Kentucky-West Virginia Gas Co. v. Martin

744 S.W.2d 745, 1987 Ky. App. LEXIS 517, 1987 WL 43877

• Court: Court of Appeals of Kentucky
• Decided: July 17, 1987
• Docket: Nos. 85-CA-1830-MR, 85-CA-1904-MR
• Status: Published

Opinions

HAYES, Judge:

The question presented is whether the rule against perpetuities operates to void a preemptive option in favor of the lessor in an oil and gas lease between the parties to this appeal. We are convinced that the option falls within the proscription of the rule and is also barred by the Kentucky rule against unreasonable restraints on alienation and thus may not be enforced by appellees.

In 1921, the predecessors in title of both appellants and appellees entered into an oil and gas lease which provided, among other things, that “the lessor will have the refusal of buying gas from the lessee for thirty cents ($.30) per thousand cubic feet, the lessor to install and furnish his own meters.” The lessors (appellees) attempted to exercise the option in 1966, but Kentucky-West Virginia Gas Company did not sell them the requested gas. In 1981, exercise of the option was again attempted, and the company again refused to sell the gas. Appellees then filed this action seeking damages for lost profits and an order directing Kentucky-West to sell gas to them at the option price of thirty cents per thousand cubic feet.

Appellants defended on the basis that: (1) the option was void for violation of the rule against perpetuities; (2) the action was barred by the statute of limitations; and (3) the federal natural gas acts deprived the state circuit court of jurisdiction to order them to sell gas to the Martins or to award damages for the refusal to do so. The trial court granted a partial summary judgment directing appellants to sell gas to the appel-lees at the option price and reserving the issue of damages for jury determination. The jury returned an award for lost profits amounting to $687,883 and this appeal ensued.

We first examine this preemptive option in light of the rule against perpetuities and the rule against unreasonable restraints on alienation because if it fails to clear these hurdles we need not address the remaining issues presented by the parties. The preemption gives appellees the right of first refusal of buying the gas produced on the lease at a fixed price of $.30 per thousand cubic feet without limitation on the time for exercising the option. Thus the interest encompassed by the option is capable of vesting outside the perpetuity period and the rule is violated. Aside from that defect, however, we find that the option creates an unreasonable restraint on alienation. A preemption of unlimited duration at a fixed price constitutes a substantial restraint on alienability particularly when the price set falls below market value. See “Perpetuities — Pre-emptive Rights to Realty,” 40 A.L.R.3rd 920, §§ 4a and b. Whatever commercial value the option may have possessed is negated by the low price. The lessee has no incentive to develop the minerals which are the subject of the lease when production costs far exceed the sale price. As stated by Professor Dukeminier in his work, Perpetuities Law in Action, (1962) at 128:

Preemptions to purchase at less than market price are in substance, though not in form, direct restraints on alienation. If the owner must sell the property at less than market price if he sells it, the property is not likely to be sold.

In this instance, when production ceases the lease is terminated and any value the lease may have possessed is destroyed. The rule of unreasonable restraints concerns itself not with the possibility of remote vesting of estates but with the imposition of objectionable conditions or limitations upon present or future interests. See Simes, Law of Future Interests at 237, 282 (1966). It is obvious that to impose upon appellants the duty to sell all gas produced on the lease for the price fixed in the preemption any time the optionee may choose to require it is an unreasonable restraint on appellants’ utilization of the lease and would cause a cessation of the development of the minerals contained therein. We therefore hold that the option cannot be enforced and the trial court erred in deciding otherwise.

Appellees also contend that the option is saved by the 1960 amendment to the Kentucky statutory enactment of the rule against perpetuities, KRS 381.216. That amendment softened somewhat the harshness of the rule by adopting a “wait and see approach” to options created after the effective date of the 1960 perpetuities act. In other words, should an otherwise void option actually be exercised within the period of the rule, it does not violate the rule. The case of Three Rivers Rock Co. v. Reed Crushed Stone, Ky., 530 S.W.2d 202 (1975) extended the benefits of the wait and see doctrine to preemptive options by holding that options created subsequent to the effective date of the 1960 amendment (KRS 381.216) are not subject to the rule against direct restraints on alienation but are to be governed by the rule against perpetuities. Clearly, an option void in 1921 cannot be redeemed by the application of a rule not effective until 1960.

However, appellees insist that because in 1973 there was a partial release by Kentucky-West of certain lands contained in the 1921 lease, a new lease was created and thus the 1960 amendment applies and the option is saved. That is, to say the least, a strained interpretation of the effect of the release. The release contained the following language:

By their execution hereof, lessor ... agrees to accept such release, to the extent aforesaid, and acknowledges and agrees that said lease is and shall remain in force and effect in accordance with the terms thereof.... (Emphasis added.)

It is very clear that the release created no new rights but merely emphasized the parties’ intent that the 1921 agreement remain in full force and effect. It can in no way be construed as setting aside the 1921 agreement and creating a new agreement so as to bring it under the purview of the 1960 perpetuities law amendment.

The judgment of the Floyd Circuit Court is reversed.

HOWERTON, C.J., concurs.

COMBS, J., dissents.