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Malad, Inc. v. Miller - 7/3/2008

Arizona Court of Appeals Division One Holds That the Rule Against Perpetuities Does Not Render Void a Commercial Real Estate Sales Agreement That Fails to Include a Specific Time Period for Performance if it is Reasonable to Conclude the Parties Intended Performance Within a Reasonable Time Period.

Malad, Inc. (“Buyer”) and Maxus Management, Inc. (“Seller”) entered into a sale agreement for real property requiring the parties to close on February 15, 2002 “or such other time as Seller and Buyer mutually agree in writing.”  The parties agreed in writing to two extensions of the closing date.  The last written extension agreement stated that “the close of escrow shall be extended to May 15, 2002, or upon delivery of clear title and verification of water rights by the sellers whichever occurs later.”  On May 15, 2002, Buyer sent a letter to the escrow agent requesting cancellation of escrow and return of Buyer’s $5,000 earnest money deposit because Seller was unable to provide clear title.  Miller, Seller’s real estate agent, convinced Buyer to withdraw its letter demanding close of escrow.  Over the next several months, Seller failed to obtain clear title to the entire property and failed to meet the conditions requisite for closing the escrow; however, Buyer informed Seller’s agent that it was no longer willing to cancel the escrow.  Nevertheless, in September 2002, Seller caused the escrow agent to cancel the escrow and return Buyer’s earnest money. 

Buyer ultimately learned that Seller sold the property to a third party less than a year later at the same price as it has agreed to sell it to Buyer.  Buyer brought suit against Seller on the contract and against Miller for intentional interference with contract.  Buyer and Seller settled, and Miller moved for summary judgment on the interference claim, alleging, among other arguments, that the rule against perpetuities voided the sale agreement, and therefore Miller could not be liable for interference with a void agreement.  The trial court granted summary judgment for Miller, concluding that the sale agreement was void because it violated the rule against perpetuities.  Buyer timely appealed.

The Court of Appeals reversed and remanded, holding that a genuine issue of material fact exists as to what reasonable time period for performance applied to the final written extension of the closing date.  The common law rule against perpetuities holds that no interest in real property is valid unless it must vest not later than twenty-one years after some life in being at the creation of the interest.  In a previous decision in Byke Construction Co. v. Miller, 140 Ariz. 57, 680 P.2d 193 (App. 1984), the Court held that an option to repurchase real property that did not specify a time period to exercise the option did not violate Arizona’s rule against perpetuities, because the court could read into the contract an implied reasonable time period for exercising the option.  Thus, where an interest in real property cannot reasonably be interpreted to vest later than twenty-one years in the future, the rule against perpetuities is inapplicable.

The Court applied the Byke analysis to the contract in question in this case.  Applying a reasonableness standard to the ambiguous contract language, the Court held that it was not reasonable to presume that Buyer would obtain equitable interest in the property after twenty-one years have passed.  Moreover, the Court interpreted the contract to include an implied condition that the parties fulfill their contractual obligations within a reasonable time.

Presiding Judge Irvine authored the opinion; Judge Brown and Judge Ehrlich concurr

Posted On: 7/29/2008