June 24, 2019

Frederick Skillern: Real Estate Case Law — Titles and Title Insurance (4)

Editor’s note: This is Part 19 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.

By Frederick B. Skillernfrederick-b-skillern

Whiting v. Atlantic Richfield
Colorado Supreme Court, March 3, 2014
2014 CO 16

Rule against perpetuities; options; reformation of option agreement under the USRAP, C.R.S. 15-11-106; common law rule does not void commercial option contract.

This is an important case that addresses much of the change in the law of the rule against perpetuities over the last 25 years. As the case came to Colorado Supreme Court the issue was twofold. First, the court accepted certiorari to examine whether the statutory right to reform a commercial contract under the Colorado version of the statutory rule against perpetuities is unconstitutional because it requires a court to reform a vested contract – in this case the right to declare one’s contract void under the common law rule against perpetuities. Second, the court sought to address as a matter of statutory interpretation whether the right of reformation only applied to what the statute refers to as “donative” transfers of property, as opposed to a commercial contract such as an option to purchase mineral rights.

The supreme court changed to focus of the case and addresses in its decision a different question, thereby avoiding the questions upon which certiorari was granted. It holds instead that the interest in question – a twenty-five year option to purchase mineral rights – does not violate the common law rule against perpetuities. As such, there is no need to resort to the reformation procedure provided in the statute.

ARCO entered into a deal in 1968 with a small oil company (Equity, now owned by Whiting) to explore Colorado shale oil development in Garfield County. It gave development money to Equity, and received a partial ownership interest in the mineral rights. Equity was given an option to repurchase ARCO’s interest within the 25-year term of the deal. In 1983, the agreement (including the option) was extended for another 25 years. The terms are summarized succinctly by the court:

Pursuant to the 1983 amendment, Equity’s right to exercise the option would not expire until 11:59 p.m. on February 1, 2008. Importantly, the parties agreed that “ARCO shall retain the sole and exclusive right to cancel this Option at any time during its term,” with the exception that Equity was granted a right of first refusal if ARCO received an offer from another party to buy its interest in the Boies Block.

Equity exercised the option shortly before the deadline. ARCO claimed that the option was void under the common law rule against perpetuities. The trial court, in a decision affirmed by the court of appeals, agreed but applied the reformation provision in CRS § 15-11-1106(2) to add a “savings clause” in the manner outlined in the statute.

The result here is to put off for another day the constitutional validity of the reformation provision of the USRAP. The court instead finds that the common law has changed sufficiently to determine, consistent with past cases of the Colorado Supreme Court, that the purpose of the common law rule is not served by applying the “21 years after the death of lives in being test” to an arms-length transaction between sophisticated oil companies. More particularly, the court holds, in a well developed decision that explores the recent development of case law in considerable depth, the fact that the option right was revocable at will by ARCO demonstrates that the option was not preventing development of the land. For that reason, the underlying the policy of the common law rule would not be served by voiding the option simply because its term extended longer than 21 years.

The Real Estate Section of the CBA submitted an amicus brief in support of the lower court’s ruling and in support of the right to reform real estate contracts found to violate the rule. This is motivated in part by the obvious liability risks confronting lawyers who may unwittingly accompany their clients into the “RAP trap.” The risk areas center around long term options, rights of first refusal, and other rights or interests contained in deeds or leases that may “walk or talk” like an executory interest or a right of reversion. As a practice point, it is important in dealing with such interests to keep the USRAP in mind, as it treats “donative transactions” differently than commercial transactions.

Frederick B. Skillern, Esq., is a director and shareholder with Montgomery Little & Soran, P.C., practicing in real estate and related litigation and appeals. He serves as an expert witness in cases dealing with real estate, professional responsibility and attorney fees, and acts as a mediator and arbitrator in real estate cases. Before joining Montgomery Little in 2003, Fred was in private practice in Denver for 6 years with Carpenter & Klatskin and for 10 years with Isaacson Rosenbaum. He served as a district judge for Colorado’s Eighteenth Judicial District from 2000 through 2002. Fred is a graduate of Dartmouth College, and received his law degree at the University of Colorado in 1976, in another day and time in which the legal job market was simply awful.

Colorado Supreme Court: Reformation Not Necessary for Commercial Option Entered Into Prior to Enactment of Statutory Rule Against Perpetuities Act

The Colorado Supreme Court issued its opinion in Atlantic Richfield Co. v. Whiting Oil & Gas Corp. on Monday, March 3, 2014.

Equity Oil Company—Reformation of Future Interests in Property—Statutory Rule Against Perpetuities Act—Common Law Rule Against Perpetuities—Nondonative Transfers

In this case, the Supreme Court considered whether a nondonative, commercial option entered into before the passage of the Statutory Rule Against Perpetuities Act is subject to reformation under CRS § 15-11-1106(2). As a threshold matter, the Court examined whether the option violated the common law rule against perpetuities, and concluded that it does not. Because the commercial option negotiated by the parties was fully revocable, it posed no practical restraint on alienation, and did not violate the common law rule against perpetuities as that rule was construed in Supreme Court case law before passage of the Statutory Rule Against Perpetuities Act.

The Court held that because the option did not violate the common law rule against perpetuities, no reformation was necessary. Accordingly, the Supreme Court affirmed the judgment of the court of appeals on different grounds, and did not reach the questions of whether § 15-11-1106(2) provides for reformation of nondonative, commercial instruments, or whether the lower courts’ application of that section to the option here was unconstitutionally retrospective.

Summary and full case available here.