Colorado Supreme Court Holds That a Revocable Option Agreement Does Not Violate The Common Law Rule Against Perpetuities

The Colorado Supreme Court held that an option to purchase oil and gas properties did not violate the common law rule against perpetuities. Atlantic Richfield Company v. Whiting Oil and Gas Corporation, f/k/a Equity Oil Company, 2014 CO 16. In 1968, Atlantic Richfield Company (ARCO) and Equity Oil Company (Equity) entered into an agreement regarding oil shale research by Equity. The 1968 agreement included provisions for money payments to Equity, conveyance of a partial interest from Equity to ARCO in certain property in western Colorado, and a provision that if oil shale was not in commercial production by 1983, Equity would convey to ARCO an additional interest in the property. Id. ¶ 8. In 1983, the parties entered into an amendment of the agreement. In the 1983 amendment, ARCO granted Equity a non-exclusive option to buy back the interest that ARCO had previously acquired from Equity as part of the 1968 agreement. The option would expire in 2008. The 1983 amendment provided “ ‘ARCO shall retain the sole and exclusive right to cancel this Option at any time during its term,’ with the exception that Equity was granted a right of first refusal if ARCO received an offer from another party to buy its interest” in the property. Id. ¶ 9. ARCO and Equity had negotiated for a year regarding the 1983 amendment. The option exercise price was tied to ARCO’s West Texas sour crude oil benchmark price. Equity exercised the option in 2006. The option exercise price at that time was significantly below the property’s 2006 market value. ARCO refused to convey the interest in the property to Equity. Id. ¶ 10.

Equity sued ARCO for specific performance of the 1983 option. ARCO argued that the 1983 option violated the common law rule against perpetuities and was void. The trial court agreed. The common law rule against perpetuities provides that “ ‘[n]o 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.’” Id. ¶ 25. The Colorado Statutory Rule Against Perpetuities Act (Act), §§ 15-11-1101 to -1216 C.R.S. (2013), supersedes the common law rule against perpetuities for nonvested property interests created after May 31, 1991. (The common law rule may still apply to nonvested property interests created prior to that date, subject to other provisions of the Act.)

The trial court and the court of appeals applied § 15-11-1106(2) of the Act, which is “a reformation provision that requires courts, upon request, to reform nonvested interests created prior to May 31, 1991 to bring them into compliance with the common law rule.” Id. ¶ 4. This reformation provision was at issue in the appeal. The Supreme Court, however, affirmed the court of appeals on different grounds. The reformation provision applies only to reform instruments that are determined “to ‘violate this state’s rule against perpetuities as that rule existed before May 31, 1991.’” Id. ¶ 4. The Supreme Court held that the option did not violate the common law rule against perpetuities. “The commercial option negotiated by the parties posed no practical restraint on alienation because it was fully revocable at any time before its exercise.” Id. ¶ 6. Thus, the court found the option was valid as originally negotiated.