Tuesday, December 17, 2013

The Top Five: The Rule Against Restraints on Alienation

It seems that the Rule Against Perpetuities gets all the attention. A similar sounding doctrine, The Rule Against Restraints on Alienation, is also likely to show up on the MBE. Here are five things to know about it:

(1): There are three types of restraints on alienation that will implicate this rule. They are disabling restraints (any attempted transfers of property will be ineffective,) forfeiture restraints (any attempted transfer of property will forfeit the interest of the transferor in that property,) and promissory restraints (any attempted transfer of property breaches a covenant).

(2): It's important to note that all three types of restraints on fee simple estates are invalid. Thus, the grantee of a fee simple estate may freely transfer the property without worry.

(3): Unlike absolute restraints, limited restraints on fee simple estates may be valid. In other words, though it is invalid to require that an owner of a fee simple estate never transfer the property, it may be valid to require that same owner not to transfer the property for a reasonable time, if there is a reasonable purpose for the restraint.

(4): Some restraints on alienation are always valid. The following fall within that category: forfeiture and promissory restraints on life estates; forfeiture restraints on transferability of future interests; reasonable restrictions in commercial transactions; rights of first refusal (but consider the Rule Against Perpetuities), and restrictions on assignments and subleases of leaseholds.

(5): Only apply the Rule Against Restraint on Alienation to legal interests. The rule does not apply to equitable interests in property. For example, consider a case in which a spendthrift clause is placed into a trust by the settlor. Such a clause does restrain the beneficiary from alienating his interest, but such clauses are valid as the beneficiary has only an equitable interest in the property (the trustee owns the legal interest).

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