Rule Against Perpetuities and Leases in North Carolina

Diana Quarry provides a guest blog post ...

Remember the Rule Against Perpetuities? 

Think back to your days in law school, sitting in your 1L Property class.  Remember the rule against perpetuities?  Remember thinking that it would never really come into play in your actual practice of law? 

Oh, how young and naïve we were back then.

In recent years, the Court of Appeals of North Carolina has handed down two decisions which make very clear that the common law rule against perpetuities doctrine is alive and well in the Tar Heel State, regardless of the State’s 1995 enactment of the Uniform Statutory Rule Against Perpetuities (“USRAP”).  The cases, New Bar Partnership v. Martin (221 N.C.App. 301 (2012)) and Khwaja v. Khan (767 S.E.2d 901 (2015)), both deal with a tenant’s attempt to exercise its right of first refusal to purchase the leased property.  New Bar Partnership v. Martin held that the USRAP, by its terms, does not deal with preemptive rights arising from nondonative transfers, such as a right of first refusal contained in a lease.  In those cases, the common law doctrine still applies.

The common law rule against perpetuities doctrine voids any interest not tied to a measuring life and which otherwise extends beyond 21 years.  The leases in both cases had terms (by virtue of the initial stated term plus available extension options) which extended beyond 21 years.  Since both rights of first refusal were exercisable at any time during the applicable lease term, and since neither lease contained a reference to a life in being, the rights were deemed void under the common law doctrine.  Keep in mind that even if a landlord does elect to sell its property to a third party prior to the 21-year outside date, a tenant may be unable to exercise its right of first refusal at such time – if the provision violates the doctrine, then the provision is void from the outset – regardless of when a tenant tries to exercise it. Including an adequate savings clause into a lease should prevent a right of first refusal from being voided under the common law doctrine, but the key is to remember to include one.