Recent Cases Cause Uncertainly Regarding Residential Restrictions and the N.C. Real Property Marketable Title Act

You may have heard about the recent pair of cases decided by the North Carolina Court of Appeals involving the North Carolina Real Property Marketable Title Act, which is codified at NCGS Chapter 47B.  The two decisions are C Investments 2, LLC v. Auger et al., and C.E. Williams III et al. v. Reardon et al. These decisions will have a significan adverse impact to North Carolina HOAs and condominiums if allowed to stand - but we don't believe that they will be allowed to stand.

The Marketable Title Act was passed almost 50 years ago and was designed to extinguish certain title flaws or encumbrances, if they had not appeared in any recorded documents within a given chain of title within the past 30 years.  The point was to clarify title and remove minor, old or forgotten matters of title if they had not reoccurred, been rerecorded, or been litigated within the past 30 years of when the title was being examined.  The Marketable Title Act has a number of exceptions for things which are not extinguished even though they may be more than 30 years old, including an exception for "covenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable."  This exception had always been interpreted by real property and homeowners association lawyers to mean that restrictive covenants for residential subdivisions were excepted from the Marketable Title Act and therefore remain in place in perpetuity, as most covenants specifically provide, even if they are older than 30 years and even if they don't appear in a given chain of title within the past 30 years.

The Court of Appeals unfortunately ruled contrary to the longstanding common opinion and practice, interpreting the above-quoted provision to mean that residential restrictive covenants which have not appeared in a given chain of title within the past 30 years are completely extinguished, other than any provision specifically restricting the property to residential use only.  While the Court of Appeals took the position that this was a plain reading of the plain words of the statute, that reading if allowed to stand would upend every subdivision with restrictive covenants 30 years or more old and cause chaos in the chains of title of thousands of homes and residential subdivisions statewide.

For example, imagine an older subdivision with residential restrictive covenants of the typical sort, which were originally recorded more than 30 years ago.  Mr. and Ms. Jones reside on Lot 1 and have lived in their home for 31 years.  Mr. and Ms. Smith live on Lot 2 and just bought their home last year.  Based on these Court of Appeals rulings, the covenants are now extinguished on Mr. and Ms. Jones' property, other than the restriction that it can only be used for single family residential purposes.  So they can quit paying dues, maintain old junked cars on cinderblocks in their front yard, and allow their home to fall into complete disrepair.  On the other hand, what is the situation next door at the Smiths?  It depends on what the deed they received said, and what the deeds of all the other folks in the chain of title for their lot in the past 30 years said.  If the recorded restrictive covenants were mentioned in any of those deeds, then by the Court of Appeal's reasoning, they have been revived and the Smiths must comply with every provision of those restrictions.  If none of the deeds mentioned the restrictions, then they get to be scofflaws just like their neighbors the Joneses.  What if their deed said something vague like, "This deed is subject to all documents of record"?  Who knows?  The Court of Appeals doesn't tell us.  Thus, chaos.

It is a universal opinion among real property and homeowners association attorneys in the state that these decisions were wrong.  The General Assembly is currently reviewing legislation to make corrections to the Marketable Title Act that will put things back the way they have always been.  The chaos which will result if that does not happen it is a strong assurance that it will. 

Bottom line: We do not believe that this is a situation which should be of concern for North Carolina HOAs or condominiums at this time. We believe the General Assembly will remedy the matter. Of course we will be monitoring the situation and will provide further updates as they occur.

Contact us if we can provide any further information, and thank you for following the NC HOA Law Blog.

Stay Out of My Tiki Hut! Court of Appeals Explores Extent of Access Easements in Recent Case

The Fiorentino home as seen from the street,
with the beach access boardwalk.

The North Carolina Court of Appeals issued an entertaining decision in Sea Watch at Kure Beach Homeowners' Association v. Fiorentino in November 2019.  In this case, a developer of a seaside residential community had reserved an access easement across a homeowner's lot, Lot 6, for other residents to access the beach.  Eventually, the access area was expanded to include not only a wooden boardwalk, but also a deck area, bathrooms, and a tiki bar.  After these improvements had been in place and in use for approximately 10 years, a homeowner who bought Lot 6 demanded that the improvements be removed and the easement area returned to its original documented use as set forth in the easement agreement for access to the beach only.  The homeowners association eventually filed suit and requested a declaratory judgment, which is a request for the court to declare the respective rights and obligations of the various parties.

The Fiorentino home in question is at top in this picture with what admittedly looks like a pretty large tiki hut on the walkway between the two homes shown.

             After a Superior Court trial, the trial court ruled in favor of the HOA and dismissed the counterclaims of the owner of Lot 6. The court stated that the improvements were allowed to remain, and the association was allowed to continue to use of the deck, bathrooms and tiki bar even though the written easement agreement only provided for an access easement.

            The trial court analyzed the history of the use of this area and made the legal determination that an "access easement" "is not merely one of ingress and egress; public representations made by the developer expanded the easement to one involving use of the improvements" as well.  The court seemed to also feel that it was important that the improvements had been in use for a substantial period of time and in fact, it appeared that the owners of  Lot 6 had had the use of them along with all of the other homeowners in the community for about 5 years, which was the amount of time that the owners of Lot 6 had lived in the neighborhood prior to purchasing Lot 6.

            This case is important for a couple of reasons.  First of all, it underlines the need for easements and other similar documents to be very specific as to the use which is intended by the original parties.  In this case, the court refused to interpret the phrase "access easement” strictly and ruled that an access easement could include the use of these types of pretty significant improvements since the easement document itself provided no specific limitations on what was meant by "access".  Homeowners associations, developers, and others entering into easements or placing restrictions on land should be explicit in describing what their intentions are in entering into the agreement as well as very specifically describing the various rights and duties granted in the document itself.

            In addition, the court found it important that the tiki bar and other improvements had been in existence for approximately 10 years  and were apparently well known to the Lot 6 owners even before they purchased Lot 6.  This brings up a couple of other important points.  The doctrine of estoppel is very important in understanding contract law and homeowners association law.  This is the doctrine of the enforcement of reasonable expectations between contracting parties.  In this case, the Lot 6 owners had purchased Lot 6 well knowing of the existence of these substantial improvements and therefore, the court found that they were estopped from later complaining about them. Estoppel is a key legal concept which prevents a party from reneging upon an expectation it reasonably induces in another party to the bargain.

            This decision also highlights that real property purchases are almost always a "buyer beware" transaction.  Notwithstanding the fact that sellers in North Carolina are required to fill out lengthy disclosures in residential real estate transactions, the law of the state of North Carolina with regard to the purchase of residential property is generally very buyer adverse. In other words, it is very difficult to sue a seller, or in this case a third party developer, for any condition on a piece of land which the buyer was aware of, or should have been aware of, or could have discovered using reasonable due diligence. Generally, even if the seller completely lies in a real property disclosure, that lie will not be actionable unless there is no way the buyer could have detected the true state of the property using reasonable due diligence prior to closing.  This decision further exemplifies the rule that a buyer generally buys property subject to any and all conditions that they could have reasonably discovered prior to closing.

            Please reach out to us if we can assist your homeowners association with any legal matters, or if you are a developer who prefers to stay out of court!

How to Handle HOA/Condo Board Member Resignations

By Chris Gelwicks, Esq.

From time to time we receive questions regarding the resignation of directors, term expiration and what to do in the event of a mass resignation by the existing board.  The North Carolina Planning Community Act, Condominium Act, and the Non-Profit Corporation Act address certain issues with regard to directors’ terms and how to fill vacancies.  Generally, the remaining board members appoint a replacement to serve out a resigning director’s term. But what happens when directors resign and do not appoint their successors, or when there are not enough remaining directors left to appoint replacements? 

Section 55A-08-05(d) of the North Carolina Non-Profit Corporations Act provides that when the term of a director expires, that director continues to serve until his or her successor is appointed or elected and takes office.  This seems to be in contrast with Section 55A-08-07 which indicates that a director’s resignation is effective upon communication of that resignation to the board (unless the resignation sets forth another effective date).  The key difference between the two statutes are the terms “expire” and “resign”.  Normally, in either case, the remaining directors would appoint someone to fill the empty seat unless the bylaws indicate differently. The board could also choose to hold an election for the empty seat(s).

Where we run into problems is where an entire board resigns at once and no successors are appointed.  Pursuant to Section 55A-08-30, directors on boards have a duty to act in good faith, with reasonable care, and in a manner that is in the best interest of the association.  Such fiduciary duties include that directors enforce the declaration of covenants, collect assessments, and ensure that the association is run and continues to be run effectively.  It is a reasonable conclusion that if an entire board resigns at once and appoints no successors to fill vacancies, then the association cannot be effectively run.  Those directors who resigned en masse potentially subject themselves to liability by not finding and appointing replacements; those directors, by basically abandoning their posts, could be construed to have violated their fiduciary duties.

The same could also apply if so many directors resign that the board can no longer reach a quorum to make a decision on appointing replacement directors.  Keep in mind that the bylaws of your homeowners association ultimately control and can provide a different procedure than these North Carolina state statutes.  If you are reading this and are on the board of your association, you may wish to review your bylaws to determine what they say in these situations and whether changes might be necessary to provide better procedures, such as stating that even board members who resign also continue to serve until their successors take office.

The bottom line is this: Resignations, vacancies and the like are not to be taken lightly.  Directors who resign should always find a successor if at all possible and submit those names to the remaining board members.  If an entire board intends to resign – which is an extremely bad idea to begin with and should be avoided at all costs – they should do so in a manner that allows successors to be appointed and the association to continue to function.  For example, the resignations may be staged over time to allow replacements to come aboard.  And remember that, at least in North Carolina, board members whose terms expire continue to serve, and continue to have fiduciary duties to the association and the members, until their replacements take office.

Failure to appoint successors in a way that results in a dysfunctional board can result in personal liability to the resigning directors for breach of fiduciary duty.  As always, don’t hesitate to contact us to discuss strategies, procedures and potential liabilities when dealing with board matters.

Click here for another of our blog posts regarding board of directors matters.

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The North Carolina Court of Appeals Says… Not Much in its Recent HOA Cases

As homeowners’ association and commercial real estate attorneys, we typically hold our breath when the North Carolina Court of Appeals issues new opinions (“opinions” is the term it uses to refer to its case decisions). While the judges are all smart, accomplished and well-meaning former attorneys, most are former litigators who unfortunately have little if any real estate or community association law experience.

For this reason, they seem to miss the point or simply get it wrong in a lot of the cases they hear involving real estate or HOA issues. In the most recent HOA cases, they have said very little, so in our mind that’s a small positive – at least they did not make something up or get something wrong altogether.

In the interest of keeping you up to date, and because there are still some "teachable moments" involved, we’ll review them anyway. The cases are Radcliffe v. Avenel Homeowners Association, Inc. and Kimler v. The Crossings at Sugar Hill Property Owner’s Association, Inc. 

Radcliffe v. Avenel Homeowners Association, Inc.

The only exciting thing about the Radcliffe case is its facts. The Avenel HOA is an upscale community located in Wilmington. If you think that you have bad neighbors, then you should read the allegations of Ms. Radcliffe in this case to feel much better about your circumstances.

Entry to Avenel HOA

Allegedly, members of the HOA’s board of directors made it their personal missions in life to cause Ms. Radcliffe to move out of the neighborhood.  Not only that, but they also tried their hardest to derail her career in the local Methodist Church. According to the Court’s opinion, their alleged reign of terror included threatening her, chasing her, assaulting her, and driving their cars at her. Her lawsuit was a textbook case for the legal cause of action known as “Intentional Infliction of Emotional Distress,” which involves a victim being subject to actions that no person living in a civilized society should have to endure.

The legal issue in the case affecting HOAs was whether the HOA corporation could be liable on these claims, or whether they were only the responsibility of the individual defendants and board members who performed these acts. Could their individual misdeeds be ascribed to the HOA?

The Court ruled that Ms. Radcliffe’s causes of action against the HOA were barred by the three-year statute of limitations applicable to these types of claims, and for that reason the Court did not explore the extent to which the individual defendants’ egregious actions were attributable to the HOA corporation, which actually would have been interesting had the Court gotten to it.

To what extent an HOA is responsible for the actions of board members is interesting legally because, generally, a company is liable for the actions of its employees and officers which are made in the course and scope of their duties. And in the case of an HOA, the HOA’s insurance will usually come in and defend a case brought against the HOA and/or its officers. But certain types of egregious actions, like fraud, intentional infliction of emotional distress, or overtly criminal acts, are typically held to be outside the course and scope of an officer’s or employee’s duties, since they are not usually part of the job description. Therefore, those types of actions usually are not ascribed to the HOA itself, the HOA would not be liable for them, and the HOA’s insurance often will not step in to defend the HOA or the individuals at fault. But the HOA could be responsible if it is found to have permitted, encouraged or facilitated such bad behavior.

Bottom line: Unless you want to find out exactly which bad actions your HOA can be held legally responsible for, and to do so potentially on your own dime with no insurance coverage, try to be nice to the members of your HOA, and don’t let board members treat members disrespectfully. Unpredictable, irresponsible or offensive people should not serve on an HOA board or committee.

Kimler v. The Crossings at Sugar Hill Property Owner’s Association, Inc.

The Kimler case dealt with the issue of amendments to a community’s declaration of covenants, conditions and restrictions. The original CCRs here were filed in 1996 and they did not include a provision that allowed the documents to be amended by anyone but the declarant. Since the HOA was created prior to the Planned Community Act (which became effective January 1, 1999), the question arose as to how the CCRs could be amended by the members.

The most intriguing thing about this case is the fact that it made it all the way to the Court of Appeals in the first place, because all of the questions that it presented can be answered by reading the statutes. Section1-102 of the Planned Community Act states that certain provisions of it apply to all HOAs, even communities that were created prior to 1999. One of these provisions is Section 2-117, which allows declarations to be amended by a vote of 67% or more of the lot owners in the community, “unless the Declaration or the Articles of Incorporation expressly provide otherwise.” 

The Court ruled that because The Crossings at Sugar Hill’s CCRs were silent altogether as to any amendment process, they did not “expressly provide otherwise”; therefore, the Planned Community Act provisions applied and the members could amend the CCRs with a 67% vote.

Bottom line: Silence in CCRs as to a particular issue will not be construed in the negative. The provisions of the Planned Community Act which specifically apply to all HOAs, even those created prior to January 1, 1999, will apply when CCRs are silent as to a particular issue.

Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with interpretation of your HOA’s governing documents, or if we can be of assistance in any other way regarding legal issues facing your community. Please be aware that we represent HOAs only – we do not represent homeowners in disputes against their HOAs. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

2013 Changes to North Carolina HOA Laws

The General Assembly has made some important, and some not-so-important, changes to HOA law in its 2013 session. With the session now nearing its end, let’s review the changes that have been enacted into law. It does not appear that any other changes to HOA laws will be enacted this year.

Be aware that if you use the N.C. General Assembly's website to look up the North Carolina statutes, they always run one legislative session behind. So, the current statutes on the website do not reflect all the changes discussed here. It will most likely be next year before the statutes on the General Assembly website are updated. 

Changes to the Foreclosure Process

House Bill 331, which was enacted as Session Law 2013-202 on June 26, is the most important bill affecting HOAs this year. It makes a few significant changes to HOA foreclosure procedure by re-writing section 3-116 of both the Planned Community Act and the Condominium Act. The changes take effect on October 1. This bill was primarily drafted and supported by the community associations subcommittee of the Real Property Section of the North Carolina Bar Association, of which I am a member, so while I was not a great supporter of the bill because I had not encountered the issues it seeks to remedy, I did have some input into the drafting of the bill, and the changes it makes are in general positive.

The changes are primarily designed to conform the HOA foreclosure process to the standard power-of-sale foreclosure process used for deeds of trust. Some clerks of court and title companies had raised concerns with the legality of the process HOAs had been using since it seemed to skip some steps required in typical non-HOA foreclosures.

The most important change is that a trustee must now be appointed to handle the foreclosure process, just as in typical non-HOA foreclosures. But don’t panic! The trustee can be the HOA attorney as long as the homeowner does not “contest” the foreclosure proceeding. If the homeowner does contest the proceeding, then an independent trustee (i.e., a separate attorney) must be appointed – but the homeowner is responsible for all the fees and expenses of the trustee.

While the $1200 cap on attorneys’ fees for an “uncontested’ foreclosure remains in place, the bill does clarify that this cap does not apply to any other legal proceedings to collect amounts due from a homeowner, or to processing payment plans and the like. We have run into this issue recently with the Mecklenburg Co. clerk of court.

In addition to some other rewordings and reorganizations of section 3-116, H.B. 331 makes one further change which is very much to the benefit of HOAs. It provides that a lender who takes title to a lot or unit by foreclosure is subject to assessments after the upset bid period passes, regardless of when the lender records the deed into itself or the foreclosure purchaser. While this does not address the issue of lenders who put off the foreclosure process, at least it does address those who foreclose but delay in recording their deed, which is certainly a step in the right direction.

Read the bill here.

Voluntary Pre-Litigation Mediation

On June 19, the General Assembly passed the dumbest of its 2013 HOA legislation, House Bill 278, enacted as Session Law 2013-127. It went into effect on July 1 and provides for a completely voluntary process by which HOAs and homeowners can agree to mediate legal disputes – which they could have done anyway without this pointless bill. The bill is codified in new statute 7A-38.3F. Chapter 7A is the chapter of our laws dealing with judicial matters – so be aware that while this is an HOA law, it is found in Chapter 7A and not in Chapter 47F (the Planned Community Act) or 47C (the Condominium Act).

The bill provides that HOAs and homeowners can agree to mediate a dispute, although neither is required to and either can decline to do so. If they do agree to do so, then the mediation is handled in the same way as any other mediation, which can result in a legally-binding settlement – again, if both parties agree.

The new law does not apply to disputes regarding payment of assessments, so I guess those now cannot be mediated even though they could have been before. Or maybe they still can be. Who knows? As is typical of the other anti-HOA legislation proposed by Rep. Deborah Ross of Wake County, who thankfully resigned from the General Assembly on June 1, such as her prior proposals to eliminate HOA foreclosures altogether, this bill is poorly-written and not well thought out in pretty much all respects. The mediation was originally proposed to be mandatory, so we can be thankful that we were at least able to make it voluntary during the legislative process.

The only really important thing to know about this bill is that the HOA is required to inform homeowners of its existence at least once per year. Typically this should appear on the HOA’s website, or on its annual meeting or budget ratification meeting notice if the HOA does not have a website. Since HOAs are required to publicize the names and addresses of the board members and officers annually in the same way anyway, this should not add much to HOAs’ administrative burdens.

Read the bill here.

Validity of Amendments and Access Through Common Areas

Senate Bill 228, enacted as Session Law 2013-34, was passed on April 24 and takes effect on October 1. It makes some fairly technical adjustments to sections 3-107 of the Planned Community Act and the Condominium Act, and to sections 1-102, 1-104, 2-103 and 2-117 of the Planned Community Act. The changes 1) confirm HOA authority as found in their articles of incorporation, bylaws and CCRs; 2) confirm that amendments to CCRs made in accordance with the articles of incorporation, bylaws and CCRs (which had been placed into some doubt by some recent appeals court decisions) are presumed valid; and 3) require lot and unit owners to provide access through their lot/unit to the HOA and other owners if needed for repairs or maintenance to common areas or other units. This bill was supported by our HOA subcommittee. It should not affect the day-to-day operations of HOAs but does help clarify some legal issues.

Read the bill here.

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company in understanding or implementing these changes, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

What if Fred and Barney lived in your HOA?

And what if Fred and Barney were goats? Fortunately for us, the Court of Appeals had occasion to address this burning issue recently in Steiner v. Windrow Estates HOA.

                                                                                                    

Mr. and Mrs. Steiner lived in Windrow Estates in southeast Mecklenburg County, and had as their beloved pets two “certified Nigerian Dwarf” goats named Fred and Barney. Of course, the CCRs prohibited “livestock”, as most do, although interestingly, they did allow horses as Windrow Estates is an equestrian community. The case turned on whether Fred and Barney were livestock, as the HOA contended, or household pets as the Steiners argued. The trial court had found in favor of the Steiners on summary judgment.

The drafter of these particular CCRs failed to define the word “livestock”. When that happens, courts typically look to determine the “ordinary meaning” of the word in question, which means they usually simply look it up in the dictionary. Here, the Court referred to Merriam-Webster’s Collegiate Dictionary and determined that “livestock” are “farm animals kept for use or profit” whereas pets are “domesticated animal[s] kept for pleasure rather than utility.”

The Court set forth excerpts from Mrs. Steiner’s affidavit in lengthy and sympathetic detail. Mrs. Steiner had been diagnosed with health problems and her physician recommended pets to speed her recovery. After some research, she determined that Nigerian Dwarf goats made excellent pets and could also live comfortably with the horses that the Steiners already kept on their property. The goats were bought from an outfit (Peach Tree Farms in nearby Oakboro) that sells them solely as pets, she said, and they were neutered and don’t produce milk or meat, so they could not be used for profit. Mrs. Steiner also testified that the goats were “affectionate, gentle, and make great companions.” (Apparently these particular goats don’t eat everything they see like the garden-variety goats I am familiar with – especially the one that once ate my uncle’s dentures. But that is another story.)

Dwarf Nigerian Goat from Peach Tree Farms' website.

Mrs. Steiner also testified that the goats lived outside in the stable with the horses, which to me seems more suggestive of livestock than household pets, but the Court somewhat facilely glossed over this issue by stating that household pets don’t necessarily have to live inside the house to be considered pets.

As often is the case when a court chooses to quote liberally from the one side’s testimony in its opinion, the Court of Appeals decided in favor of the sympathetic plaintiffs Mr. and Mrs. Steiner, holding that Fred and Barney were indeed pets and upholding the decision of the Superior Court. But the bigger question is, why did the Court decide the way it did and what, if anything, can we learn from this opinion? I see at least three takeaways for HOAs:

The first and most obvious takeaway is that it is critically important to define terms in CCRs. Obviously, had the CCRs clearly stated that goats were included in the term “livestock”, it would have helped the HOA’s case, but most likely this wouldn’t have changed the outcome, because it appears that the goats in this case were in fact pets.

Second, the plaintiffs in this case came across very sympathetically, and since judges are people too, this was an important part of why the decision ended up the way it did. HOAs facing litigation should very carefully consider the relative sympathies of the parties involved before incurring the expense of protracted litigation, even if they feel the legalities are on their side. Don’t miss the forest for the trees when deciding whether litigation is warranted.

Finally, it is crucially important for HOAs to be aware that North Carolina courts look upon all CCRs with a jaundiced eye. The Court of Appeals spent a good portion of its opinion harping on this particular doctrine, summarizing it as follows:

“The law looks with disfavor upon covenants restricting the free use of property. As a consequence, the law declares that nothing can be read into a restrictive covenant enlarging its meaning beyond what its language plainly and unmistakably imports.”

This gave the Court the legal support it was looking for to read the term “livestock” very restrictively (even though the careful reader will note that the Merriam-Webster definition states that livestock includes “farm animals”, and I can’t imagine anyone arguing that goats are not generally considered farm animals) and to find in favor of plaintiffs it clearly found to be worthy of its support, even on summary judgment. In addition, and perhaps I am just being paranoid here, this allowed the Court to hand the HOA community another in a fairly consistent string of losses at the North Carolina appellate level on facts that seemingly could have gone either way.

The case is Steiner v. Windrow Estates Home Owners Association, Inc., 713 S.E.2d 518 (July 19, 2011). Read the full text of the opinion here: http://appellate.nccourts.org/opinions/?c=2&pdf=MjAxMS8xMC04NjUtMS5wZGY=