Does a Top Lease Violate the Rule Against Perpetuities?

Does a Top Lease Violate the Rule Against Perpetuities?

A top lease is a lease that is taken on a tract already subject to an existing lease.  Although top leases in Texas are permitted, they present a number of issues which may be avoided by careful drafting. 

In order for the top lease to be valid it must not violate the Rule against Perpetuities.  The Rule requires that an estate must vest in interest with the perpetuity period of twenty-one (21) years after some life or lives in being at the creation of the interest or, if not attached to a life in being, then twenty-one )(21) years after the execution of the instrument.  If there is any possibility that the interest will not vest within the perpetuities period, it violates the Rule and is void.  Present or future interests which vest upon creation do not violate the Rule.

This creates a dilemma when drafting a top lease.  If the top lease conveys a present interest in the mineral estate, it may constitute a cloud on the title of the lessee of the bottom lease.  To avoid this, the top lease will generally contain language providing that it is subject to the bottom lease and does not vest or become effective until its termination.  Without some limitation, this constitutes the grant of a springing executory interest and will violate the Rule and be void. 

There are ways to avoid creating a cloud on title and refrain from violating the Rule.  First, the lease may state that it is subordinate to the bottom lease and will not vest until the bottom lease expires and that if vesting does not occur within up to one day less than twenty-one (21) years from execution it is void.  Alternatively, the top lease may be a present grant of the lessor’s possibility of reverter in the bottom lease with possession delayed until the expiration of the bottom lease.  In Peveto v. Sharkey, 645 S.W.2d 770 (Tex. 1982), the Texas Supreme Court, in the context of a top deed, voided a springing executory interest but concluded that a present grant of a possibility of reverter would not violate the Rule.  This was affirmed by the Amarillo Court of Appeals in a top lease context in Hamman v. Bright and Company, 924 S.W. 2d 168 (Tex. App.—Amarillo 1996).  A drafter must insure that the interest in the reverter vest at conveyance with possession delayed.  If vesting is contingent on some future event, it may violate the Rule.