Amendment to IRS Section 216 on 80/20 Rule and Rule Against Perpetuities

Update January 2010: The decision I discuss in my original post was overturned. See my update dated January 21, 2010. The proverbial floodgates of litigation in the co-op world appear to have opened. The first case may be Bleecker St Tenants Corp v. Bleecker Jones LLC where the co-op tried to use the Rule Against Perpetuities to defeat a long term commercial lease signed years ago which no doubt limited rent to 20% of income (NYLJ, 9/4/08, pg 27). The Perpetuities Rule has long bedeviled law students and is a famously esoteric mind-bender. At its most simplistic it prohibits options which might vest in perpetuity. The co-op creatively tried to use it to defeat the long term lease which is well below market and no longer needed since the Section 216 80/20 rule was amended. The lease has a reminder clause for renewals. The co-op is required to remind the tenant to renew. Since the renewal lasts for 60 days after the reminder, technically the tenant could renew after the lease expired thereby taking it out of one of the many tortured exceptions to the Perpetuities Rule. No dice said NY Supreme Court Justice Edmead – the co-op is stuck with a few more decades on the lease. I’m sure this won’t be the last co-op seeking to use technicalities to escape long term leases of commercial space in light of the revised 80/20 rule.

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