St. Regis Paper Co. v. Brown , 247 Ga. 361 ( 1981 )

Clarke, Justice.

The Court of Appeals held that options to purchase contained within two timber leases were void ab initio as violations of the rule against perpetuities. St. Regis Paper Co. v. Brown, 155 Ga. App. 679 (272 SE2d 544) (1980). We granted certiorari. The timber leases are for terms of sixty years plus a few months and contain options which granted to the lessee the right to purchase the real estate for a fixed per acre price during the term of the lease, but could not be exercised during the first twelve years of the lease. The resulting effect was that the options held by St. Regis extended for more than sixty years from the date of the execution of the document in which they were contained. We conclude that these options do not violate the rule against perpetuities.

The rule against perpetuities in Georgia is statutory. Code Ann. § 85-707 (a) provides: “Limitations of estates may extend through any number of lives in being at the time when the limitations commence, and 21 years, and the usual period of gestation added thereafter. A limitation beyond that period the law terms a perpetuity and forbids its creation.”

The rule did not originate in this state and has a long history. Following the enactment of the Statute of Uses in England in 1536, there were many instances in which executory interests became legal interests entitled to protection of the courts. When a series of decisions in the 17th century made these future interests indestructible, the rule against perpetuities evolved from a judicial attempt to curtail the resulting threat to alienability of property. A classic statement of the rule is as follows: “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.” Gray, Rule Against Perpetuities, § 201 (4th ed., 1942). We have held that where the future estate created is not tied to any life in being, the interest must become vested within twenty-one years. Murphy v. Johnston, 190 Ga. 23 (8 SE2d 23) (1940).

The rule has from its inception constituted a trap for the unwary and scholars are critical of extensions of the rule. See Leach, Perpetuities: New Absurdity, Judicial and Statutory Correctives, 73 Harv. L. Rev. 1318 (1960) (hereinafter “Leach”). Nevertheless, the purposes which it serves, even in a modern setting, are numerous. Among these are the utilization of wealth, the development of land by its current beneficial owners, and the assuránce that society will be controlled by the living rather than from the grave. Chaffin, Real Property, 17 Mer. L. Rev. 208 (1965); 4 Restatement of Property, Introduction to Part I, pp. 2132-33 (1944).

The wisdom and legal logic, however, for extending the rule’s applicability to a commercial setting is at best questionable. In today’s world of complex and sophisticated real estate dealings, it is important that we do not broaden the rule against perpetuities to the point that its effect will be the opposite of its intended purpose. The rule came into being in order to control family property transfers which limited the rights of certain generations to alienate the property. Therefore, the thrust of the rule is to encourage the right of free dealings in real estate interest. To apply the rule to options contained in leases could very well have a reverse effect. Neither lives in being nor twenty-one years has any relevance to the commercial situation. This is particularly true when the holder of the beneficial interest in the property is able to utilize and develop his interest to its fullest, as is the case of a lessee who holds an option to purchase a leasehold. Leach, supra.

The majority rule in this country and the rule in England have followed a parallel course mandating that an option to purchase beyond the period of the rule of perpetuities is void if the holder of the option has no interest in the property. Simes & Smith, The Law of Future Interests, § 1244 (2d ed. 1956) (hereinafter “Simes & Smith”). The underlying rationale for this proposition is that the existence of such an option serves as a substantial deterrent to the free marketability of the real estate and to the possibility of its development. The majority of American jurisdictions part company with the English rule when the option is found in a lease. Under these circumstances, a distinction is made between an option in gross and an option appendant. When the option is a part of the lease and exercisable beyond the period of the rule against perpetuities, most American jurisdictions have found it to be valid. 4 Restatement of Property, § 395 (1944); 6 American Law of Property, § 24.57 (A. J. Casner ed. 1952); Simes & Smith, § 1244. In both the case of an option in gross and an option within a lease, “... the equitable future interest of the option-holder, derived from the specific enforceability of the option, is not ‘vested’; but the courts wisely ignore this purely conceptual fact, examine the effect of the transaction, and recognize that in the first case the option defeats the policy objectives of the Rule and in the second case it furthers them.” Leach, supra at 1320.

Although the question of the applicability of the rule to options to purchase when they are part of a lease has been settled in England and most American jurisdictions, it has not been squarely addressed in Georgia. It is clear that in Georgia a perpetual lease or a perpetual right to renew a lease does not violate the rule against perpetuities. Smith v. Aggregate Supply Co., 214 Ga. 20 (102 SE2d 539) (1958); Williams v. J. M. High Co., 200 Ga. 230 (36 SE2d 667) (1946). Lessor/appellee insists the matter of the option within a lease is controlled by Turner v. Peacock, 153 Ga. 870 (113 SE 585) (1922) and Brown v. Mathis, 201 Ga. 740 (41 SE2d 137) (1947). These cases are, however, distinguishable in that they do not involve an option in a lease. In Turner v. Peacock, supra, the option was contained in a deed. Since the option to purchase additional realty was not limited in time, it was held that the option was void. Brown v. Mathis, supra, involved a reservation in a deed to mine and take sand perpetually at a set price. The court found that “... the reservation clause was an attempt to reserve to the grantor, its successors and assigns, a perpetual option to purchase the sand on the land described at the price of 10 cents per car, and constituted a direct violation of the rule against perpetuities . . .” Id. at 746. As noted above, neither of the options was contained within a lease.

In establishing a rule for Georgia, we take into consideration the fact that a lease may create an interest in real estate. Such an interest was created here. It is logical that one interest which vests at an early time may be tied to certain conditions which cause it to ripen into a larger interest at a later time. Such a transition from one interest to another occurs when the holder of a security deed exercises the power of sale contained in the security deed after default by the grantor. No one questions that the power of sale in a security deed may be exercised ■ beyond the period established in the rule against perpetuities. In the case before us now, we have a leasehold interest which may ripen into a fee simple interest upon the exercise of an option. Indeed, the holder of a leasehold interest is in a stronger position than the holder of a security deed because he is in possession. The combination of early vesting of an interest in the realty and the right of possession is enough to place an option appendant to a lease beyond the prohibitions established in the rule against perpetuities.

Decided March 12, 1981 Rehearing denied March 24, 1981. Jesse G. Bowles, Jesse G. Bowles III, Howell Hollis, Albert W. Stubbs, William H. Agnor, for appellant. Robert M. Margeson III, Donald D. Rentz, Edward Wohlwender, Jr., Alston, Miller & Gaines, G. Conley Ingram, Thomas Thorne-Thomsen, for appellees. John B. Harris, Jr., Mary Mendel Katz, Charles L. Gowen, Pope B. Mclntire, Griffin B. Bell, G. L. Dickens, Jr., Charles E. Moore, Philip B. Spivey, amici curiae.

Having considered the circumstances in this case in the light of commercial realities, as well as in the light of the basic policy behind the rule against perpetuities, we hold that an option to purchase written into a lease and exercisable within the period of the lease does not violate the rule against perpetuities even though the period within which it may be exercised extends beyond the period specified in the rule.

Judgment reversed.

All the Justices concur, except Smith, J., who dissents.