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Buying Business – Restraints on Alienation and the Rule Against Perpetuities

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Think of your will Buying Business

I was thinking about this subject a few weeks ago after an acquaintance mentioned about a will and the fact that there was a restraint in the will to on-sell the property that was left to their friend.

So, I started doing some research and this is what I found.

According to The Legal Information Institute, restraint on alienation is “a provision in a deed or will that attempts to restrict the sale or transfer of the property forever or for an extremely long period of time”.

There seems to be yet another complex part of the law as it is not limited to clauses in estates but restraints on alienability can also be put onto such things as agreements and landholders.

The most common sample and the one I would like to discuss is estates/land.

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This is where a person attempts to prevent land being sold outside of their family after their death. Most methods used were fee tail estates, under this an estate could only pass to a restricted class of direct descendants of the original heir.

In the fifteenth century, Lawyers devised means by which a fee tail was converted into a fee simple, however, this was rarely used in Australia and has been abolished in most countries.

Common Law

The general rule of common law is that any attempt to utilise a limiting clause in a grant or agreement to prevent alienability is averse to private ownership, and is consequently void on public policy grounds.

In recent time it seems the courts have shown a willingness to relax this rule where there is only a partial restraint of alienability or there are legitimate collateral resins for restricting alienability.

Besides public considerations, the freedom to alienate has also had support by – settled land legislation (which extends the powers of limited estate holders) and the rule against perpetuities.

This creates an opportunity for the creation of uses. The trust made it possible for landholders to craft elaborate sets of future interests in land to control land after death by postponing the vesting of an interest in a property for an indefinite period.

Limiting Clauses

The bundle of rights attached to freehold estates may be decreased by imposing limiting factors. An estate that has no limiting factors is an absolute interest, whereas modifying factors can be imposed to create: determinable interest or conditional interest.

A determinable interest may be ended by a specified event. Whereas a conditional precedent and a condition subsequent will prevent an estate from vesting until the relevant event is satisfied.

The distinction between a determinable interest and a conditional interest is that a condition is an independent clause added to a limitation of an estate which operates to defeat it, whereas a determinable interest is a limit which is part of the estate.

To prove whether a determinable limitation or a condition is attached to an estate, it is necessary to construct the terms of the limiting event. You need to look at terms such as ‘until’, ‘while’, ‘during’ and ‘as long as’ these all indicate a determinable factor.

The general rule to my understanding is that a limiting clause must not restrict alienability. A clause which attempts to take away the power of alienation is intolerable to private ownership and thus void on public policy grounds.

Rule Against Perpetuities

This is getting complex, to say the least. Further to my understanding of perpetuities is as follows: general law favours freedom of alienation, but this conflicted with the desire of some landholders to maintain control of land after death.

It seems that landholders have tried many different methods and various devices to curtail alienability.

With the enactment of the Statute of Uses 1535 etc, it became possible for landholders to create an elaborate web of future interests to control the bind land after their death.

Eventually, the courts adopted the position that freedom of alienation could only be secured by placing restrictions on the ability to create future interests. They came up with a rule that was a counter-attack on perpetuities, this was designed to prevent the indefinite postponement of the vesting of an interest in a property. Basically, it ensures that an interest will vest in an individual within a certain period after the creation of an interest.

Interestingly enough, the modern rule invalidates any grant of contingent remainder if it vests outside the perpetuity period as enunciated by the courts. This rule has been modified by statute and applies to all jurisdictions except South Australia. The rule has been extended to all forms of property and prevents trusts, for example, holding company shares outside of the perpetuity period.

Well with all that said this is as far as my research goes on this subject. The above is my own opinions and is not legal advice in anyway just an interesting complex topic. I cannot answer as to how my acquaintance’s friend is going with the will. I suppose they may seek a professional to help.

Author: Kathleen Dale, Business Advisor and Founder of Compass Business Advisory.

Business Advisor and Compass Business Advisory Founder Kathleen Dale in Townsville North Queensland
Image: Kathleen Dale, Business Advisor and
Founder of Compass Business Advisory

 

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Kathleen Dale

Kathleen has a Bachelor of Commerce and a Major in Business Law and employment law. Kathleen is working on her honors in Occupational Health & Safety & Environment Management and Human Resource because Kathleen believes these areas give Compass Business Advisory an opportunity to give clients the best possible outcomes. Kathleen’s experience is vast from a union delegate to a safety officer. Kathleen is a specialist in Small to Medium business, has personally owned and sold her own successful businesses and business compliance is her specialty.

https://www.compass-businessadvisory.com/

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