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*Note: The following opinion was edited by AudioCaseFiles' staff.
© 2007 AudioCaseFiles, LLC.

The Symphony Space, Inc. v. Pergola Properties, Inc.
669 N.E.2d 799
Court of Appeals of New York, 1996

Chief Judge KAYE.
This case presents the novel question whether options to purchase commercial property are exempt from the prohibition against remote vesting embodied in New York's Rule against Perpetuities. Because an exception for commercial options finds no support in our law, we decline to exempt all commercial option agreements from the statutory Rule against Perpetuities.

Here, we agree with the trial court and Appellate Division that the option defendants seek to enforce violates the statutory prohibition against remote vesting and is therefore unenforceable.

I. FACTS

The subject of this proceeding is a two-story building situated on the Broadway block between 94th and 95th Streets on Manhattan's Upper West Side. In 1978, Broadwest Realty Corporation owned this building, which housed a theater and commercial space. Broadwest had been unable to secure a permanent tenant for the theater--approximately 58% of the total square footage of the building's floor space. Broadwest also owned two adjacent properties, Pomander Walk (a residential complex) and the Healy Building (a commercial building). Broadwest had been operating its properties at a net loss.

Plaintiff Symphony Space, Inc., a not-for-profit entity devoted to the arts, had previously rented the theater for several one-night engagements. In 1978, Symphony and Broadwest engaged in a transaction whereby Broadwest sold the entire building to Symphony for the below-market price of $ 10,010 and leased back the income-producing commercial property, excluding the theater, for $1 per year. Broadwest maintained liability for the existing $ 243,000 mortgage on the property as well as certain maintenance obligations. As a condition of the sale, Symphony, for consideration of $ 10, also granted Broadwest an option to repurchase the entire building. Notably, the transaction did not involve Pomander Walk or the Healy Building.

The purpose of this arrangement was to enable Symphony, as a not-for-profit corporation, to seek a property tax exemption for the entire building--which constituted a single tax parcel--predicated on its use of the theater. The sale-and-leaseback would thereby reduce Broadwest's real estate taxes by $ 30,000 per year, while permitting Broadwest to retain the rental income from the leased commercial space in the building, which the trial court found produced $ 140,000 annually. The arrangement also furthered Broadwest's goal of selling all the properties, by allowing Broadwest to postpone any sale until property values in the area increased and until the commercial leases expired. Symphony, in turn, would have use of the theater at minimal cost, once it received a tax exemption.

Thus, on December 1, 1978, Symphony and Broadwest--both sides represented by counsel--executed a contract for sale of the property from Broadwest to Symphony for the purchase price of $ 10,010. The contract specified that $ 10 was to be paid at the closing and $ 10,000 was to be paid by means of a purchase-money mortgage.

The parties also signed several separate documents, each dated December 31, 1978: (1) a deed for the property from Broadwest to Symphony; (2) a lease from Symphony to Broadwest of the entire building except the theater for rent of $ 1 per year and for the term January 1, 1979 to May 31, 2003, unless terminated earlier; (3) a 25-year, $ 10,000 mortgage and mortgage note from Symphony as mortgagor to Broadwest as mortgagee, with full payment due on December 31, 2003; and (4) an option agreement by which Broadwest obtained from Symphony the exclusive right to repurchase all of the property, including the theater.

It is the option agreement that is at the heart of the present dispute. Section 3 of that agreement provides that Broadwest may exercise its option to purchase the property during any of the following "Exercise Periods":

"(a) at any time after July 1, 1979, so long as the Notice of Election specifies that the Closing is to occur during any of the calendar years 1987, 1993, 1998 and 2003;

"(b) at any time following the maturity of the indebtedness evidenced by the Note and secured by the Mortgage, whether by acceleration or otherwise;

"(c) during the ninety days immediately following any termination of the Lease by the lessor thereof other than for nonpayment of rent or any termination of the Lease by the lessee thereof ...

"(d) during the ninety days immediately following the thirtieth day after Broadwest shall have sent Symphony a notice specifying a default by Symphony of any of its covenants or obligations under the Mortgage."

Section 1 states that "Broadwest may exercise its option at any time during any Exercise Period." That section further specifies that the notice of election must be sent at least 180 days prior to the closing date if the option is exercised pursuant to section 3 (a) and at least 90 days prior to the closing date if exercised pursuant to any other subdivision.

The following purchase prices of the property, contingent upon the closing date, are set forth in section 4: $ 15,000 if the closing date is 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.

Importantly, the option agreement specifies in section 5 that "Broadwest's right to exercise the option granted hereby is ... unconditional and shall not be in any way affected or impaired by Broadwest's performance or nonperformance, actual or asserted, of any obligation to be performed under the Lease or any other agreement or instrument by or between Broadwest and Symphony, "other than that Broadwest was required to pay Symphony any unpaid rent on the closing date. Finally, section 6 established that the option constituted "a covenant running with the land, inuring to the benefit of heirs, successors and assigns of Broadwest."

Symphony ultimately obtained a tax exemption for the theater. In the summer of 1981, Broadwest sold and assigned its interest under the lease, option agreement, mortgage and mortgage note, as well as its ownership interest in the contiguous Pomander Walk and Healy Building, to defendants' nominee for $ 4.8 million. The nominee contemporaneously transferred its rights under these agreements to defendants Pergola Properties, Inc., Bradford N. Swett, Casandium Limited and Darenth Consultants as tenants in common.

Subsequently, defendants initiated a cooperative conversion of Pomander Walk, which was designated a landmark in 1982, and the value of the properties increased substantially. An August 1988 appraisal of the entire blockfront, including the Healy Building and the unused air and other development rights available from Pomander Walk, valued the property at $ 27 million assuming the enforceability of the option. By contrast, the value of the leasehold interest plus the Healy Building without the option were appraised at $ 5.5 million.

Due to Symphony's alleged default on the mortgage note, defendant Swett served Symphony with notice in January 1985 that it was exercising the option on behalf of all defendants. The notice set a closing date of May 6, 1985. Symphony, however, disputed both that it was in default and Swett's authority to exercise the option for all of the defendants. According to Symphony, moreover, it then discovered that the option agreement was possibly invalid. Consequently, in March 1985, Symphony initiated this declaratory judgment action against defendants, arguing that the option agreement violated the New York statutory prohibition against remote vesting and clogged its equity of redemption under the mortgage.

Defendant Pergola subsequently served Symphony with separate notice of default dated April 4, 1985, informing Symphony that it was exercising the option on behalf of all defendants pursuant to sections 1, 3 (b) and 3 (d) of the option agreement and setting the closing date for July 10, 1985. Pergola further notified Symphony that it was alternatively exercising the option under section 3 (a) of the option agreement, which was not contingent upon Symphony's default, with the closing date scheduled for January 5, 1987. Symphony did not appear for any of the closing dates contained in Swett's or Pergola's notices.

A dispute among the defendants over Swett's authority to serve the initial notice developed into a separate litigation, culminating in the trial court authorizing Pergola to exercise the option on behalf of all defendants. In March 1987, Pergola thus served Symphony with another notice that it was exercising the option pursuant to section 3 (a), with the closing scheduled for September 11, 1987. The trial court's judgment was stayed, however, and Symphony did not appear at the March closing.

Thereafter, the parties cross-moved for summary judgment in the instant declaratory judgment proceeding. The trial court granted Symphony's motion while denying that of defendants. In particular, the court concluded that the Rule against Perpetuities applied to the commercial option contained in the parties' agreement, that the option violated the Rule and that Symphony was entitled to exercise its equitable right to redeem the mortgage. The trial court also dismissed defendants' counterclaim for rescission of the agreements underlying the transaction based on the parties' mutual mistake.

In a comprehensive writing by Justice Ellerin, the Appellate Division likewise determined that the commercial option was unenforceable under the Rule against Perpetuities and that rescission was inappropriate.

II. STATUTORY BACKGROUND

The Rule against Perpetuities evolved from judicial efforts during the 17th century to limit control of title to real property by the dead hand of landowners reaching into future generations. Underlying both early and modern rules restricting future dispositions of property is the principle that it is socially undesirable for property to be inalienable for an unreasonable period of time. These rules thus seek "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"

The traditional statement of the common-law Rule against Perpetuities was set forth by Professor John Chipman Gray: "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."

In New York, the rules regarding suspension of the power of alienation and remoteness in vesting--the Rule against Perpetuities--have been statutory since 1830. Prior to 1958, the perpetuities period was two lives in being plus actual periods of minority. Widely criticized as unduly complex and restrictive, the statutory period was revised in 1958 and 1960, restoring the common-law period of lives in being plus 21 years.

Formerly, the rule against remote vesting in New York was narrower than the common-law rule, encompassing only particular interests. A further 1965 amendment enacted a broad prohibition against remote vesting. This amendment was intended to make clear that the American common-law rule of perpetuities was now fully in force in New York.

New York's current statutory Rule against Perpetuities is found in EPTL 9-1.1. Subdivision (a) sets forth the suspension of alienation rule and deems void any estate in which the conveying instrument suspends the absolute power of alienation for longer than lives in being at the creation of the estate plus 21 years. The prohibition against remote vesting is contained in subdivision (b), which states that "[n]o estate in property shall be valid unless it must vest, if at all, not later than twenty-one years after one or more lives in being at the creation of the estate and any period of gestation involved." This Court has described subdivision (b) as "a rigid formula that invalidates any interest that may not vest within the prescribed time period" and has "capricious consequences." Indeed, these rules are predicated upon the public policy of the State and constitute nonwaivable, legal prohibitions.


III. VALIDITY OF THE OPTION AGREEMENT

Defendants proffer three grounds for upholding the option: that the statutory prohibition against remote vesting does not apply to commercial options; that the option here cannot be exercised beyond the statutory period; and that this Court should adopt the " wait and see" approach to the Rule against Perpetuities. We consider each in turn.

A. Applicability of the Rule to Commercial Options

Under the common law, options to purchase land are subject to the rule against remote vesting. Such options are specifically enforceable and give the option holder a contingent, equitable interest in the land. This creates a disincentive for the landowner to develop the property and hinders its alienability, thereby defeating the policy objectives underlying the Rule against Perpetuities.

Typically, however, options to purchase are part of a commercial transaction. For this reason, subjecting them to the Rule against Perpetuities has been deemed "a step of doubtful wisdom."

It is now settled in New York that, generally, EPTL 9-1.1 (b) applies to options. [W]e have reiterated that options in real estate are subject to the statutory rule.

Because the common-law rule against remote vesting encompasses purchase options that might vest beyond the permissible period, the court concluded that EPTL 9-1.1 (b) necessarily encompasses such options. Inasmuch as the common-law prohibition against remote vesting applies to both commercial and noncommercial options, it likewise follows that the Legislature intended EPTL 9-1.1 (b) to apply to commercial purchase options as well.

Consequently, creation of a general exception to EPTL 9-1.1 (b) for all purchase options that are commercial in nature, as advocated by defendants, would remove an entire class of contingent future interests that the Legislature intended the statute to cover. While defendants offer compelling policy reasons--echoing those voiced by Professor Leach--for refusing to apply the traditional rule against remote vesting to these commercial option contracts, such statutory reformation would require legislative action similar to that undertaken by numerous other State lawmakers.

"An option grants to the holder the power to compel the owner of property to sell it whether the owner is willing to part with ownership or not. A preemptive right, or right of first refusal, does not give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method.”

Enforcement of the preemptive right in the context of the governmental and commercial transaction, moreover, actually encouraged the use and development of the land, outweighing any minor impediment to alienability.

Here, the option agreement creates precisely the sort of control over future disposition of the property that we have previously associated with purchase options and that the common-law rule against remote vesting--and thus EPTL 9-1.1 (b)--seeks to prevent. As the Appellate Division explained, the option grants its holder absolute power to purchase the property at the holder's whim and at a token price set far below market value. This Sword of Damocles necessarily discourages the property owner from investing in improvements to the property. Furthermore, the option's existence significantly impedes the owner's ability to sell the property to a third party, as a practical matter rendering it inalienable.

That defendants, the holder of this option, are also the lessees of a portion of the premises does not lead to a different conclusion here.

Put simply, the option here cannot qualify as an option appurtenant and significantly deters development of the property. If the option is exercisable beyond the statutory perpetuities period, refusing to enforce it would thus further the purpose and rationale underlying the statutory prohibition against remote vesting.


C. "Wait and See" Approach

Defendants next urge that we adopt the "wait and see" approach to the Rule against Perpetuities: an interest is valid if it actually vests during the perpetuities period, irrespective of what might have happened. The option here would survive under the "wait and see" approach since it was exercised by 1987, well within the 21-year limitation.

This Court, however, has long refused to "wait and see" whether a perpetuities violation in fact occurs. As explained in Matter of Fischer, "[i]t is settled beyond dispute that in determining whether a will has illegally suspended the power of alienation, the courts will look to what might have happened under the terms of the will rather than to what has actually happened since the death of the testator".

The very language of EPTL 9-1.1, moreover, precludes us from determining the validity of an interest based upon what actually occurs during the perpetuities period. Under the statutory rule against remote vesting, an interest is invalid "unless it must vest, if at all, not later than twenty-one years after one or more lives in being". That is, an interest is void from the outset if it may vest too remotely. Because the option here could have vested after expiration of the 21-year perpetuities period, it offends the Rule.

We note that the desirability of the "wait and see" doctrine has been widely debated. Its incorporation into EPTL 9-1.1, in any event, must be accomplished by the Legislature, not the courts.

We therefore conclude that the option agreement is invalid under EPTL 9-1.1 (b). In light of this conclusion, we need not decide whether the option violated Symphony's equitable right to redeem the mortgage.

IV. REMEDY

As a final matter, defendants argue that, if the option fails, the contract of sale conveying the property from Broadwest to Symphony should be rescinded due to the mutual mistake of the parties. We conclude that rescission is inappropriate and therefore do not pass upon whether Broadwest's claim for rescission was properly assigned to defendant Pergola.

A contract entered into under mutual mistake of fact is generally subject to rescission. CPLR 3005 provides that when relief against mistake is sought, it shall not be denied merely because the mistake is one of law rather than fact. Relying on this provision, defendants maintain that neither Symphony nor Broadwest realized that the option violated the Rule against Perpetuities at the time they entered into the agreement and that both parties intended the option to be enforceable.

CPLR 3005, however, does not equate all mistakes of law with mistakes of fact. Rather, the provision "removes technical objections in instances where recoveries can otherwise be justified by analogy with mistakes of fact.” Indeed, this Court has held that the predecessor statute, Civil Practice Act § 112-f, did not mandate the court to grant relief where taxes had been paid on the assumption that a taxing statute subsequently found to be unconstitutional was valid. Likewise, CPLR 3005 "does not permit a mere misreading of the law by any party to cancel an agreement.”

Here, the parties' mistake amounts to nothing more than a misunderstanding as to the applicable law, and CPLR 3005 does not direct undoing of the transaction.

The remedy of rescission, moreover, lies in equity and is a matter of discretion. Defendants' plea that the unenforceability of the option is contrary to the intent of the original parties ignores that the effect of the Rule against Perpetuities--which is a statutory prohibition, not a rule of construction--is always to defeat the intent of parties who create a remotely vesting interest. As explained by the Appellate Division, there is "an irreconcilable conflict in applying a remedy which is designed to void a transaction because it fails to carry out the parties' true intent to a transaction in which the mistake made by the parties was the application of the Rule against Perpetuities, the purpose of which is to defeat the intent of the parties."

The Rule against Perpetuities reflects the public policy of the State. Granting the relief requested by defendants would thus be contrary to public policy, since it would lead to the same result as enforcing the option and tend to compel performance of contracts violative of the Rule. Similarly, damages are not recoverable where options to acquire real property violate the Rule against Perpetuities, since that would amount to giving effect to the option.

Accordingly, the order of the Appellate Division should be affirmed, with costs, and the certified question answered in the affirmative.

Judges Simons, Titone, Bellacosa, Smith, Levine and Ciparick concur.

Order affirmed, etc.

This case is in these books

• Property
• Dukeminier, Krier, Alexander, Schill
• 6th Edition