to defendants' nominee, which contemporaneously transferred it to the defendants herein as tenants in common. Defendants subsequently sponsored a cooperative conversion of the residential apartment complex, Pomander Walk, which had since been designated a landmark. The value of the properties quickly increased.

In January of 1985, defendant Bradford N. Swett notified Symphony that, because of various alleged defaults under its mortgage, he, on behalf of the defendants, was declaring the note immediately due and electing to exercise the option pursuant to the provisions permitting its exercise upon a  [*71]  mortgage default by Symphony. According to defendants, Swett had acted because Symphony had failed to make payments required by the mortgage. The closing was set for May 6, 1985. According to Symphony, it believed that it was not in default and that this attempt to exercise the option was improper, and, moreover, suspected that Swett's purported exercise of the option on behalf of all the defendants was without authority and that, in fact, he was acting alone. To address these concerns, Symphony turned to its counsel, who, upon reexamining the option agreement, informed Symphony of his belief that the agreement was invalid both under the Rule against Perpetuities and as clogging Symphony's equity of redemption in the mortgage. As a result, in March 1985, Symphony instituted this action to have the option agreement declared void. The IAS Court granted Symphony’s motion for summary judgment declaring the agreement void.

Issue:

Was the option agreement in violation of the Rule of Perpetuities and therefore void?

Answer:

Yes.

Conclusion:

A factual analysis of the option in this case, in the context of the purpose underlying the statutory stricture, demonstrates the difference in impact that such option has in distinction to a preemptive right. In the case of a preemptive right, neither the decision to sell the property nor the amount of the ultimate price to be paid are within the control of the holder of the right thereby encouraging the current beneficial owner to improve and enhance the value of the property. In distinction, in the case of the option before us, it is the holder who would determine when the sale takes place and at a predetermined token price, wholly unrelated to the value of the property. This would clearly eliminate any incentive to invest money to properly maintain or upgrade the property by the current owner, even if Symphony were financially in a position to do so. Moreover, not only would the consequences of such option prevent Symphony from obtaining any financing to improve the property but any attempt by it to sell the property would necessarily be severely impaired because of the absolute restraint imposed by the meagerly priced option, in distinction to the minimal restraint on alienability imposed by rights of first refusal. Moreover, the existence of the option agreement not only inhibited Symphony, as the owner, from seeking to make capital improvements to the property, but the leaseback of only a portion of the premises to the original seller and holder of the option, under the circumstances of this transaction, also discouraged the lessee from developing the property since independent development of the commercial space separate from the theater space was not feasible. As a result, defendants had no incentive to improve any part of the property prior to an exercise of the option (which would be guided by appreciating real estate market forces) and, instead, ignored their maintenance obligations and permitted the property to fall into disrepair.