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.

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!