Church Property – Part 1

A New York court ruled that a church could transfer its property despite a provision in its deed that required the property to be used forever for religious purposes.

Church Law and Tax 2002-11-01

Church Property

Key point 7-14. Some deeds to church property contain a "reversion" clause stating that title will revert back to the previous owner in the event that a specified condition occurs. The courts will enforce such provisions, so long as they can do so without interpreting church doctrine.

* A New York court ruled that a church could transfer its property despite a provision in its deed that required the property to be used forever for religious purposes. In 1885 a family sold a parcel of land to a church. Pursuant to a restriction contained in the deed, the premises were conveyed to the church "and its successors forever for the use of the Protestant Episcopal Church in the Diocese of Long Island but without any power, right, or authority to grant, convey, or mortgage the same or any part thereof in any way or manner whatsoever." The deed also contained the further restriction that the premises were not to be "used or occupied for any other use or purposes than as sites or grounds for buildings or institutions connected with said church and devoted to its religious uses or educational purposes." Some years later, the family’s heirs sold their right to recover the property in the event the deed restrictions were violated to a business corporation (the "company"). The church continued to own and occupy the premises in accordance with the restrictions contained in the deed from the time of the conveyance in 1891 until the present.

In 1993 the church, which was in severe financial distress, filed a voluntary petition in bankruptcy pursuant to Chapter 11 of the bankruptcy code. The bankruptcy court directed that certain properties owned by the church be sold, including the property subject to the deed restrictions. The church asked a court to extinguish the deed restrictions so that it could sell the property. The company asserted that it became the lawful owners of the property when it ceased to be used for religious purposes.

A trial court found that the church was entitled to sell its property despite the deed restrictions. It noted that the original deed created a "right of reentry" in the heirs. Such a right gave the heirs the legal authority to reenter the property and claim ownership in the event that the church ever ceased to use the property for religious purposes. However, the court ruled that such a right is not assignable, and therefore the company had no enforceable interest in the property. The court also relied on a state law giving the civil courts the authority to extinguish restrictions on the sale of property by charities. It concluded that "to require the church to hold the land in perpetuity is unconscionable." The company appealed, claiming that its interest under the original deed was a "possibility of reverter" rather than a right of reentry, and that such a right automatically vested title in the company upon a violation of the deed restrictions. Therefore, the trial court did not have the authority to ignore the company’s interest.

A state appeals court rejected the company’s argument and affirmed the trial court’s ruling. It concluded that the original deed in 1885 did not create a right of reversion since it “did not contain any language providing for the automatic termination of the church’s interest in the property in the event that the property was no longer used for religious and educational purposes.” At best, the deed created a right of reentry, and the court concluded that “any attempt by the heirs of the original grantors to assign a right of reentry to the company would be rendered void, since, under the common law, such a right was not assignable or devisable at the time that the original deeds were executed.”

Application. This case illustrates the following important points.

1. Deeds to property may contain restrictions on the sale of the property. Two common restrictions are "rights of reentry" and "possibilities of reverter." Though these interests are similar, they have very different legal consequences. A possibility of reverter arises when one person transfers property to another by means of a deed containing language clearly providing that title will automatically revert to the prior owner if the current owner violates a restriction in the deed. Language creating a possibility of reverter includes words such as "so long as," "until," or "until such time as." To illustrate, assume that A transfers land to B with a deed specifying that title is transferred "so long as" B uses the property for church purposes. Here, the language is clear that if the land ceases to be used for church purposes, it will automatically revert to A. The significance of this is that the reversion of title to A is automatic, and requires no action by a court.

On the other hand, deeds often contain conditions that do not call for an automatic reversion of title to the previous owner upon the occurrence of some condition. In such cases the prior owner has a "right of reentry." Such a right does not vest automatically in the prior owner. Rather, the prior owner must go to court to have his or her interest recognized. As this case illustrates, this is a more uncertain interest in property, since it does not operate automatically.

2. Churches should check their deeds to see if they contain a condition that may give the prior owner either a possibility of reverter or a right of reentry. In either case, the prior owner may attempt to claim title to the church’s property in the event the specified condition is violated. However, if the prior owner retained a possibility of reverter, the transfer of title back to the prior owner occurs immediately. This can cause major problems for a church when it belatedly discovers that it no longer owns the property.

3. This case demonstrates the negative attitude the courts have toward restrictions on the sale of property by charities. In some states, such as New York, laws have been enacted giving the civil courts some leeway in extinguishing such restrictions. If your church deed contains restrictions on the sale of property, you may want to consult with a local attorney concerning the existence of such a law in your state. In the Matter of Incorporated Village of Garden City, 734 N.Y.S.2d 225 (N.Y.A.D. 2001).

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