Chap 12 Rule Against Perpetuities
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The common law Rule Against Perpetuities is: “no interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” Earle v. International Paper Co., 429 So. 2d 989, 991 (Ala. 1983). Effective January 1, 2012, Alabama moves from the common law Rule Against Perpetuities to the Alabama Uniform Statutory Rule Against Perpetuities, which is codified in Sections 35-4A-421 through 35-4A-428 of the Code of Alabama (1975). The Alabama Uniform Rule provides, in part: a “nonvested property interest is invalid unless:(1) when the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive; or (2) the interest either vests or terminates within 100 years after its creation.” 2011 Alabama Laws Act 2011-532 (H.B. 28).
The common law Rule could have disastrous effects, because the Rule can render the “future interest is invalid unless it is absolutely certain that it must vest within the period of perpetuities. Probability of vesting, however great, is not sufficient. The certainty of vesting must have existed at the time when the instrument took effect.” First Alabama Bank of Montgomery v. Adams, 382 So. 2d 1104, 1107 (Ala. 1980). There is no opportunity to reform an attempted transfer that violated the rule. The Alabama Uniform Rule authorizes Alabama circuit courts “to reform [under certain circumstances] a disposition in the manner that most closely approximates the transferor’s manifested plan of distribution and is within the 100 years allowed by Section 35-4A-221(a)(2), (b)(2), or (c)(2) or the 360 years allowed by Section 35-4A-424(9).” 2011 Alabama Laws Act 2011-532 (H.B. 28).
The Alabama Uniform Rule applies prospectively only and will govern only “ a nonvested property interest or a power of appointment that is created on or after January 1, 2012.” 2011 Alabama Laws Act 2011-532 (H.B. 28).
For nonvested interests attempted to be created prior to January 1, 2012, the common law Rule will still apply. See Section 35-4-4 of the Code of Alabama (1975). Effective January 1, 2012,§ 35-4-4 is repealed and replaced prospectively by the Alabama Uniform Rule.
Occasionally, oil and gas transactions involve the transfer of a future interest. Usually the future interest will be something that is to take effect after: (i) the termination of an existing oil and gas lease, which can remain in effect so long as oil and gas are produced from the leased premises; (ii) the lapse of a specified term of years and the cessation of all paying oil and gas production; or (iii) a well on the property has produced enough oil and gas to allow the operator to recoup its costs of drilling and completing the well. In each of these situations, the time that the future interest vests is uncertain. Further, the interest may not vest in the grantee for many years. Due to this uncertainty, the transfer easily can run afoul of the rule against perpetuities.
In Earle v. International Paper Co., 429 So. 2d 989 (Ala. 1983), the Alabama Supreme Court considered the application of the common law Rule Against Perpetuities to a deed that left the grantor with an undivided one-half mineral interest for a period of fifteen years and so long thereafter as oil, gas or minerals were being produced in paying quantities. The question in the case was whether the grantor or the grantee got the undivided one-half interest when the fifteen-year term elapsed and there was no mineral production. The grantor argued the common law Rule voided the grantee’s right to the one-half mineral interest, despite the parties’ manifest intentions in the deed. The court sided with the grantee by finding that the grantor conveyed the entire fee simple estate to the grantee and reserved an undivided, defeasible one-half mineral interest. Since a reservation is technically a grant back to the grantor, the grantee held a possibility of reverter in the disputed one-half mineral interest. Although a possibility of reverter is a future interest, (L. Simes, Handbook of The Law of Future Interests (1966)), it is not subject to the Rule Against Perpetuities. Earle v. International Paper Co.
Earle provides excellent guidance on how to avoid the disastrous effects of the Rule Against Perpetuities. Simply grant everything to the grantee, and reserve the defeasible interest the grantor desires to retain. The reservation clause should contain words of inheritance and should contain no words of exception. The reservation – exception distinction is important, because Earle turned on the distinction between a reservation and an exception. If the disputed interest had been excepted from the grant, the grantee would have acquired a springing executory interest, which would have been subject to the Rule Against Perpetuities. The court construed the presence of words of inheritance in the reservation as an indication that the grantor intended to reserve and not to except the disputed interest.
The Alabama Uniform Rule also gives guidance on ways to avoid the disaster of the Rule. For example, § 35-4-421(a)(2) provides that a nonvested interest would be valid if “the interest either vests or terminates within 100 years after its creation.” So actual vesting can cure an otherwise invalid attempted transfer.
Copyright 2011 by Edward G, Hawkins. All rights reserved.