Restraints on Alienation
Restrictions on use are generally favored. Restrictions on use examples, must use for ag purposes, can’t operate a bar on the property, etc.
Restraints vs. Restrictions
Restraints on alienation are disfavored.
Courts consider three things:
} Scope of the restraint
◦ Total (most disfavored)
◦ Partial
} Method of restraint
◦ Disabling (most disfavored)
◦ Forfeiture
◦ Promissory
} Nature of the interest restrained
◦ Fee simple (most disfavored)
◦ Life estate
◦ Leasehold interest
There are three methods of restraint of alientation:
1. Disabling restraints withhold the power of alienation (“A to B, and any attempted transfer by B shall be void and of no effect”. Withholds the power of alientation. You are disabling them for selling.
2. Forfeiture restraints provide that the grantee will lose her interest if she attempts to transfer the property (“A to B so long as B does not convey”) The grantee will lose her interest if she attempts to transfer the property.
3. Promissory restraints expose the grantee to contract remedies in the event of an attempted transfer (“A to B, and B promises never to convey the lands”. Framed in contract terms; imposes an obligation (promise) on grantee.
Type of Restraint
Fee Simple
Life Estate
Leasehold
Disabling
Invalid
Prohibited
Okay
Forfeiture
Invalid
Okay
Okay
Promissory
Possibly okay if partial and reasonable
Okay
Okay
Nature of Interest Restrained
· Restraints on fee simples are disfavored
o Total restraints are not enforceable
o Partial restraints (time limitations, limitations on people to whom the grantee may transfer the land ) are disfavored.
· Restraints on leasehold interest are not disfavored and are generally enforceable
· Life estate fall somewhere in between
Habendum clause: the part of a deed that limits and defines an estate.
Restrictions on use are not void. Restrictions on the ability to sell or transfer the land are void.
Restrictions on use are merely the conveyance of a fee simple subject to a condition subsequent
Charitable Exemption
Restraints on alienation might be okay for charitable gifts. Some jurisdictions allow this. If a gift is to a charity, the restraint might be able to be enforced. It enforces charitable gifts. Not all non-profits are “charitable;” most fraternal organizations are non-profit, but not charitable. Horse Pond Fish & Game Club, p. 631.
There are several factors to consider when determining whether a right of first refusal or a restriction on assignability is valid (Urquhart):
1. If the price for purchase is fixed and disproportionate to its value, then it might be unreasonable.
2. You have to determine whether the restraint was entered into with mutual consent by parties with equal bargaining power or if it was intended to restrain alienability.
3. If the restraint serves some purpose other than restricting alienability, it might be reasonable.
4. You have to look at whether the restraint is limited in duration and allows several types of transfers.
5. If not limited to the number of person to whom transfer is prohibited, then it might be unreasonable
6. Does the restraint increase or decrease the value of the property? If decreases it, then might be unreasonable.
Statutes
MCA § 70-1-405: Conditions restraining alienation void
Conditions restraining alienation, when repugnant to the interest created, are void.
[But court will apply a reasonableness test. Urqhart]
Cases
Case
Alsup v. Montoya (TN 1972)
Topic
Rules promoting alienability and marketability
Loc.
621
Facts
The father of three daughters left his land to his daughters for life, then to their grandchildren. The father’s will explicitly prohibited the sale of the farm. Daughters (p./ae.) lived in CA and wanted to sell the farm. Grandchildren did not.
Chancery court found there had been a material change in conditions and that it was in the best interest of the parties to have the land sold for reinvestment. The restraint on alienation was invalid.
Issue
Is a restraint on alienation in a will valid?
Holding
The law generally is clear that any restraint which undertakes to wholly remove the power of a life tenant to alienate his estate is absolutely void.
Court allowed the property to be sold, with the proceeds reinvested.
The governing issue here is testamentary intent.
App.
The restraint on alienation was invalid. The father would have probably wanted to re-write the will if he knew what would happen.
The court construed the restraint as a total restrain on the ability of the sisters to transfer their life estate.
Focused on the change in circumstances – court using their equitable powers!
Notes
As a general rule, as a life tenant, don’t really have the right to go in and change the use of the property.
Life tenants get income generated by the land.
The alternative is to create a trust. Rules governing restraints generally do not apply to trusts. A trust will give more flexibility.
Case
Mountain Brow Lodge No. v. Toscano (CA 1967)
Loc.
626
Facts
Toscano (d./ae.) left property to Mountain (p./at.) with the following condition:
“Said property is restricted for the use and benefit of Mountain, only; and in the event the same fails to be used by Mountain or in the event of sale or transfer by Mountain of all or any part of said lot, the same is to revert to Toscano, successors, heirs or assigns.”
Issue
Is the provision valid?
Holding
Yes and no.
The clause that prohibits Mountain from selling or transferring the land under penalty of forfeiture is an absolute restraint against alienation and is invalid.
The clause restricting use is merely the conveyance of a fee simple subject to a condition subsequent with Toscano retaining a reversion interest.
No formal language is required to create a fee simple subject to a condition subsequent.
The important dist
land, such as developing agricultural land into a shopping mall. Can’t substantially change land even if it results in an appreciation of land.
All types of waste are actionable and are subject to damages.
In absence of an express intention to grant life tenant rights, life tenants are constrained in how they can use the property. Example, can’t clear cut the timber on property unless the life tenant has been expressly given the right by the grantor. Facts and circumstances test. Remember, if construed as waste, life tenant can be liable for treble damages!!
Remedies
• Compensatory damages: in the Moore case the district court determined that the total damages from the deterioration of the farmhouse was $10,433.
• Many jurisdictions, including Montana, allow treble damages (MCA 70-16-106).
• Injunctive relief: requiring the life tenant to take certain actions (such as repair) or stop certain actions (such as logging).
• Forfeiture: some states allow the court to terminate the life estate, but usually applied only in context of egregious or malicious acts.
Bringing actions
• The remainderman does not have to wait until the life tenant dies.
• For permissive waste, injury continues and statute of limitations does not commence to run until life tenant dies.
Life estate expenses
• As between a life tenant and remainderman, who should bear the cost of permanent improvement or expenses that have long-term benefits.
• For example, $30,000 in attorney fees incurred in defending water rights that benefit both the life tenant and the remainderman?
– Necessary versus discretionary costs
– See Harris v. Audubon Soc. of Rhode Island, 468 A.2d 258 (R.I. 1983) (life tenant could not compel remainderman to contribute to cost of commercial kennel improvements required by governmental order where improvements were for use discretionary with life tenant and were neither necessary to preserve remainder interests nor beneficial to remainderman).
Insurance
• If a building burns down, and the life tenant maintained insurance on the building, should the life tenant be required to replace the building?
• In Ellerbusch v. Myers, 683 N.E.2d 1352 (Ind. App. 1997), the court held that a life tenant cannot be compelled to rebuild property damaged by an insured casualty for remainder’s benefit nor will the court impress a trust on insurance proceeds for the remainderman’s benefit.
