Caseflicks

Montana Supreme Court • 1998

Urquhart v. Teller

1998 MT 119 | 958 P.2d 714 | 288 Mont. 497 | 55 State Rptr. 461 | 1998 Mont. LEXIS 86

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Takeaway

In short, this case voids a fixed-price, long-lasting right of first refusal that severely impairs marketability, while holding that restrictions in a completed land-sale contract do not survive an unrestricted deed absent a clear basis to treat them as collateral obligations.

Background

In 1971, Otto and Elena Teller agreed to sell Robert and Evelyn Urquhart roughly 270 acres in Ravalli County while retaining an adjoining 10-acre parcel. The parties executed a contract for deed and placed an unrestricted warranty deed in escrow. The contract gave the Urquharts an “option,” more accurately a preemptive right of first refusal, to buy the retained 10 acres for $10,000, plus $2,000 if a bedroom and bath were added. It also restricted construction, subdivision, waste, and removal of improvements on the 270-acre tract, and stated that its covenants ran with the land.

The Urquharts paid off the contract in 1979, and the unrestricted warranty deed was released and recorded. Although the Urquharts and later owners divided the property and built substantial improvements, Teller did not enforce the restrictions. The Urquharts eventually conveyed interests in the land to their living trust, family members, and Spring Creek Investments.

In 1993, Teller conveyed his retained 10-acre parcel to the Cinnabar Foundation as a charitable gift. By then, the parcel was worth approximately $375,000 to $400,000. The Urquharts sued to enforce their claimed right to buy it at the contract price. Teller and Cinnabar counterclaimed to enforce the restrictions in the contract for deed against the Urquharts and subsequent owners.

The District Court granted partial summary judgment to Teller and Cinnabar on the purchase right, concluding that it was limited to the contract-for-deed period, was an unreasonable restraint on alienation, violated the Rule Against Perpetuities, and would be inequitable to enforce. It granted partial summary judgment to the Urquharts and the other landowners on the covenant counterclaim, holding that the restrictions did not run with the land, were barred in part by limitations and laches, and could not be enforced prospectively. Both sides appealed.

Issues

Issue #1

Whether the Urquharts could enforce the contract provision giving them a preemptive right of first refusal to purchase Teller’s retained 10-acre parcel at a fixed price.

Holding

No. The preemptive right of first refusal was void as an unreasonable restraint on alienation under § 70-1-405, MCA.

Reasoning

The Court first classified the purported “option” correctly. It was not an ordinary option exercisable at the buyers’ will; rather, it was a preemptive right of first refusal triggered when Teller chose to transfer the property or upon his death. The Court evaluated its validity under Montana’s rule that a restraint on alienation repugnant to the estate created is void.

Under Edgar v. Hunt, the reasonableness inquiry considers, among other things, the fixed price, the parties’ purpose, and whether the restraint was a normal incident of an equal and voluntary transaction. Here, the contract price was $10,000, or at most $12,000, while the property’s value had risen to roughly $370,000 to $400,000. That extreme disparity strongly showed that the restraint was unreasonable because it would let the Urquharts obtain an enormously appreciated parcel at a fraction of its value.

The original purpose of the right also no longer justified its enforcement. Although the Urquharts may initially have sought the ability to acquire neighboring acreage, they had since transferred their entire interest in the original 270-acre tract to a trust and other owners. Enforcing the right no longer protected a meaningful neighboring-owner interest; it either burdened Teller’s ability to transfer the parcel or gave the Urquharts an extraordinary bargain.

Additional Restatement factors reinforced that conclusion. The right applied broadly to transfers and transferees, and its language could be read to endure indefinitely because the buyers’ deaths did not terminate it. The Court construed the provision to require Teller’s heirs or representatives to provide notice of death within a reasonable time, thereby avoiding a Rule Against Perpetuities violation. But the provision’s potential perpetual duration still supported the conclusion that it unreasonably restrained alienation.

The restraint reduced rather than enhanced the parcel’s marketability and value. The property was valuable and marketable in the Bitterroot Valley, but the fixed-price right forced a sale at far below market value. Because the right was void as an unreasonable restraint on alienation, the Court did not need to decide its precise duration or whether specific performance would independently be inequitable.

Issue #2

Whether the restrictive covenants in the contract for deed remained enforceable after the unrestricted warranty deed was delivered and recorded.

Holding

No. The restrictions merged into and were extinguished by the unrestricted warranty deed.

Reasoning

The Court applied the general merger doctrine: once a deed is executed under a real-estate sale contract, the purchaser’s rights ordinarily arise from the deed rather than the completed contract. A contract provision survives only if the parties intended it to be a collateral agreement. Covenants concerning title, possession, or use of the land generally are not collateral and merge into the deed.

The evidence showed that the parties intended the contract for deed and its restrictions to merge into the warranty deed. They executed the contract and deed at the same time, placed the deed in escrow for delivery upon performance, and used an unrestricted deed that did not mention the covenants or incorporate the contract. No separate declaration of restrictions was filed, and the recorded purchaser’s-interest notice likewise omitted any restrictions.

Teller and Cinnabar relied on the contract language declaring that the covenants ran with the land and on the fact that the contract was recorded. The Court distinguished Kosel v. Stone, where a developer had separately recorded a declaration of restrictions that was tied to a subdivision plat and thus became part of later purchasers’ deeds through constructive notice. Kosel did not involve a contract between the same buyer and seller followed by a deed, so the merger doctrine was not at issue.

Although a real-estate sales contract can create a covenant that runs with the land, these particular restrictions did not survive the deed. The contract’s breach remedies were framed for the original contracting parties, the deed was unrestricted, and the parties created no separate enduring instrument of covenants. The Court therefore affirmed the refusal to enforce the restrictions for either past or future conduct.

Concurrences

Justice Trieweiler

Reasoning

Justice Trieweiler agreed that the preemptive purchase right was void as an unreasonable restraint on alienation. He therefore joined the judgment insofar as it rejected the Urquharts’ attempt to acquire the 10-acre parcel for the fixed contract price.

Dissents

Justice Trieweiler

Reasoning

Justice Trieweiler disagreed that the land-use restrictions were extinguished by merger. In his view, the contract’s express statement that its covenants “run with the land” and bind heirs, executors, administrators, and assigns was the best evidence of the parties’ intent. The majority improperly disregarded that unambiguous language by inferring a contrary intent from the later unrestricted deed.

He reasoned that the restrictions met the requirements for real covenants: they were written, concerned the use of the land, were intended to bind successors, and were recorded. Under §§ 70-17-201 and 70-17-203, MCA, covenants contained in a grant of a real-property estate that directly benefit the land run with it. The recorded contract for deed was itself a conveyance affecting real property and gave subsequent purchasers constructive notice.

Justice Trieweiler viewed Kosel v. Stone as supporting enforcement rather than as distinguishable. In his reading, Kosel recognized that recorded restrictions affecting real-property title can bind later owners even where later deeds omit those restrictions. The contract for deed here likewise imposed recorded use restrictions on the property conveyed to the Urquharts.

He agreed that laches barred enforcement against owners for violations occurring before Teller filed the counterclaim, because Teller had knowingly delayed while subdivisions and construction proceeded. But the contract’s explicit nonwaiver clause preserved the right to prevent future breaches. He would have reversed the refusal to enforce the covenants prospectively while denying relief for past violations.