Reversionary Interests

If an owner is willing to donate or sell land only for so long as it is used, or not used, for a particular purpose, the owner can transfer the land on a conditional rather than absolute basis. The deed used to convey the property can include terms that will trigger a change in ownership back to the original owner (or owner’s heirs, successors and assigns) if use or ownership of the land falls out of compliance with the conditions set forth in the deed.

Summary

A reversionary interest is created when a deed provides that the property transfer is "on condition that" or "only for so long as" the property described in the deed is used, or not used, for certain purposes. The reservation of a reversionary interest in a deed gives the original owner (and the owner’s heirs, successors and assigns) a powerful tool to take the land back if promises about future land use are broken. Reversionary interests can be structured in several ways. The change of ownership can occur automatically when the condition is broken or it can occur only if and when the holder of the reversionary interest elects to retake the property once the condition is broken. The reserved right can be structured as an option to repurchase for nominal, fair value or other consideration if and when the condition is broken.

Track Record

Reversionary interests have been used for centuries to provide a mechanism for change of ownership if certain conditions set forth in a deed are not met.

Typical End Users

A donor who would not have parted ownership with his land but for promises that it would be used only for a specific public or charitable purpose.
A donor of a parcel of land to a local government, church, university, scouting group or other nonprofit who wants the land to transfer to a conservation organization if the grantee uses, or ceases to use, the land in conformity with the expectations of grantor.
Funders of open space acquisitions who want to be sure that property acquired with grant funds will be used in conformity with program standards or, if not, ownership will be transferred to another entity who will use the land in conformity with such standards.

Conservation Impact

An owner may be more willing to donate land in fee simple for a public park, preserve or other conservation use if there is a mechanism in place for a transfer of ownership to a replacement organization upon a misuse of the land.
Public support for acquisition of open space may be enhanced by vesting a reversionary interest in a public or private entity with the funds and commitment to maintain ownership and control of the property for the purposes intended by the acquisition.

What You'll Need

Meeting of the minds as to exactly what conditions trigger the reversionary right; who can exercise the right; whether the reversion is automatic or at the election of the holder; under what circumstances is any compensation payable or owed to the owner at the time of a reversion.
Professional assistance in drafting the deed clauses to achieve the desired result. If there is any uncertainty about whether the parties intended to create a reversionary interest, the courts will interpret the clause to be merely a use restriction enforceable by injunction but not by forfeiture of ownership.

Obstacles and Challenges

The possibility of reversion impacts marketability of title to a greater degree than the existence of a deed restriction on future use of the property (sometimes called a restrictive covenant). If a restrictive covenant is violated, perhaps inadvertently, the owner can cease the non-compliant activity without concern that his title may be vulnerable to divestment. If the violation has triggered a reversion, title may have been divested or may be subject to divestment even though nothing appears on the public record and the triggering activity has ceased without any visible signs on the property. Title risks are a factor taken into consideration in establishing market value of a property.
Mere change of ownership as a triggering event may be subject to challenge as an unreasonable restraint on alienation.
Determining who has the right to exercise, modify or release a reversionary right can be a complicated title problem. Possibilities of future ownership are often not specifically addressed in wills and so pass through residuary clauses or intestate succession over a number of generations resulting in a large number of individuals holding an undivided proportionate share in the reversionary right.

Contents of Main Description

      Varieties of Reversionary Interests
         Automatic Reversion
         Right of Reentry
         Option to Reacquire
      Potential Issues
         Triggering Events
         Grant to Third Party
         Remedies
      Related Tools
      Disclaimer

Reversionary interests are created by a deed that reserves to the grantor a future ownership right upon the occurrence of some condition. The possibility of future ownership can be transferred to a land trust or other person or entity by recordation of a deed or other instrument of transfer in the public records of the county in which the land is located. Because a reversionary right may not be exercised for an indeterminate period, an individual who has reserved such a right is well advised to transfer the right during his lifetime to an entity that can act quickly and decisively in the event of a breach of condition.

Varieties of Reversionary Interests

Automatic Reversion

An automatic reversion is created by a deed that grants title from grantor to grantee on condition that, or only for so long as, certain conditions are met. If nothing more is said about how the change of ownership is to occur, it happens automatically upon the occurrence of the condition. Full title and the right of possession become immediately vested in the original grantor or whoever now holds the grantor's possibility of reverter.

While this is true as a legal principle, in actuality it's not that simple: official title and tax records are not automatically changed merely by delivery of an affidavit that a certain occurrence has happened and, accordingly, by operation of law, the holder of the reversionary interest is now the owner of the property. An action in ejectment (an action to determine rights of possession) or, perhaps, if possession of the property is not in issue, an action in quiet title (an action to determine rights of ownership), may be necessary to establish the termination of the grantee's fee simple interest and the change of ownership to the holder of the reversion on the public records. If the occurrence of the triggering event is disputed, then establishing the change of ownership may not be simple, easy or inexpensive.

Right of Reentry

It is generally unwise to accept ownership of a parcel of land that has not been inspected for conformance to applicable laws. The land may have been free of hazardous substances or waste when conveyed but there is no guarantee that it remains in that condition when the condition is broken. For that reason, a right of reentry may be preferable to an automatic reversion. The right of reentry is created by adding to the reversionary clause described above a provision along the lines of the following:

but if the land ceases to be used as and for a public park or nature preserve, then grantor, his heirs and assigns, have the right to re-enter the premises and, upon exercise of such re-entry, all right, title and interest of grantee in the above-described premises shall cease and revert immediately to grantor, his heirs and assigns.

Contemporary drafting practices would support adding to the provision an agreed upon method to effectuate the re-entry, other than by taking actual possession or by commencement of an action in ejectment, such as giving of notice by certified mail, etc. to the address of the then owner identified on the county tax records and/or posting at the property.

Option to Reacquire

No compensation is paid upon the occurrence of an automatic reversion or a right of re-entry. This may be perfectly acceptable if the original transfer was a donation strictly for open space purposes. But if the original transfer was a sale, in whole or in part, or the grantee is expected to install improvements consistent with applicable restrictions, then the grantee may not be willing to accept the creation of a reversionary interest that does not provide for some compensation being paid to the grantee upon the reversion or exercise of right of re-entry. One method to address this need for compensation is to substitute for a right of re-entry an option to purchase. The purchase price could be the original consideration adjusted by some factor, compensation for the present value of improvements, fair market value or some other calculation that takes into account the reasonable expectations of the parties without rewarding the grantee for breach of the condition triggering the reversionary right.

Potential Issues

Triggering Events

Consideration should be given to drafting the triggering event so that action can be taken before damage or destruction of conservation values has occurred.
Change of ownership alone as a triggering event may be challenged as an unreasonable restraint on alienation unless the restriction is limited to a particular category of owners that bears some reasonable relationship to the purpose of the condition. For example, if the purpose of the reversionary right is to limit the universe of potential owners to entities who would have qualified as an original grant fund recipient, then the triggering event could be drafted so as to be a change of ownership to a person or entity who would not so qualify.
Change of use as a triggering event may be difficult to enforce without reference to a description of ongoing uses as of transfer date or a description of uses that may or may not be ongoing as of the transfer date but which do not trigger the reversionary right.

Grant to Third Party

To avoid an issue as to whether a third party can be vested with the reversionary interest reserved in a deed, it is advisable not to name the third party in the deed; instead, transfer the reversionary right reserved to the grantor (and their heirs, successors and assigns) to the third party by separately recorded assignment.

Remedies

An action in ejectment or quiet title may be necessary to effectuate the reversionary right and establish good and marketable title on the public record.
Remedies for breach of a restrictive covenant, such as injunctive relief, may not be available if the occurrence is stated only as a triggering event for the reversionary right and not as a separately enforceable restrictive covenant.
If change of ownership is the triggering event, a right of first purchase may be considered as an additional or alternative right to reacquire the property.

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