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26. If the court rules against the landowner, it will be because
The common law Rule Against Perpetuities is unmodified by statute.
The bank began appropriate foreclosure proceedings against the niece. The landowner properly intervened, tendered $1,000, and sought judgment that the niece and the bank be ordered to convey Blackacre to the landowner, free and clear of the mortgage.
Two years ago the niece converted her use of Blackacre from residential to commercial without the knowledge or consent of the landowner or of the bank. The niece's commercial venture failed, and the niece defaulted on her mortgage payments to the bank. Blackacre now has a fair market value of $25,000.
Three years ago a landowner conveyed Blackacre to his niece for $50,000 by a deed that provided: «By accepting this deed, [the niece] covenants for herself, her heirs and assigns, that the premises herein conveyed shall be used solely for residential purposes and, if the premises are used for nonresidential purposes, the landowner, his heirs and assigns, shall have the right to repurchase the premises for the sum of one thousand dollars ($1,000).» In order to pay the $50,000 purchase price for Blackacre, the niece obtained a $35,000 mortgage loan from the bank. The landowner had full knowledge of the mortgage transaction. The deed and mortgage were promptly and properly recorded in proper sequence. The mortgage, however, made no reference to the quoted language in the deed.
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(i) Contingent remainders — To A for life, then to the heirs of B (assuming B is alive).
(ii) Executory interests — To A, but if A marries, to B; To A for life, then to B if B delivers a eulogy at A's funeral.
(iii) Class gifts where the class is still open OR a condition has not been satisfied for every class member — To A for life, then to A's children who attain age 30.
(iv) Unexercised options and rights of first refusal — To A for life, then B has the right to purchase.
(v) Powers of appointment — To A to be distributed as he sees fit. The key to understanding this question is the wording of the call. It asks why the court would rule against the landowner. This is essentially a hypothetical, asking you IF the court did something, WHY did they do it.
A is correct. The deed in which the landowner conveyed Blackacre to his niece included a condition that Blackacre only be used for residential purposes. If Blackacre ceased to be used as residential property by the niece OR her heirs and assigns, the landowner OR his heirs and assigns would have the right to repurchase the land for $1,000.
This is an option to purchase. More specifically, this is an option for the original landowner or his heirs and assigns to repurchase. Although a specified triggering event (land being used for nonresidential purposes) must occur before the right may be exercised, for purposes of a RAP analysis, the option to purchase is treated as an «unvested» future interest.
As an aside, this might look like a shifting executory interest (a condition that shifts the right to present possession to someone other than the original grantor upon a specified occurrence). However, an executory interest requires that the right of present possession must shift to a third party, not back to the grantor, as with the option right in this case.
Future interests held by the grantor that are properly classified as a possibility of reverter or a right of re-entry are not subject to the Rule because these future interests are vested in the grantor. This deed does not create a possibility of reverter (the future interest that follows a fee simple determinable) or a right of re-entry (the future interest that follows a fee simple to subject to condition subsequent). Present possession goes to the holder of a possibility of reverter automatically when a specified event or condition occurs. Although a right to re-entry is optional, meaning that the holder has discretion whether or not to assert the right to present possession when a specified event or condition occurs, a right of re-entry does not require the grantor to pay the party who currently holds present possession in order to re-enter the property and assume fee simple absolute ownership again.
Unexercised options are considered under the common law to be «unvested» future interests that are subject to the Rule.
In this case, if the court rules against the landowner, it must be because it is possible for the option to repurchase to be exercised (and thus «vest» for purposes of the Rule) after 21 years after the death of all persons who are alive at the time the option right is is created. This possibility arises because both the event that triggers the right to exercise the option (use of Blackacre for non-residential purposes) and the person (s) who can exercise the option right are not strictly limited to the lives of the niece and the landowner. Instead, it is possible that the «heirs and assigns» of the niece (individuals born hundreds of years later) could use the land for non-residential purposes. Likewise, the landowner's «heirs and assigns» (again, born hundreds of years later) could then exercise the option right.
In short, because the individuals who can cause triggering event necessary to exercise the option right AND the individuals who can exercise the option right are not guaranteed to be lives in being at the time the option right is created, it violates the RAP and is void. Thus, the court will rule against the landowner because the option right does not exist — it has been struck from the deed by operation of law.
Exam Tip: To tackle this question, you do not have to do a Rule Against Perpetuities analysis. You can also use the process of elimination for each of the remaining choices.
B is incorrect. The bank's actual knowledge of the interest created in the deed is irrelevant, as the deed was recorded, giving the bank constructive knowledge.
C is incorrect. A purchase money mortgage (issued by a borrower to the seller to enable the seller to purchase the real estate) would not have any effect on this type of interest created in the deed. A purchase money mortgage will impact the priority of other similar mortgage devices, but it will not impact the validity of a non-mortgage interest, right, or restriction related to the real estate.
D is incorrect. The consideration to be paid by the landowner to exercise an option right does not have to equal the fair market value of the real estate. Inadequate consideration does not void an option contract, absent some specific defense such as fraud or undue influence, or a claim that the option contract is really an equitable mortgage in disguise. There are no facts indicating fraud here, or evidence that the «option right» was really just given as security for a loan made by the landowner to the niece (the hallmark of an equitable mortgage).
Here, the niece obtained a loan from the bank, not the landowner who holds the option right.
Exam Tip: «Inadequate consideration» often arises as a possible answer choice in questions involving equitable mortgage claims. This is not at issue here. However, remember that when you face a question with a potential equitable mortgage claim, consider whether the right to an option to repurchase might be void because of inadequate consideration, as long as the holder of the option to repurchase is the LENDER.