Perpetuities perpetuated: Symphony Space, Inc. v. Pergola Properties, Inc.

• Author: Reyhan, Patricia Y.
• Position: New York

"No one can read the perpetuities cases ... without some

sense of nausea."(1)

1. Introduction

   In 1986, the New York Court of Appeals in Metropolitan Transportation Authority v. Bruken Realty Corp.(2) unanimously concluded that a preemptive right in the form of a right of first refusal in a commercial or governmental transaction is exempt from the Rule against Perpetuities (Rule) as embodied in New York Estates Powers and Trusts Law (EPTL) section 9-1.1(b).(3) The court reasoned that such rights, even if unlimited in duration, implicate the Rule only marginally and that "application of the rule, because of its inflexibility, may operate to invalidate legitimate transactions."(4) Although the court made clear that options in gross(5) were significantly different from rights of first refusal in their legal effect(6) and hinted that they differed as well in the extent to which they implicated the policies underlying the Rule,(7) the court did not decide whether the commercial realities that led it to free rights of first refusal from the Rule would lead it to unshackle options in gross as well.

   Ten years later, Symphony Space, Inc. v. Pergola Properties, Inc.(8) squarely presented that question. The court, again unanimously, held that options in gross are within the purview of the Rule and left to the Legislature consideration of the policy reasons proffered in support of releasing them from the Rule's unyielding grasp.(9)

2. Background

   Like most states that have codified the Rule against Perpetuities, New York simply adopted the common law rule, both in language(10) and intent.(11) Doubtless to the great relief of lawyers throughout the state, the Legislature saw fit to save from the Rule's "remorseless[]"(12) application victims of such common law tyrants as the "unborn widow,"(13) the "fertile octogenarian,"(14) the "slothful executor,"(15) and the age contingency that well-intentioned lawyers fatally set at greater than twenty-one.(16) Even more generously, the Legislature created a "saving statute,"(17) establishing a presumption that the creator of the estate intended it to be valid.(18) This statutory section "seeks to avoid annulling dispositions due to inadvertent violations of the Rule Against Perpetuities."(19) Significantly, however, the section provides a rule of construction only. Thus, "[w]hile the statute obligates reviewing courts, where possible, to avoid constructions that frustrate the parties' intended purposes, it does not authorize courts to rewrite instruments that unequivocally allow interests to vest outside the perpetuities period ...."(20)

   The New York Legislature has stopped short, however, of enacting the type of broad remedial statutes enacted in a number of other states.(21) Moreover, the Court of Appeals has made clear that, whatever the desirability of broad remedial rules, reform, if any, must come from the legislative branch and not from the judicial branch.(22)

   While the Court of Appeals has shown an unwillingness to save interests violating the Rule, where the Legislature has not approved the rescue,(23) the court has shown a willingness in the last decade to hesitate before tossing certain kinds of interests upon the Rule's stormy seas.(24) Recognizing that invalidating an interest by application of the Rule will nearly always do violence to the parties' intentions,(25) the court has found it appropriate to consider whether the policies and values sought to be furthered by the Rule are in fact served by the Rule's application to a given class of interests beyond those to which it traditionally applied.(26) As the court had declared in the last case to reach it before Symphony Space: "[t]hat the principles of the 1682 Duke of Norfolk's Case should emerge to dominate this modern commercial transaction is a royal irony that does not serve the common law policy designed to block long-term retention over property by long-gone ancestors."(27) It was characterizations of this kind that the defendants in Symphony Space hoped would lead the court to conclude that the option they desired to exercise did not threaten the evils sought to be banished by the Rule and therefore was not subject to it. That hope proved to be futile.

   An understanding of the Court of Appeals' willingness to make policy judgments about when the Rule against Perpetuities should apply but not how it should apply requires an appreciation of the core policy behind the Rule itself. That policy, from the Rule's 17th century birth to today, is that it is socially and economically undesirable to allow property to be inalienable for an unreasonable length of time.(28) The Rule is intended "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."(29) This intent is achieved in this State by application of what the Court of Appeals has described as a "rigid formula" having 'capricious consequences."(30)

3. Symphony SpaDATE. Pergola Properties

   The Symphony Space case arose out of a complicated sale transaction involving a two-story building located on Manhattan's Upper West Side on the Broadway block between 94th and 95th Streets.(31) This building, which housed a theater and commercial space, was owned by Broadwest Realty Corporation (Broadwest). Broadwest owned two adjacent properties, a residential complex called Pomander Walk and a commercial building called the Healy Building.(32) In 1978, all three properties were operating at a net loss.(33) In the case of the building at issue here, that loss was caused by the inability of Broadwest to secure a permanent tenant for the theater, which occupied fifty-eight percent of the building's total square footage.(34)

   In 1978, plaintiff Symphony Space, Inc., a not-for-profit corporation devoted to the arts, and Broadwest entered into a transaction in which Symphony Space bought the building for $10,010, a price below market value.(35) This transaction did not involve either Pomander Square or the Healy Building. As part of the transaction, Symphony Space leased back the commercial portion of the building to Broadwest for one dollar a year.(36) A $243,000 mortgage on the property remained the obligation of Broadwest.(37) The significant part of the transaction -- which was the focus of the case and was a condition of the sale -- is the option that Symphony Space granted Broadwest for ten dollars consideration, giving Broadwest the right to repurchase the building.(38)

   This transaction accomplished a number of desirable ends for both Broadwest and Symphony Space. First, if it used the theater, Symphony Space would be entitled to a property tax exemption for the entire building.(39) In light of Broadwest's goal of selling all the properties, the arrangement allowed Broadwest to postpone ultimate sale until the commercial leases expired and property values rose. From Symphony Space's vantage point, it gained the benefit of use of the theater at minimum cost.(40)

   The repurchase option that lay at the heart of the transaction and later dispute, provided that Broadwest could exercise its option to repurchase during any of four "Exercise Periods."(41) Broadwest's right to exercise the option was "unconditional' and constituted "a covenant running with the land, inuring to the benefit of heirs, successors and assigns of Broadwest."(42) The purchase price that Broadwest would be required to pay would turn on the closing date: "$15,000 if . . . on or before December 31, 1987; $20,000 if on or before December 31, 1993; $24,000 if on or before December 31, 1998; and $28,000 if on or before December 31, 2003."(43)

   In 1981, Broadwest sold all of its interest in the three properties, including its option on the theater property, to a nominee who immediately transferred it to the four defendants for $4.8 million.(44) Sometime thereafter the defendants converted Pomander Walk, which had been designated a landmark in...