Chapter 8 - § 8.8 • RULE AGAINST PERPETUITIES AND RESTRAINTS ON ALIENATION
| Jurisdiction | Colorado |
§ 8.8.1—Rule Against Perpetuities
Common-Law Rule
The common-law Rule Against Perpetuities provided: "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."342
Prior to May 31, 1991, the Rule Against Perpetuities was recognized in Colorado as a part of the common law.343 And in Miller v. Weston,344 the Colorado Supreme Court said that "the rule against perpetuities is no rule at all unless the condition required to satisfy it is absolutely certain to take place within lives in being plus 21 years, which doubtless is the reason why it has stood so rigidly in that form." Nevertheless, the Colorado Supreme Court held that the Rule Against Perpetuities would be applied "only where the purposes of the rule, such as preventing a practical restraint upon alienation or encouraging the improvement of the property, are served."345
In Colorado, the common-law Rule Against Perpetuities did not apply to public charitable gifts,346 cemetery trusts,347 or employees' benefit trusts.348
The object of the Rule Against Perpetuities is to require the vesting of future estates within a limited period of time after their creation, and to bar the creation of future interests depending on remote contingencies. The Rule is formulated on the public policy of preventing the fettering of the marketability of property over long periods of time by indirect restraints upon its alienation. Under the Rule, no interest subject to condition precedent is good unless the condition must be fulfilled, if at all, within the period limited by the Rule. The usual effect of the Rule is to prohibit or invalidate attempts to create by limitation, whether executory or by way of remainder, future interest or estate, the vesture of which is postponed beyond the prescribed period.349 The Rule merely invalidates any interest which vests too remotely; it does not invalidate every perpetual interest.350
The Rule Against Perpetuities is not limited to a single life in being but may utilize several lives.351 A corporation may not serve as a life in being, since it has a potential perpetual life which would frustrate the basic purpose of the Rule.352
Interests Subject to the Common-Law Rule
Executory or springing interests: An executory interest or springing use is subject to the Rule.353
Contingent remainders: The Rule is applicable to contingent remainders, and the event on the happening of which the remainder is to vest must be one that is certain to happen within the prescribed period, or the limitation will be bad.354
Options: An option to purchase may or may not be subject to the Rule.355 An option to purchase property from the owner is within the Rule.356 A contract for the sale of land not fixing the time for performance is not an option; the law presumes that it is to be performed in a reasonable time, and therefore is not subject to the Rule.357 Where real property is sold with a reservation of minerals, the further reservation by the mineral owner of the right, unlimited in time, to repurchase the surface violates the Rule.358 But an option to purchase real property from a person if and when he or she acquires it is not subject to the Rule where the period of the option after such acquisition is within the limits of the Rule.359 An option in a lease to purchase the leased property or to extend the term of the lease is not subject to the Rule,360 but an option in a lease to acquire additional premises is subject to the Rule.361
Preemptive rights: The difference between an ordinary option and a preemptive right is that in a typical option, the optionee has the absolute right to purchase something for a definite consideration, while a preemptive right involves a creation of the privilege to purchase only on the formulation of a desire on the part of the owner to sell and, in most cases, for the price at which the owner is willing to sell to a third person. The reason for application of the Rule Against Perpetuities to a preemptive right to purchase at an offeror's price acceptable to the owner is not supported by the same reasoning as found in the option example, thus making the case for non-application much more arguable. Nevertheless, a preemptive right without limit in time and unconnected with any land owned by the holder of the preemptive right is void under the Rule.362 In Atchison v. City of Englewood,363 the court suggested that its conclusion might be different if the ownership of the preemptive right followed the title to designated real property, or if it were restricted to a limited term found to be reasonable, albeit longer than a life in being plus 21 years. In Polemi v. Wells,364 a preemptive right held by a lessee of a portion of the premises to purchase the entire premises was held not to violate the Rule where the lease was for a term of ten years, renewable for an additional ten years. A preemptive right which terminates only upon the construction and occupation of a house on the property may be exercised after the period of the Rule, and therefore violates the Rule.365 But in Cambridge Company v. East Slope Investment Corp.,366 the Colorado Supreme Court held that under the particular circumstances of that case a preemptive right at the owner's price does not violate the rule.
Contracts for sale of land: A contract for the sale of land, which does not fix a time for performance, does not violate the Rule because the contract will be construed to provide for a reasonable time for performance.367
Other interests: An interest that is presently vested is not subject to the Rule.368 An option to lease real property vests an interest in the property in the optionee upon exercise, not upon the subsequent commencement of the lease term.369 A devise to trustees "on the admission of this will to probate" violates the Rule, as the probate may never occur. But a legacy to be paid "as soon after my decease as reasonably may be practicable without material sacrifice of the value of my estate" does not violate the Rule.370 Similarly, a devise in trust of the residue of the testator's estate, after payment of debts and certain specific bequests, vests title to the property immediately. Only the enjoyment of the trust property is postponed until after payment of the debts and legacies, and therefore the Rule is not applicable.371 The routine use of an inurement clause may cause an option, intended to be personal to the optionee, to continue in the optionee's heirs or assigns, and therefore to violate the Rule.372 Where a transfer is restricted by independent and alternate interests, and one interest is void as against the Rule, the other is not likewise void as long as that interest is itself valid.373
Effect of Violation of the Rule
If the Rule Against Perpetuities is violated, the court will interpret the instrument as though the invalid provision were not included.374
Statutory Modification
In 1991, the Colorado legislature enacted the Colorado Statutory Rule Against Perpetuities Act, which become effective May 31, 1991. This Act superseded and abolished the common law Rule Against Perpetuities for nonvested interests created after May 31, 1991.375 The Act was substantially amended in 2006.376 The statutory rule against perpetuities has numerous exclusions. Among these exclusions are the following:
Nondonative transfers: With certain exceptions, the statutory Rule Against Perpetuities does not apply to a nonvested property interest or a power of appointment that arises from a nondonative transfer.377 (The term "nondonative transfer" is commonly misconstrued by Colorado attorneys to mean "transfer of commercial property."378 ) The exceptions are a premarital or postmarital agreement, a separation or divorce agreement, a spouse's election, a similar arrangement arising out of a prospective, existing, or previous marital relationship between the parties, a contract to make (or not to revoke) a will or trust, a contract to exercise (or not to exercise) a power of appointment, and a transfer in satisfaction of a duty of support.379
Powers relating to fiduciaries: The statutory Rule Against Perpetuities does not apply to a nonvested property interest or a power of appointment arising out of a fiduciary's power relating to the administration or management of assets, including the power of a fiduciary to sell, lease, or mortgage property, and the power of a fiduciary to determine principal and income, a power to appoint a fiduciary, or a discretionary power of a trustee to distribute principal before termination of a trust to a beneficiary having an indefeasibly vested interest in the income and principal.380
Future interests held by charities or government: The statutory Rule Against Perpetuities does not apply to a nonvested property interest or a power of appointment arising out of a nonvested property interest held by a charity, government, or governmental agency or subdivision, if the nonvested property interest is preceded by an interest held by another charity, government, or governmental agency or subdivision.381
Employee benefit plans: The statutory Rule Against Perpetuities does not apply to a nonvested property interest or a power of appointment arising out of a nonvested property interest in or a power of appointment with respect to a trust or other property arrangement forming part of a pension, profit-sharing, stock bonus, health, disability, death benefit, income deferral, or other current or deferred benefit plan for one or more employees, independent contractors, or their beneficiaries or spouses, to which contributions are made for the purpose of distributing to or for the benefit of the participants or their beneficiaries or spouses the property, income, or principal in the trust or other property arrangement, except a nonvested property interest or a power of appointment that...
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