Ferrero Construction Co. v. Dennis Rourke Corp.
536 A.2d 1137, 311 Md. 560, 1988 Md. LEXIS 19 (1988)
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Rule of Law:
A right of first refusal is a property interest, not merely a contract right, and is therefore subject to the common law Rule Against Perpetuities. If such a right is of unlimited duration and not tied to a specific measuring life, it is void for violating the Rule.
Facts:
- On April 27, 1981, Dennis Rourke Corp. (Rourke) entered into a contract to purchase two lots from Ferrero Construction Co. (Ferrero).
- The contract included a clause granting Rourke a right of first refusal on the future sale of any of Ferrero's seven remaining lots on Mercy Court.
- The contract, which was never recorded, did not specify a duration for the right of first refusal.
- On March 12, 1984, Ferrero notified Rourke of a third-party offer to purchase one of the remaining lots, Lot 27.
- Rourke immediately stated its intention to exercise its right of first refusal and submitted a contract with terms matching the third-party offer.
- Ferrero subsequently decided to reject both offers, refused to appear at settlement, and would not sell Lot 27 to Rourke.
Procedural Posture:
- Dennis Rourke Corp. sued Ferrero Construction Co. for specific performance in the Circuit Court for Montgomery County (a state trial court).
- The trial court granted Ferrero's motion for judgment on the specific performance claim, ruling that the right of first refusal violated the Rule Against Perpetuities and was therefore void.
- The trial court also ruled against Rourke on a separate contract claim, finding the parties had proceeded under a mutual mistake of law.
- Rourke (as appellant) appealed the decision to the Court of Special Appeals of Maryland (an intermediate appellate court).
- The Court of Special Appeals reversed the trial court's judgment, holding that the Rule Against Perpetuities was inapplicable to rights of first refusal.
- Ferrero (as petitioner) filed a petition for a writ of certiorari, which was granted by the Court of Appeals of Maryland (the state's highest court).
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Issue:
Does the common law Rule Against Perpetuities apply to a right of first refusal for the purchase of real property?
Opinions:
Majority - Eldridge, Judge
Yes, the common law Rule Against Perpetuities applies to a right of first refusal. A right of first refusal is an equitable interest in property that vests only when the property owner decides to sell. The court reasoned that the vast majority of American jurisdictions, as well as the Restatement of Property, treat such rights as property interests subject to the Rule. The court rejected the minority view that the Rule should not apply because rights of first refusal are not significant restraints on alienation, clarifying that the Rule is concerned with remote vesting of interests, not just restraints on alienation. Because the right granted to Rourke, a corporation with perpetual existence, was of unlimited duration, it could vest well beyond the permissible period of a life in being plus twenty-one years, and was therefore void from its creation.
Dissenting - Cole, Judge
No, the Rule Against Perpetuities should not be applied to a right of first refusal where the price is determined by a third-party offer. The dissent argued that the court should not mechanically apply the Rule but should consider its underlying policies, which are to prevent restraints on the alienation and marketability of property. A right of first refusal to match a market-value offer does not hinder alienation because the owner can still sell at any time for fair market value. Applying the Rule in this commercial context thwarts the express intent of the contracting parties without furthering the public policy behind the Rule. The dissent contended that the majority's approach was an unduly punitive application of an archaic rule that destroys a bargain that ought to be performed.
Analysis:
This decision solidifies Maryland's adherence to the traditional majority view that rights of first refusal are subject to the Rule Against Perpetuities. It rejects the growing minority and academic trend of exempting commercial preemptive rights from the Rule, prioritizing certainty and stability in property law over a more flexible, policy-driven analysis. The ruling serves as a strong caution to practitioners drafting commercial real estate agreements in Maryland to include specific time limitations to ensure the validity of such rights. By declining to create a new judicial exception to the Rule, the court reinforced the legislature's primary role in modifying this long-standing common law doctrine.
