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natural end. The future interest in such situations is called an executory interest (we have already seen an example of this in the paired future interest to a fee simple subject to an executory limitation). An example would be where O grants “to A for life, but if A remarries, then to B in fee simple.” As long as such a scheme is designed for the support of A before remarriage and not as a penalty for remarriage, the executory interest in B cuts off A’s life estate upon A’s remarriage, before the natural ending of the life estate, which would otherwise occur on A’s death. Executory interests, like contingent remainders, are subject to the RAP. That is, they must vest in interest within the period prescribed by the Rule or they are invalid. Again, the proliferation of terminology is less important now than it used to be when remainders and executory interests behaved more differently than they now do. Both are transferable, devisable, and inheritable, and holders of both can sue for waste.
What distinguishes future interests such as reversions, remainders, or executory interests from a future sale or gift from A to B is that the holder of a future interest is regarded as having a property right now, namely a right to the asset in the future. So with every future interest you need to know several things. First, when will it become possessory—after the end of the present holder’s life or after some other defined event? Second, when it becomes possessory (when it “vests in possession”), what kind of right is it—full ownership or some lesser present possessory interest (like a life interest)? Third, is there some uncertainty about who the holder will be or whether the event will occur that makes the interest come into force? This problem of “vesting in interest” is primarily important because of the RAP.
• How the System Works
So far the system of estates and future interests might look like an arbitrary jumble of labels. Although the system does have a certain amount of unnecessary detail, one might wonder why we don’t
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need even more types of interests, considering all the ways property rights might be usefully carved up along the temporal dimension. Further, the features that are reflected in the labels for the various interests do not seem to exhaust those needed to make the system work. Instead, a number of architectural aspects and maintenance doctrines help the system function.
First, it is useful to realize that the combinations of interests we just explored have a generative quality that simply memorizing them does not capture. The key point is that the different interests can be combined and repeated in different ways, just as phrases connected by connectors such as “and,” “or,” “that,” or “then” can be combined to make complex sentences. For example, what if the grantor wanted to give Blackacre to A for life and then to A’s child B for life and then to C ? O could grant “to A for life, then to B for life, and then to C.” A has a life estate and C has a remainder, in fee simple—when it becomes possessory it will be a fee simple. What does B have? Because it follows a life estate and the interest is not in O (the grantor), B has a remainder. But it is not a remainder in fee simple as in our previous examples. Instead, if and when the remainder vests in possession it will be a life estate in B, so B currently has a remainder in life estate, followed in turn by a remainder in C in fee simple.
Other constructional principles help to eliminate uncertainties about the list of temporal divisions that has been created. One particularly interesting principle is the conservation of estates: All the estates granted plus those retained must add up to the fee simple, which, recall, has indefinite duration. So if O transfers O’s entire interest, then the total of the interests transferred from O must add up to a fee simple, just as the total of the interests received by the grantees must add up to a fee simple. Nothing is created out of thin air or goes up in smoke. Thus, in all the examples the final future interest must be in fee simple in order for all the pieces to add up to a fee simple. Otherwise, we might get to a situation in which an interest ended (say a final life estate) with no one to take, which is not supposed to happen. What if O grants “to A for life,
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then to B for life?” Is this a problem? No. As we noted above, in such a case there is an implied reversion in O, and now we can see why. The interests that O grants and retains must add up to what O had to begin with, which was a fee simple. In order for this to be true O must have retained a reversion in fee simple, despite not having said so. It simply follows from the way the system works, here through the conservation of estates.
When a fee simple is broken into smaller durational parts, there is a “conservation” problem in a different sense of the word. The holder of a present interest is less likely to want to conserve the resource than the future interest holder(s). The present holder, aware of not being entitled to the property forever, will favor more consumption and less preservation; the future interest holder will favor less consumption and more preservation. Neither will reflect the preferences of a fee simple owner, who would take into account all the benefits and costs of consumption versus preservation. Mainly the problem is constraining the excessive consumption and lack of investment of the present possessor because the present possessor is the one with control over the property now. Indeed the future interest holders may not even be fully determined yet (the vesting in interest problem again) making monitoring and negotiating on their part prohibitive.
This conflict between the present and the future interest holders gives rise to the action for waste and its associated doctrine. Under the law of waste, the present possessory interest holder may not unreasonably use the resource and must turn it over in substantially the same condition as he or she received it. Interestingly, this is a standard, tucked in the middle of a system that is largely built on rules. The problems that can arise between present possessory and future interest holders are just too multifarious to reduce to rules. Not paying taxes (and risking forfeiture) is a clear case of waste (called “permissive” waste). Excessive mining or cutting of trees would also be waste (“affirmative waste”). Rules of thumb have developed to evaluate such behavior based in part on custom and in part on rough and conservative guesses. For example, under the
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“open mines doctrine,” a present interest holder has the right to mine only from mines open at the beginning of the interest but not otherwise. Tearing down a usable building and replacing it with another more valuable and cost-effective building can also be waste (“ameliorative waste”),1 although most jurisdictions today would probably not impose liability for changes that enhance the economic value of property.
In theory, a good benchmark for evaluating the behavior of the present possessor would be to ask what the holder of a fee simple owner would do under the circumstances. In practice, such a standard would be quite unworkable for a court. Hence the use of rules of thumb and the bias toward conservation. Of course, an owner can leave instructions that would override the law of waste, for example, if the owner wanted the life tenant to have the right to mine land not currently being mined.
How dire the conflict between the present and future interest holders is depends in part on how long the present interest holder’s interest is likely to last. (Another factor would be how much the present interest holder cares about the future interest holder, e.g., as a younger relative or a friend.) If the present holder’s interest is set to last for a long time or, in the case of a defeasible fee, is not likely to come to an end, then the present holder’s incentives will not be all that different from a full owner’s and the doctrine of waste is less likely to be invoked. (It may also be that courts, realizing this, give more leeway to present interest holders whose interests are “larger” in this sense.) Related to this, the value of an interest depends not only on its length, but it also on how weighted it is to the present. A dollar now is worth more than a dollar a year from now because one would need to have less than a dollar now in order to have a dollar a year from now. (To figure out how much a future dollar is worth in present value terms one needs to use the appropriate discount rate, which is the product of the rate of expected
1. Brokaw v. Fairchild, 135 Misc. 70, 237 N.Y.S. 6 (S. Ct. N.Y. Cty. 1929).
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inflation and the real interest rate.) Thus if you hold the remainder, it matters a lot whether the life tenant is 30 or 90 years old.
Another principle central to the estate system is the numerus clausus. This term, originally from civil law, refers to standardization in property law: Applied to the estate system, the numerus clausus mandates a fixed and closed set of forms of ownership, and owners and transactors are not allowed to add to this list. For example, stringent versions of the numerus clausus disallow new forms of inheritance (such as variants on the old fee tail to keep property in the family over generations) and novel types of leases such as a lease for the duration of the war or a lease for life.2 (On the allowed forms of leases, see Chapter 6.) One cannot create a timeshare in a watch, for example, Wednesday rights in a watch that would give all the rights of an owner on Wednesdays. (One can rent out a watch but this gives the lessee less than full ownership.) This standardization of property in the numerus clausus stands in contrast to contract law where, subject to doctrines such as consideration and the criteria for contract formation, facilitating individual customization is the name of the game.
What is the harm in allowing parties to customize their property rights? One effect of limiting the ways of dividing property may be to discourage division and thereby prevent excessive fragmentation. But as we have seen, the system of estates is characterized by its generativity (as illustrated by the repeated application of the life estate plus remainder split). What the numerus clausus does is prevent the proliferation of new types of property rights. Transactors and even courts are supposed to let the legislature take the lead in making major modifications to the list of approved forms of ownership. By reducing the number of types of property rights, the numerus clausus gives third parties, including courts, less to be on the lookout for.
2.See, e.g., Johnson v. Whiton, 34 N.E. 542 (Mass. 1893) (Holmes, J.) (disallowing new form of inheritance); Nat’l Bellas Hess v. Kalis, 191 F.2d 739 (8th Cir. 1951) (disallowing a lease for the duration of the war). For a lenient approach to the lease for life, see Garner v. Gerrish, 473 N.E.2d 223 (N.Y. 1984).
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This is a pervasive problem and stems from the in rem nature of property. Thus, if you create a property right in Wednesday-watches or a property right with a different remedy for trespass (150 percent damages on even numbered days and 50 percent damages on odd-numbered days), this increases the information costs for your contracting partners and successors. Such an idiosyncratic right will be less valuable to them, and they will pay less for such rights, so to this extent the costs of your preferences are internalized to you through the price you receive (compare Demsetz, Chapter 3). But your idiosyncratic tastes also raise the information costs for anyone considering whether to buy watches or land in general, as well as for those seeking to avoid violating property rights or to enforce them. These third parties now have more possibilities to investigate. Such third party costs are an externality created by your idiosyncrasy. By limiting your ability to create these kinds of oddball rights, these external costs of information gathering and processing are reduced. Other methods of reducing the third-party information costs involve trusts (see Chapter 6) and rules for registering interests, especially in land (see Chapter 7). Which combination of these information-cost-lowering devices is best is an empirical question. But recall that because the estate system itself is so flexible (from its generativity), limiting the forms of ownership has a minimal impact on the goals that can be served using the system.
Third-party information costs may also supply a reason for the law’s suspicion of restraints on alienation, which we encountered in Chapter 4. One might ask why putting even an extreme restraint on alienation is a problem. If one can refuse to alienate, why can’t one alienate with strings attached? And if (and it is an if) the cost of the restraint is reflected in the price one can charge for the asset, then there is no externality. But when we cast a wider glance at who might be affected, there is more cause for concern. Restraints on alienation can in effect create new ways of owning in a fashion reminiscent of what the numerus clausus prevents. Restraints on alienation can make the nature of property rights in general harder to investigate and make the property system as a whole
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operate less smoothly in the realm of transfer. Without these systemic effects, the rule against unreasonable restraints on alienation has to be justified by parties’ myopia or other irrationality, or courts’ superior knowledge of what is reasonable ex post.
Because property interests can last a long time, any form other than the fee simple can lead to restrictions that persist far into the future. One concern is that remote future interests will either prevent alienation altogether (because the identity of future interest holders cannot be determined until certain contingencies are resolved), or will practically impair alienation (because of the difficulty of obtaining unanimous consent from all interest holders). Another concern involves “dead hand control”—tying up the use of property for long periods of time based on the preferences and assumptions of someone who has long since departed from the scene. Here too there is a widely shared intuition that an owner should not be allowed to project his or her control “too far” into the future. Worries about such control center on the proper relation between the present and the future, implying that the increasingly small benefits and costs, in present value terms, of the restrictions in more and more remote future times should be of less concern to current owners.
One device traditionally used to limit dead hand control is the (in)famous Rule Against Perpetuities (RAP). Originally the common law provided a loose set of doctrines that would invalidate restrictions placed by owners that operate too far into the future (“perpetuities”). The common law rule crystallized into its modern form (before more recent reforms and trends to abolish it) in part through the famous formulation by John Chipman Gray: “No interest is good unless it must vest, if at all, not later than twenty-one years after
some life in being at the creation of the interest.”3 Gray envisioned a rule that would have limited but highly determinate—and
3.John Chipman Gray, Rule Against Perpetuities § 201 (Roland Gray ed., 4th ed. 1942).
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“remorseless”—effect. Violation of the rule would result in mechanical invalidation of the interest in question. Like the system of estates and future interests more generally, the rule could be applied ex ante, by a trained lawyer, so as to determine whether any interest is valid or invalid at the moment of its creation.
When does an interest violate the rule? The first thing to notice about the rule is what it is not. It is not a rule against interests lasting too long (the fee simple lasts indefinitely long) nor a requirement that the interest must become possessory at some specific time. Instead the rule requires that uncertainties surrounding interests that have not yet vested must be resolved, one way or another, within a period of time defined by the rule. The type of vesting that must occur, if at all, within the perpetuities period is vesting in interest, which, in the case of executory interests and options amounts to needing to know when they will vest in possession. Thus if the interest is conditioned on someone’s passing the bar or being born as the child of a certain person, these events have to occur within the “perpetuities period.”
Consider an example. If O grants “to A for life, then to the first child of A who passes the bar,” there is uncertainty as to who that will be. For the remainder to vest in interest, A must have a child who passes the bar. The issue under the RAP is whether that uncertainty will be dispelled within 21 years after some life in being at the creation of the interest. This means that we should be able to find one or more persons, who are living at the time the interest is created, such that the interest will vest (in interest) during that life or within 21 years after that person dies. If we can find no such “measuring life,” the interest is invalid under the RAP. In the example just given, A is the best candidate measuring life. Does A work? A is alive at the creation of the interest; but A could die, and A’s child (if any) might pass the bar more than 21 years after that. So the RAP invalidates the interest. By contrast, if O had granted “to A for life, and then to A’s first child who shall graduate from high school by age 21,” the interest would be good. We will know the identity of all of A’s children by the time A dies, and we will know within 21 years
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thereafter whether any child has graduated from high school by age 21. (If the child were in utero at A’s death, the remaining term of the pregnancy is added in to the perpetuities period as long as the child is born alive. Statutes govern the effects of more recent innovations having to do with in vitro fertilization technology.)
Well-advised clients should have no problems with the RAP.4 Besides being predictable to those in the know, one can also use a perpetuities savings clause to contain any problems. Such a clause in a will would state that if any interest in the will is challenged as violating the RAP, a corporate donee is designated to appoint a grantee that would most closely approximate the wishes expressed in the will. Some legislatures and courts have adopted a lenient approach to the RAP under which the courts are directed to clean up interests to make them conform to the RAP (for example, by changing 25 years to 21 years in an interest such as the high school graduation example above).5
Other states have pursued more far-reaching reforms. Some have adopted wait-and-see statutes, which do not invalidate an interest ex ante (as would the common-law RAP), but only if it turns out ex post that the interest does not vest within the perpetuities period. This eliminates some cases of unfairness (caused by bad lawyering?), but at the expense of creating considerable uncertainty while the waiting goes on. Sometimes wait-and-see reform statutes use a period of 90 years, or 90 years or the common law perpetuities period whichever comes earlier.6 Recently, in an effort to attract
4.But cf. Lucas v. Hamm, 364 P.2d 685, 690–91 (Cal. 1961) (ruling that the RAP is so difficult that a lawyer drafting a trust interest that was invalid under RAP was not liable in negligence or breach of contract). For fictional examples of RAP problems (and the like) run wild, see, e.g., Louis Auchincloss, The Power of Appointment, in Powers of Attorney 172 (1963); Body Heat (Warner Bros. 1981).
5.See, e.g., In re Estate of Anderson, 541 So.2d 423 (Miss. 1989).
6.See Uniform Statutory Rule Against Perpetuities, 8B U.L.A. 223 (2001), now included in the Uniform Probate Code, Uniform. Probate Code §§ 2–901 to –906, 8 U.L.A. 61–62 (Supp. 2006).