to raise the possibility of a perpetuities violation under a termination clause despite its thorough consideration of termination provisions and its specific focus on landlord and tenant law strongly suggests that comment (a) to § 394 in the First Restatement is not an established principle under the common law.
The court's conclusion that a landlord's option to terminate a long-term commercial lease for payment of a specified sum of money is not subject to the Rule Against Perpetuities comports with the history and purposes of the Rule. The Rule Against Perpetuities originated in 1682 in the Duke of Norfolk's Case, 3 Ch. Cas. 1 (1682). The Rule was developed to defeat otherwise indestructible executory interests that could perpetually fetter the land and inhibit its full development. Simes & Smith, § 34 at 38. Historically, reversionary interests left in the creator have been excluded from the operation of the Rule. See 5A R. Powell, The Law of Real Property P 769 (1992).
The New York Court of Appeals recently examined the history and purposes of the Rule Against Perpetuities in the context of commercial transactions involving preemptive rights, or rights of first refusal, holding that the Rule did not apply to such rights. Wildenstein & Co., Inc. v. Wallis, 79 N.Y.2d 641, 584 N.Y.S.2d 753, 595 N.E.2d 828 (1992). Although the holding in Wildenstein does not govern the present case, the court's reasoning is instructive. After noting the commercial context of the dispute, the Court stated:
That the principles of the 1682 Duke of Norfolk's Case (3 Ch. Cas. 1) 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.
The court then proceeded to examine the historical underpinnings of the Rule:
The rule against remote vesting originated in the late 17th century to address donative transfers of land among family members. By curbing attempts by the landed gentry to control future generations' ownership of their real property, the rule protected the public's interest in the development of land and prevented undue concentrations of wealth and power. [citations omitted] Although the limits imposed by the rule upon the power to control future ownership of property stem from a policy against the withdrawal of property from commerce, the rule against remote vesting struck a balance in allowing property owners to provide for family members they personally knew and those within the first generation after that class. Id.
Applying the policies behind the Rule Against Perpetuities to the preemptive rights in question, the court found that the application of the rule against remote vesting in such a context would not serve the Rule's policies. The court reasoned:
Application of the rule to invalidate rights such as rights of first refusal has been found to defeat the legitimate expectations of the holder of the rights to the advantage of the other party who expressly agreed to the limitations. . . . Thus, courts have recognized that the important commercial interests served by upholding preemptive rights, which only minimally affect alienability, outweigh the purpose underlying the rule against remote vesting. . . . [citations omitted] Id.
Similarly, in Metropolitan Transp. Authority v. Bruken Realty Corp., 67 N.Y.2d 156, 501 N.Y.S.2d 306, 492 N.E.2d 379 (1986), the court held that the Rule Against Perpetuities did not apply to preemptive rights in commercial and governmental transactions, emphasizing that application of the rule would "invalidate an agreement which promoted the use and development of the property." Metropolitan Transp. Authority, 67 N.Y.2d at 166, 168.
As these two recent cases in the New York Court of Appeals indicate, the legitimate expectations of the parties and the commercial worth of the restriction on the property are legitimate factors to be considered in determining the applicability of the Rule Against Perpetuities. In this case, a landlord's option to terminate a long-term commercial lease upon payment of a specified sum of money does not precipitate the evils which the rule against remote vesting was designed to address. Section 32.01 of the lease encourages the property owner to make the most economically efficient use of the property. If the landlord can use the property in such a manner as to make it economically preferable to pay the tenant $ 350,000 and terminate the lease, he has the right to do so. Far from inhibiting development of the land, the provision actually promotes the most efficient use of the property from the perspective of the landowner. This is a very different situation from restrictions that impede future generations' ownership of their property and effectively withdraw the property from commerce.
It is true, as plaintiff points out, that under the lease the tenant does not have an incentive to make improvements on the property that would render possession of the property for the remaining term of the lease more valuable than the sum of money for which the landlord may terminate the lease. However, the tenant is made aware of this incentive structure upon entering into the lease and can adjust the amount she is willing to pay for the lease and invest in the property accordingly. Moreover, improvements to property undertaken by a tenant are not necessarily encouraged under New York law. At common law, a tenant does not have the right to alter the property, even where such alteration would increase the value of the property. Two Guys from Harrison - New York Inc. v. S.F.R. Realty Associates, 63 N.Y.2d 396, 400, 482 N.Y.S.2d 465, 466, 472 N.E.2d 315 (1984). Under New York statutory law, a tenant may only make improvements on the property if the tenant first obtains court approval, and court approval will only be granted if the lease does not prohibit the making of the improvement. RPAPL § 803(1)(c); Two Guys from Harrison, 63 N.Y.2d at 399, 482 N.Y.S.2d at 466. Because New York allows the landlord to prevent a commercial tenant from alienating the leasehold and from making improvements, a landlord's option to terminate a lease does not defeat New York public policy.
In conveying a term of years under the lease, the grantor, LSC, retained an unconveyed residuary of the grantor's original fee. Based on the reversionary nature of the interest retained and the policies served by the Rule Against Perpetuities, the court concludes that the landlord's option to increase its reversion by terminating the lease with payment of a specified sum of money is not subject to the Rule Against Perpetuities. Plaintiff's motion for partial summary judgment on her second cause of action is denied.
Defendants' motion to dismiss plaintiff's claims under 42 U.S.C. § 1983 and RPAPL § 853 is granted. Defendants' motion to dismiss plaintiff's remaining state law claims is denied. Defendants' motion to dismiss the complaint with respect to defendant Aaron Kozak is granted. Defendants' motion for summary judgment is denied. Plaintiff's cross-motion for summary judgment is denied.
New York, New York
September 11, 1992
Constance Baker Motley, U.S.D.J.