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12. Which of the following identifies the determinative rule or doctrine upon which the split occurs, and states the position favorable to the owner.
If judgment is rendered in favor of the owner, it will be because the relevant jurisdiction has adopted a rule on a key issue as to which various state courts have split.
The owner brought an appropriate action against the friend for specific performance.
Two years later, the owner contracted to sell Whiteacre to his friend and to convey a marketable title «subject to rights of the tenant under her lease.» The friend refused to close because of the outstanding option assigned to the brother.
The owner of Whiteacre in fee simple leased Whiteacre to a tenant for a term of 10 years by properly executed written instrument. The lease was promptly and properly recorded. It contained an option for the tenant to purchase Whiteacre by tendering $250,000 as a purchase price any time «during the term of this lease.» One year later, the tenant, by a properly executed written instrument, purported to assign the option to his brother, expressly retaining all of the remaining terms of the lease. The instrument of assignment was promptly and properly recorded.
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An option to purchase property may be included within a tenant's lease as long as the option is exercised during the term of the lease. The Rule Against Perpetuities (RAP) does not apply to an option to purchase land when it is contained within a lease of that property and may only be exercised during the term of the lease.
Typically, a tenant is permitted to assign his entire interest in the leased premises to a third party (the assignee). However, courts are split as to whether a tenant's entire alienable interest includes an option to purchase, and subsequently, whether an option to purchase contained in a lease can be assigned separately from the lease.
Exam Tip: This is a reading comprehension question and can be answered through the process of elimination.
D is correct. The key issue is that the tenant has a lease for years, which is not a complete ownership interest, but merely a non-freehold estate in Whiteacre. The tenant's option to purchase was only «during the term of this lease.» Courts are divided on the issue of whether an option to purchase may be assigned separately from the lease. If this rule is construed in a way that favors the owner, the court will likely find that the tenant does not have a property interest in the option that he is able to assign. He only has an alienable interest in the leasehold itself, allowing him to assign his entire interest (but that does not include the option).
A is incorrect. This choice can be eliminated immediately because it erroneously assumes a transfer of property has occurred. The tenant had a lease for years that contained an option to purchase, not a contract to buy Whiteacre containing a lease clause.
B is incorrect. Marketable title is not at issue because the Whiteacre property was not sold. The issue is whether a leasehold estate can assign its option to purchase while keeping the remaining terms of the lease, as explained above.
C is incorrect. The RAP does not apply to an option to purchase where it is contained in a lease and may only be exercised during the term of the lease. Because the tenant's option to purchase must be exercised within the 10-year lease period, it will not be subject to any potential RAP violation.