Costly Drafting Errors and the Rule Against Perpetuities: The Case of Symphony Space

There’s a saying in New York that every building tells a story.  In the case of Symphony Space, that story is a fascinating legal story with an unforgettable lesson.  Symphony Space is a cultural landmark on New York’s Upper West Side, located on Broadway and 95th Street.  I walk by it every day.  And yet I did not know its legal story until I was doing some research recently on New York’s Rule Against Perpetuities contained in EPTL § 9-1.1(b).

Simply stated, the Rule Against Perpetuities (RAP) works this way: “No interest is good unless it must vest, if at all, no later than twenty-one years after some life in being at the creation of the interest” (John Chipman Gray, The Rule Against Perpetutities § 201 at 191 [4th ed. 1942]).

At one time, Symphony Space’s theater and commercial space was owned by Broadwest Realty Corporation.  Broadwest also owned Pomander Walk and a commercial building, the Healy Building, named after nightclub impresario Thomas J. Healy who had built Pomander Walk in 1921.  Pomander Walk was granted landmark status by New York City in 1982.

In 1978, the New York real estate market was experiencing a severe downturn.  Broadwest needed to sell its properties, but was looking for a way to postpone a final sale of it properties until the market conditions were more favorable.   Broadwest set about looking for a short-term solution to its economic problems by looking for a buyer for its theater and commercial space.

Symphony Space, Inc, a non-profit arts organization, became the perfect candidate for two reasons.  First, the organization had an immediate need for the theater space.  Secondly, and equally important for Broadwest, Symphony Space’s non-profit status meant that the entire building — the theater and the commercial space — would benefit from a property tax exemption. 

So in 1978 Symphony Space purchased the building housing the theater and the commercial space from Broadwest for $10,010.  The deal included the following parts.  Broadwest would continue to pay the $243,000 mortgage on the property.  Symphony Space, Inc. would lease back the commercial space to Broadwest for $1 per year.  Because of Symphony Space’s non-profit status, its use of the theater would grant a property tax exemption for the entire building, including the commercial space.  Finally, as a condition of the sale, Symphony Space granted Broadwest the option to repurchase the building in exchange for $10 consideration.

The option to repurchase the building granted to Broadwest by Symphony Space was a covenant running with the land, meaning that the option could be exercised by Broadwest and its heirs, successors and assigns.  The contract specified four exercise periods for the option:  “$15,000 if (…) on or before December 31, 1987; $20,000 if on or before December 31, 1993; $24,000 if on or before December 31, 1998; and $28,000 if on or before December 31, 2003.”  Symphony Space, Inc. v. Pergola Properties, Inc., 669 N.E.2d 799, 801 (N.Y. 1996).

In 1981, Broadwest sold all of its interests, including the option to repurchase, to a nominee who then transferred to rights to Pergola Properties, Inc., Bradford N. Swett, Casandium Limited, and Darenth Consultants as tenants in common.  A year later, Pomander Walk received landmark status, thereby increasing the value of the entire block front to $27 million, assuming that the option to repurchase from Symphony Space was enforceable.  Without the enforceable option, the appraised value decreased to $5.5 million.  It thus became in the new owners’ best interest to exercise the repurchase option.

Alleging that Symphony Space had defaulted on the mortgage, Swett served Symphony Space with notice in January 1985 that Swett was exercising the option to repurchase on behalf of all the defendants.  Symphony Space countered that the option agreement might be invalid and in March of 1985 Symphony Space began an action for a declaratory judgment against the defendants.  At issue was whether the option agreement violated New York’s Rule Against Perpetuities.

In the case of the Broadwest repurchase option, it was created in 1978.  If RAP was applicable to option agreements, then the latest year during which the option could have been exercised would have been 1999.  Accordingly, if RAP applied, then only three exercise periods were legitimate.  The fourth option exercise period, on or before 31 December 2003,  was outside of the statutory period for RAP.  If RAP were applicable to commercial options, then the entire repurchase option with Symphony Space was invalid and unenforceable by the defendants.  Without a valid option, the value of their properties would decrease by around $21 million.

For the next eleven years, the case wound its way through the courts.  The trial court  ruled that RAP applied to commercial options, that the repurchase option in question violated RAP, and that Symphony Space was entitled to redeem the mortgage.  The defendants appealed and the Appellate Division certified the question to  the Court of Appeals, New York’s highest court.  At issue was the novel question of whether options to purchase commercial property are exempt from RAP.

Citing Buffalo Seminary v. McCarthy (86 AD2d 435, affd 58 NY2d 867), the court ruled that RAP did indeed apply to commercial real estate options and that the New York State Legislature had intended for the prohibition against remote vesting to apply to commercial purchase options.  The reason for the legislature’s prohibition against remote vesting was to encourage land use and development.

Moreover, the court cited the following defects with the purchase option.  First, the option involved the entire building, the theater and the commercial space, even though the defendants were leasing only the commercial space.  This created a disincentive for Symphony Space to invest in maintaining the property since the option holder would reap the benefit of its investments.  Secondly, the option was not drafted as part of the lease itself, but as a separate agreement.  The purchase option exceeded the term of the lease, meaning that under the terms of the option the defendants could force Symphony Space to sell them the property even though they were no longer tenants of the commercial space.

Nor could the “saving statute” (EPTL 9-1.3), a rule of construction meant to avoid frustrating the creator’s intention “unless a contrary intention appears,”  be invoked in this case.  Here the plain language of the option rendered it unambiguous and thus not subject to a rule of construction.

In practical terms, a drafting error in the original repurchase option had neglected to take into account RAP.  During the time of their purchase from Broadwest, the defendants could have caught the error with a thorough legal review of the original documents.  These two failings combined had ultimately cost the defendants over $21 million.

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