Brief Fact Summary.
Land owners sold a portion of property to relatives with a clause providing for automatic reverter if the property was encumbered. The purchasers mortgaged the property and defaulted and the grantors sued the bank to quiet title after foreclosure.
Synopsis of Rule of Law.
A restraint on alienation must not be undue or unreasonable. A restriction against encumbering the property may be reasonable and justified by the legitimate interests of the parties involved.
Eugene and Susan Alby (Plaintiffs) sold a portion of the family farm to their niece and her husband for $15,000, $85,000 below market value. The contract and deed stated that the land would revert to the Plaintiffs automatically if the purchasers subdivided, mortgaged, or otherwise encumbered the property. The niece and her husband took out two mortgages on the property and then defaulted. Banc One Financial (Defendant) held one of the mortgages and purchased the property in foreclosure. Plaintiffs filed a quiet title action against Defendant, claiming that under the terms of the deed, the property had automatically reverted to the Plaintiffs when the purchasers encumbered the property. The trial court found the reversion clause to be an unreasonable restraint on alienation of property and therefore void as against public policy. The court of appeals reversed, finding the restraint reasonable. Defendant appealed to the state supreme court.
Can a restraint on alienation preventing a grantee from encumbering property be reasonable and justified?
(Johnson, J.) Yes. A restraint on alienation must not be undue or unreasonable. A restriction against encumbering the property may be reasonable and justified by the legitimate interests of the parties involved. The Plaintiffs conveyed a fee simple determinable interest when they included a clause providing for the property to revert to the Plaintiffs if it was encumbered or mortgaged during their lifetimes. Fee simple determinable estates cannot have unreasonable or undue restraints on alienation. A restraint is unreasonable when the purpose served by the restraint is outweighed by the harmful consequences that will likely flow from the restraint. Here, the balance is between allowing for a free market in land and the right to keep property within a family for a certain time period. The balance falls in favor of Plaintiffs’ interests in keeping the property family-owned and is therefore reasonable. Although family ownership is frequently outweighed by interests in alienability, it is not in every case. In this case, the property had been held by the family for a long time, the restraint was against encumbrances, not transfer, was supported by a reduced purchase price, and was recorded to provide notice to affected parties. Also, this restraint is justified by the legitimate interests of the parties. The purchasers’ interest in allowing alienability is limited by the fact that they agreed to the restriction in exchange for a drastically lowered purchase price. The parties contracted to transfer the property amongst family members with the intent to keep it family-owned during Plaintiffs’ lifetimes. This is a reasonable purpose and justified by the legitimate interests of the parties. Affirmed.
(Alexander, C.J.) The restraint in this case was unreasonable because a free market in land outweighs an interest in family ownership.
(Chambers, J.) Restraints on alienation may be direct or indirect. The automatic reverter clause here is a direct forfeiture restraint. The general rule is that even limited forfeiture restraints that interfere with the alienability of property are void if they are unreasonable. A direct and automatic reverter upon an attempt to alienate property is unreasonable as a matter of law. The clause is void.
At common law, a fee tail or entail was an interest in property obtained through inheritance. This interest prevented the sale of the property and required the property to be further passed to the new owner’s heirs at his death. The intent was to keep property family-owned. This type of estate was eliminated in order to allow individuals who inherited property to sell the property to pay off debts. The distinction between the fee tail estate and the restraint on alienation allowed in this case is the contractual nature of the arrangement. The parties in this case agreed to the restrain in exchange for a purchase price well below market value.