Otter Creek Development Co. v. Friesenhahn

748 S.W.2d 344, 295 Ark. 318, 1988 Ark. LEXIS 209

• Court: Supreme Court of Arkansas
• Decided: May 2, 1988
• Docket: 87-290
• Status: Published

Opinions

Robert H. Dudley, Justice.

The only issue we need to decide is whether an option to purchase real estate violates the rule against perpetuities.

In 1971, the appellant, Otter Creek Development Company, a domestic limited partnership, was formed for the purpose of investing in and developing a tract of land at the then proposed junction of Interstate Highway 30 and Interstate Highway 430 in south Pulaski County. Otter Creek acquired a large tract of land and, on March 23, 1981, gave an option to purchase six of the acres to appellee Vernon C. Friesenhahn d/b/a Friesenhahn Development Company. The option grants appellee one year in which to purchase the six acres, and the option is renewable annually by payment of a specified sum. There is no limit on the number of years the option can be renewed. The option further provides that it is binding on the heirs, successors, and assigns of the parties. The option provides that it will be terminated automatically if not exercised within 90 days from the date that appellee Friesenhahn receives notice from Otter Creek that a building permit is available from the City of Little Rock. The appellee has renewed the option each year and filed a declaratory judgment proceeding asking that his option be declared valid. The trial court declared the option valid. We reverse because the option violated the rule against perpetuities.

We have held that a repurchase option contained in a deed is subject to the rule against perpetuities, Broach v. City of Hampton, 283 Ark. 496, 677 S.W.2d 851 (1984), but we have never before decided whether an independent option to purchase is subject to the rule. We now hold that an independent option to purchase real estate is subject to the rule against perpetuities. One reason for the holding is that we look upon independent options to purchase real estate as creating future interests depending on the contingency of the exercise of the option. This position has been taken by all but one of the courts which considered the issue. See Annotation, Independent Option to Purchase Real Estate as Violating Rule Against Perpetuities or Restraints on Alienation, 66 A.L.R.3d 1294 (1975), and J. Gray, The Rule Against Perpetuities § 330 (4th ed. 1942).

The issue then becomes whether this independent option violates the rule against perpetuities. The Constitution of Arkansas forbids “perpetuities,” but it does not describe them. Ark. Const, art. 2, § 19. The description comes from common law. Broach v. City of Hampton, 283 Ark. 496, 677 S.W.2d 851 (1984). Common law describes the rule against perpetuities as a rule which prohibits the creation of future interests or estates which by possibility may not become vested within the life or lives in being at the time of the effective date of the instrument and 21 years thereafter. Id. The agreement now before us provides that the appellee, the optionee, or his heirs or assigns can exercise the option over an unlimited number of years, subject only to automatic termination if the option is not exercised within 90 days of the availability of a building permit, if ever that condition occurs. It is clear that on the date the instrument was signed there existed a distinct possibility that the specified contingency might not occur until after expiration of the life or lives in being plus 21 years.

By quoting one sentence from a federal district court case, the appellee argues that the rule is not violated when the contingency, as in this case, is capable of vesting in lives in being plus 21 years. The argument is clearly contrary to our settled law. In Comstock v. Smith, 255 Ark. 564, 566, 501 S.W.2d 617, 618 (1973), we wrote, “The interest must vest within the time allowed by the rule. If there is any possibility that the contingent event may happen beyond the limits of the rule, the transaction is void.” In the case before us the contingent event may happen beyond the limits of the rule. Therefore, the option is void. The dissenting opinion would retroactively overrule Comstock v. Smith and decide this case on a basis neither pleaded nor asked below or in this Court. Comstock v. Smith was decided in 1973 and has now become a rule of property. This Court should rarely overrule an earlier decision when the decision has become a rule of property. Gibson v. Talley, 206 Ark. 1, 174 S.W.2d 551 (1943); Fisher v. Cowan, 205 Ark. 722, 170 S.W.2d 603 (1943); Town of Pocahontas v. Central Power & Light Co., 152 Ark. 276, 239 S.W. 1 and 244 S.W. 712, appeal dismissed, 260 U.S. 755 (1922). Even if we should decide to overrule a rule of property, we could not do it retroactively, but could only give a caveat for the future. O’Brien v. Atlas Finance Co., 223 Ark. 176, 264 S.W.2d 839 (1954). We choose not to overrule the rule of property.

Reversed and remanded for entry of a decree consistent with this opinion.

Hickman and Hays, JJ., dissent. Purtle, J., not participating.