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.

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!