Abolition of the rule against perpetuities for property transactions

22/02/10

The "rule against perpetuities", which currently restricts the creation of future interests in land, is being abolished in respect of all property transactions from 6 April 2010. It will still be possible to place contractual limitations on such interests but thought will need to be given to the drafting of any documents which contain perpetuity wording (such as deeds of easement and option agreements). This note briefly summarises the current law, explains the changes and sets out some drafting considerations.

How does the law currently work?

Many property transactions are currently subject to the "rule against perpetuities". This rule is designed to restrict the creation of interests in property today which won't actually come into effect until some point in the distant future, such as the grant of a right of way over a road that hasn't yet been constructed.

The "perpetuity period" is the period of time during which the interest can validly come into effect. For example, if there is an 80 year perpetuity period in respect of the right of way over the road then, provided that the road is constructed within 80 years from the date this right is granted, the right will be valid. If the road is not constructed within this time the right will fall away.

The rule against perpetuities only applies to transactions which create an interest in land, but how and when it applies can be a little confusing. For example, it applies to the creation of an easement but almost certainly not to the creation of a restrictive covenant; it applies to the grant of a call option, but not to the creation of a put option and probably not to the grant of pre-emption rights. The maximum perpetuity period varies depending on the nature of the right or interest that is granted or reserved but as a general rule will be 21 years unless increased by agreement up to a maximum of 80 years.

How is the law changing?

Property documents which come into effect on or after 6 April 2010 will not be subject to any perpetuity rules. This means that the parties will be able to grant or reserve easements and grant or impose options to take effect at any time in the future. The old perpetuities rules, outlined above, will continue to apply to property transactions which came into effect before 6 April 2010. The only new documents that perpetuities will apply to are particular trusts, wills and powers of appointment.

Do I need to do anything now?

If you are currently involved in any transaction which includes the creation of an interest which would be subject to the rule against perpetuities but which will not complete until on or after 6 April you need to think about how to deal with this change. It may be that you are happy that the interest can come into effect at any time or you may want to impose some kind of contractual limitation on this.

Where documents refer to the perpetuity period this is usually done in one of two different ways:

1. By reference to a defined "Perpetuity Period" (often of 80 years) and drafting along the lines of "a right of way over all roads laid at any time during the Perpetuity Period"
2. No mention of the perpetuity period but the inclusion of an express period in the clause itself, for example "a right of way over all roads laid at any time during a period of 80 years from the date of this agreement".

No "creation" period required

If you are happy that there is no limitation on when your right can come into effect or your option be exercised you can:

• Delete all references to there being any kind of limited period so that the wording reads, for example, "a right of way over all roads laid at any time": this is probably the neatest approach.
• Where you have type (a) wording, just leave it as drafted: this wording will be ignored as redundant on the basis that there is no longer a rule against perpetuities.

However, if you have type (b) wording and you leave this as drafted, the 80 year period may not be ignored as redundant: whilst it is likely that this was included for perpetuities reasons it may have been included because the parties had contractually agreed that there would be an 80 year limitation. If you have wording of this kind it should be deleted if you don't want any risk of the limitation applying.

Limited "creation" period required

Alternatively you may actually want a contractually limited period during which the interest can come into effect, whether this is 80 years or some other period. There is nothing to prevent you from including a contractual limitation of this kind. However, make sure that the drafting is very clear so as to avoid an argument in the future as to the intended effect: for example you could have a defined 50 year "Agreed Construction Period" and the grant of "a right of way over all roads laid at any time during the Agreed Construction Period". If you don't include clear wording there is a risk that the period will be interpreted as a reference to a perpetuity period and will be ignored as redundant.

Leases: different rules apply

There is also a rule which prevents the grant of lease with a term which will start more than 21 years after the date of completion. This looks similar to the rule against perpetuities but is covered by different legislation and will not change on 6 April. However, following the changes on 6 April it will be possible to get round this rule by, for example, entering into an agreement to grant a lease at some future date, which is no longer subject to the rule against perpetuities.

Further information

If you have questions about any of the matters raised in this note we would be happy to discuss these with you. Please get in touch with your usual contact at BSDR.