67 N.Y.2d 156, 501 N.Y.S.2d 306, 492 N.E.2d 379
In 1966 the State of New York, acting through the Metropolitan Commuter Transportation Authority which is now plaintiff Metropolitan Transportation Authority, purchased all the capital stock of plaintiff Long Island Railroad from the Pennsylvania Railroad for $65 million.1 Included among the assets acquired were 65 acres of real property in Queens which had been used by the Long Island Railroad as a freight yard.2 As part of the consideration to reduce the purchase price, the State conveyed air rights above this property to Delbay Corporation, a subsidiary of Pennsylvania, together with an easement permitting it to erect columns, piers or foundations and to install utility services necessary to support and service improvements within the air rights.3 The State also executed an option agreement granting Delbay the right to purchase 12 lots in the freight yard at market value if MTA subsequently determined that the property was no longer necessary for its transportation operations. The option was to expire after 99 years if not exercised by Delbay or its successors or assigns.4
On April 16, 1982 MTA notified Delbay that it no longer required six of the lots and that Delbay could acquire them.5 Delbay thereafter assigned its right to two of the lots to a real estate developer, defendant Bruken Realty Corporation.6 By letter dated July 13, 1982, Bruken notified MTA of its election to purchase them.7 Although the original agreement provided for arbitration of the market value, the parties agreed to attempt to negotiate the price after obtaining separate appraisals. However, the air rights conveyed to Delbay had since been acquired by the City of New York in a tax foreclosure proceeding. With the air rights and the ground rights in separate ownership, the parties were unable to reach agreement.8
The parties selected arbitrators and submitted the determination of market value to them.9 Before hearings could start, plaintiffs instituted this action requesting that the court enjoin the arbitration proceeding and declare that the conveyance to Delbay of the right to acquire the freight yard lots was void.10 Plaintiffs subsequently moved for summary judgment and Supreme Court denied the motion on alternative legal grounds.11 The Appellate Division affirmed without opinion, and the matter is before the Court of Appeals on a certified question by its leave.12
Whether the 1966 agreement granted Delbay an option or a preemptive right to acquire the freight yard lots?13
An option grants to the holder the power to compel the owner of property to sell it whether the owner is willing to part with ownership or not.14 A preemptive right, or right of first refusal, does not give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method.15
No. The agreement provided that Delbay could purchase the lots only if MTA subsequently determined that the property was no longer necessary for its transportation operations.16 MTA activated Delbay's rights in April 1982 by notifying Delbay that the property was available for purchase.17 The decision to sell remained with MTA and Delbay was granted the right to purchase only if MTA first decided to sell because it had no further need for the property.18 Thus, the right acquired by Delbay was a preemptive right rather than an option.19
The instrument invalidated in Buffalo Seminary granted the holder an unlimited right to buy the owner’s land at any time.20 Under the terms of this instrument, however, the decision to sell remained with MTA.21
The 1966 agreement granted Delbay a preemptive right to acquire the freight yard lots.22
Whether the rule against remote vesting applies to preemptive rights?23
The statutory rule prohibiting remote vesting and the common-law rule against unreasonable restraints serve the same general purpose by limiting the power of an owner to create uncertain future estates.24 Although preemptive rights unlimited in duration violate the rule against remote vesting they do so only marginally and that application of the rule, because of its inflexibility, may operate to invalidate legitimate transactions.25 In such cases the need to insure free alienability is served more effectively if the validity of the preemptive right is assessed by applying the common-law rule prohibiting unreasonable restraints.26
No. Preemptive rights differ significantly from options.27 The courts have reached this conclusion in circumstances involving options and preemptive rights because enforcement did not violate the underlying purposes of the rule against remote vesting.28 Enforcement of the preemptive right in such cases encouraged the holder to develop the property by insuring his opportunity to benefit from development and to recapture his investment in it.29 This case illustrates the point because the agreement promoted the use and development of the property while imposing only a minor impediment to free transferability.30
Implicit in these decisions is a recognition that although preemptive rights unlimited in duration violate the rule against remote vesting they do so only marginally.31 Application of the rule against remote vesting here would defeat the policies underlying the rule because it would invalidate an agreement which promoted the use and development of the property.32
The rule against remote vesting does not apply to preemptive rights in commercial and governmental transactions.33
Whether the right granted to Delbay in the 1966 transaction violated the prohibition against remote vesting stated in New York’s Rule against Perpetuities?34
Under the rule prohibiting unreasonable restraints on alienation, the validity of the preemptive right rests on its reasonableness, judged by its duration, price and purpose.35 The duration of the restraint is not measured by the life of the preemptive right.36 Reasonableness also depends on price, for the method by which the price is set can be critical in determining whether a preemptive right unlawfully restrains transfers.37 A preemptive right, however, usually will not be unlawful when conditioned on payment of market value or a sum equal to a third-party offer.38
No. The rule against remote vesting does not apply to the preemptive right granted in this commercial and governmental transaction.39 Under the rule against unreasonable restraints, the preemptive right is reasonable because the 90-day period during which the right could be exercised after MTA decided to sell is reasonable, the price is market value fixed by arbitrators, and the right served a beneficial purpose in allowing the State to reduce the purchase price while preserving commuter service.40
The transfer permitted the parties to put both properties, the railroad and the freight yard, to their maximum productive use, a benefit which far outweighed any public interest served by automatic invalidation of the preemptive right to the lots solely because of remote vesting of Delbay’s interest.41 The preemptive right in this case clearly served a beneficial purpose and given its reasonableness in terms of duration and price, it should be enforced.42
The right granted to Delbay did not violate the prohibition against remote vesting stated in New York’s Rule against Perpetuities.43