Restraints on The Transfer of Real Property

Restraints on Transferring Real Property  

An owner of real property is said to control a “bundle of sticks” regarding the property he owns. Each of the “sticks” represent an aspect of ownership; such as the right to occupy, the right to enjoy and the right to keep others off of the property. One of the sticks in this bundle is the power of alienation, or the ability to transfer real property. This allows property owners the power to restrict the use of their property and such restrictions persist after the property is transferred. For example, a person may choose to sell a farm, but attach a condition that it must not be developed within 20 years after the sale.

This creates some tension with the free market policy that looks unfavorably on restrictions on the usages of potential commercial assets. Public policy favors a person’s right to freely dispose of property. Some legal scholars have even written that “the concept of free alienability is a cornerstone of modern Anglo-American civilization.”[1]

This policy has given rise to the Rule Against Restraints on Alienation. Alienation, in this context, means the ability to resell or transfer the property. Generally, there are three types of restraints on alienation that are considered void:

The first type of restriction is a disabling restraint. This restraint, which is always void, prohibits a grantee from making ANY transfer of interest in real property. An example of a disabling restraint is if a property transfer deed contains a provision that states “Neither the grantee nor any of the grantee’s heirs shall have the right to transfer the land or any interest in the land.”

The second type is a forfeiture restraint, which states that a grantee will forfeit the real property if the grantee attempts a transfer. An example of a prohibited forfeiture restraint is a provision that provides “If the grantee attempts to transfer Blackacre or any interest in Blackacre during his lifetime, his estate shall cease and title in Blackacre shall vest in a third-party.”   

The third type of restriction is a promissory restraint, where a grantor makes a grantee promise not to transfer the land. An example of a prohibited promissory restraint is the following provision: “B hereby promises that he will not transfer Blackacre or any interest in Blackacre without A’s prior written consent.”

Modern Void Restrictions on Real Property Transferability

Lesser restrictions on the alienability of property may be valid, depending on how far they go and how much they negatively impact the stream of commerce. A restraint on the usage of property for a limited time after it’s sold, for example, can be valid. Let’s look at some examples of restraints that are generally allowable and then some of those that are not.

A partial restraint on alienation refers to a restraint on alienation that is qualified. The “reasonable restraints” doctrine provides guidelines for what counts as a valid partial restraint.[2] A restraint on alienation will be classified as a valid partial restraint if it restrains property transfers for a (A) limited time AND (B) for a reasonable purpose.

For example, A, who owns and resides on Blackacre, transfers one-half of her interest in Blackacre to her sister, B. In the deed transferring this one-half interest, A includes a provision stating that “During A and B’s lifetimes, each party promises not to convey her interest in Blackacre to any non-family member without the consent of the other party.”

The purpose of the restraint is to prevent either party from being forced to live with someone who is not a family member. Because that purpose is reasonable and because of the lifetime limitation, this restraint will likely be considered valid.

Reasonable restrictions in commercial real property transactions and sales are likewise acceptable. An example of a reasonable restriction might be where the owner of a restaurant sells half his lot with the condition that the buyer not open a competing restaurant on that half lot for the next 20 years. Because these restrictions are the product of arm’s-length, bargained-for transactions, they are generally considered reasonable.

Another example of a generally acceptable restraint on alienation is a “right of first refusal”, which means that the transferor retains the right to have the first opportunity to purchase property upon the owner's decision to sell, on the same terms offered by a third party (or at terms dictated by the restraint).[3] While a right of first refusal limits the ability of the owner of real property to sell it, it doesn’t necessarily restrict the commercial opportunities available regarding the property because the person with the right of first refusal still has to match the economic terms of a third-party offeror.

As with the other examples, rights of first refusal must be reasonable, meaning that the right of first refusal allow the contract holder to purchase on the same terms and conditions as the other offer. Additionally, the contract must provide a clear procedure for exercising the right of first refusal and it must also provide a reasonable time for exercising the right of first refusal.[4]

Conversely, there are several categories of restraints on alienation that are prohibited by law. For example, restraints that prohibit transferability to protected classes of people will almost certainly be voided. So, one cannot transfer property while imposing restrictions based on categories such as race, religion, ethnicity or gender.

In the 1948 Supreme Court case, Shelley v. Kraemer, an African-American family sought to purchase a home in St. Louis. The home they wanted to purchase, however, was covered by a racially restrictive covenant where the building owners agreed not to sell to any person other than a Caucasian.[5]

The Court held that the covenants were unconstitutional restraints on alienation. If a state court were to uphold covenants forbidding home sales to people of a certain race, then it would be a “discriminatory state action” that violates the Constitution.[6] The Court found that the Fourteenth Amendment’s guarantee of equal protection of the laws includes a person’s rights to acquire and dispose of property.[7] The principle behind Shelley has been expanded to a much broader array of restrictions today.

In addition to constitutional principles in Shelley, and any applicable state rules, Congress passed the Fair Housing Act in 1968, which banned housing discrimination in home sales and leases. The Act made it unlawful for a home owner or landlord to refuse to negotiate for housing, make housing unavailable, set different terms, conditions or privileges for sale or rental of a home, or provide different housing services based on a prospective buyer or renter’s race, color, religion, sex, familial status or national origin. [8]

The rules regarding restraints on alienation reflect a balance of competing principles. On the one hand, you have the market principle that tends to favor allowing any commercial transaction that the parties agree to. On the other hand, restraints on alienation must be limited so that they do not go too far in limiting the ability to make economic use of property or to achieve discriminatory or immoral goals. This presentation illustrates some of the effects of the balancing test between these principles.