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NEW COURT OF APPEALS RULING:

CERTAIN COMMUNITY ASSOCIATION RESTRICTIVE COVENANTS MAY BE UNENFORCEABLE … BUT DON’T PANIC!

On May 18, 2021, the North Carolina Court of Appeals issued an opinion in the case of C Investments 2, LLC v. Auger et al., 2021-NCCOA-209. This case has been anticipated for months as it deals with the North Carolina Marketable Title Act and its effect on older covenants and neighborhoods.

The relevant facts from the case are that a residential subdivision known as Country Colony was developed in the 1950s. In 1952, the developer recorded a set of restrictions that contains nine restrictive covenants. Those restrictions included a restriction limiting lot use to residential only. The remaining restrictions generally addressed nuisance or offensive type activity, size of structures, setbacks, minimum square footage of structures, and right-a-way for utilities on certain portions of the lots. Note that the restrictions did not contain language creating or authorizing the creation of a community association. Further, the restrictions did not contain a renewal provision, nor was there any indication the restrictions were amended after the original recording.

The Plaintiff, in this case, filed an action challenging the enforceability of the covenants pursuant to the North Carolina Marketable Title Act (“Act”), codified at Chapter 47B of the North Carolina General Statutes. In this opinion, the Court of Appeals went through a brief history of the Act. The Act was passed in 1973 with the purpose of creating "marketable record title" to real property upon a showing of an unbroken, 30-year chain of title to real property. It functions to create “marketable record title” to real property upon a showing of an unbroken, 30-year chain of title to real property. The goal was, according to the Court, to “simplify title searches and render our State’s real estate more marketable.” The Court opined that the Act, per section 47B-3, “extinguishes all rights, estates, interests, claims or charges whatsoever, the existence of which depends upon any act, title transaction, event or omission that occurred prior to such 30-year period.” This includes restrictive covenants, unless the restrictive covenants fall into an exception.

Indeed, the Act contains exceptions in section 47B-3. Per subsection (13) of that section, the Act does not extinguish a covenant “applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict a property to multi-family or single-family residential use or simply to residential use. Restrictive covenants other than those mentioned herein which limit the property to residential use only are not excepted from the provisions of Chapter 47B.”

In sum, the main issue for the court was whether restrictions more than thirty years old are extinguished if at least one of the restrictions contained provisions limiting lots to residential use.

The Mecklenburg County trial court found that the Act extinguished all of the restrictions except the residential use restriction. The court declared that the other challenged covenants did not fall within any exception listed in 47B Subsection 13, and effectively extinguishing those covenants.

The Court of Appeals review of the trial court decision focused on the interpretation of the relevant sections of the act. The Defendants argued that the Act exempts all covenants from extinguishment if the covenants governing the uniform scheme of development included a restriction on residential use. In other words, if the restrictions contained a residential use restriction in addition to the others, all of the restrictions survive.

The Court of Appeals looked at the plain language and legislative history of the act, and rejected the defendant’s argument. It found that the extinguishment exception “applies only to covenants applicable to a general or uniform scheme of development that either restrict the property to residential use only, or more narrowly restrict the property to multi-family or single-family residential use only.” The Court of Appeals determined that to interpret the exception more broadly than what was written would basically result in the Court of Appeals writing law; something that is outside its power.

Notably, there was a dissent filed which attacked the reasoning of the Court’s majority opinion and asserted that at least two other covenants of the nine in question should survive.

To sum up, per this ruling, non-residential use restrictions that are more than thirty years old could be considered extinguished or unenforceable. However, as the title of this blog indicates, it is not the time to panic. There are a number of issues to consider before coming to a hard conclusion.

First, the case most likely will be reconsidered or appealed. Thus, there is a strong possibility that decision will be revisited. Please stay tuned for future developments.

Second, the facts of this case may limit the scope of the ruling. The ruling did not speak to communities formed under the specific provisions of the North Carolina Planned Community Act (“PCA”). Communities formed after the inception of the PCA could argue that the specific language of the PCA controls over the general language in the Act. In other words, since a community was created under the specific provisions of the PCA, the PCA controls where it is in conflict with the Marketable Title Act.

Third, the Court, due to the limits of the restrictions it reviewed in the case, did not address the issue of automatic renewal provisions contained in many declarations. Such renewal provision could circumvent the language in the Act because the covenants would begin anew at the end of the expiration of the term. The opinion further did not address whether older covenants, if amended, and such amendment contains language that ratifies or adopts the original covenants and prior amendments, would survive. Amended and restated covenants could have an even stronger argument of survivability.

Please keep in mind that the above are simply potential arguments to counter assertions regarding restriction extinguishment. Until further guidance is provided by either our Court or General Assembly, we are left to determine the best practice for each association. Older communities with covenants not subject to the PCA, and which may not have any argument regarding survivability, may be faced with a reality of non-residential restriction unenforceability. Thus, we urge you to work with your association counsel to discuss these issues and develop an appropriate plan of response.

Finally, the Marketable Title Act contains provisions which provide a procedure by which communities less than thirty years old may record a notice that would keep the restrictions from being extinguished. The dissent in the opinion mentions such notice, albeit in perhaps an oversimplified way. The notice contains specifics as to what it must contain in order to be valid. Thus, again, consultation with association counsel is imperative.

We will continue to review the latest developments on this case and issues surrounding it and will provide updates when appropriate. Please feel free to reach out to us with any questions.

Chris Gelwicks

Community Association Law Attorney

chris@mcintoshlawfirm.com

www.mcintoshlawfirm.com