February 2002
New Year, New Issues By Chris Burti, Vice President and Legal Counsel, Statewide Title, Inc.Tax Certification Required Before Recording
The North Carolina General Assembly passed House Bill 108, Session Law 2001-464 before its adjournment last year. While the application of this new law will be limited to certain counties, it will affect all practitioners who must record deeds in those counties. Article 2 of Chapter 161 of the General Statutes has been amended by adding a new Section 161-31. This new section provides that a county may require the register of deeds to receive a certification from the county tax collector stating that no delinquent ad valorem taxes, or other taxes, are a lien on the property conveyed in a deed before accepting it for registration. This act became effective November 16, 2001 and applies to the following counties. Alleghany, Anson, Beaufort, Cabarrus, Camden, Cherokee, Chowan, Currituck, Forsyth, Graham, Granville, Harnett, Haywood, Jackson, Lee, Madison, Montgomery, Pasquotank, Perquimans, Pitt, Stanly, Swain, Vance, Warren, and Yadkin.
This legislation presents a conundrum to real property practitioners. In the typical transaction, the title is updated immediately after closing. If the title is found to be satisfactory, the instruments are then recorded. Our ethics requirements, and typical lender’s instructions, prohibit disbursing funds prior to this process occurring. In order to comply with these requirements and the new legislation, all delinquent taxes will have to be paid prior to closing. This procedure runs counter to the closing practices that have been in effect for generations. Additionally, lenders selling foreclosed properties may be reluctant to comply with a requirement that is in place in a limited number of counties. It may require time-consuming discussion to convince these lenders that they must pay the taxes prior to closing.
One does not have to ponder this issue very long before one begins to visualize the potential nightmares that may become reality. It is easy to picture the scene scripted as follows. A buyer is willing to advance payment of substantial, delinquent taxes that the seller is unable to satisfy. The closing progresses normally. The title is updated and found to be satisfactory. Payment is made at a busy tax office, and after the expected and typical delay, the certification is issued. While this is transpiring and before recording, a transcript of a huge judgment from a distant county is docketed. Perhaps, a Chapter 44A lien is filed. Maybe a grantor dies. The ethical question of what to do next might be placed aptly on a Bar examination.
Not having a Constitutional authority readily available, it is with trepidation that we venture down that slippery path. It may, nonetheless, prove worthwhile if it provokes consideration by those more qualified. While the practical implications may be somewhat obvious, we might also consider whether there are Constitutional issues involved. If a property owner is unable to pay a large tax liability and no buyer is willing to risk advancing funds, no sale will take place. Can it be successfully argued that this legislated inalienability is a taking prohibited by the Fourteenth Amendment of the U.S. Constitution or by North Carolina’s Article I, Section 19? This might be argued since there appears to be no procedure for hearing, waiver or appeal and the State already has adequate means to accomplish its objectives. If the right to convey property is considered inseparable from the right to hold it, Eason v. Spence, 232 N.C. 579 (1950) might apply by extension. This law, arguably, authorizes the State to take that right by legislative fiat without hearing. Since there exist extensive foreclosure and garnishment procedures, the new provisions are arguably redundant. In most cases the only occasions that the certificate will produce payments that would not ordinarily be made, is in pro se transactions. We would expect that when an attorney is involved in the transaction, the taxes will be paid in most cases.
Additionally, in the circumstances described above, a tax foreclosure is likely to result. Our society’s standards of fairness ought to be offended by a taxing authority selling a citizen’s property as the direct result of a law that prevents a sale that would have satisfied the liability. This is particularly true if the citizen loses significant equity in the property as a consequence of the foreclosure.
Perhaps a technical correction could be adopted, permitting the tax collector to issue a certificate based upon a representation by the closing attorney that the taxes will be paid promptly after recording. It is not a perfect solution, but it seems that it would accomplish the goals of the bill while alleviating the concerns produced by the existing legislation.
Covenants-Radical Changes
Medearis v. Trustees of Meyers Park Baptist Church, COA01-114, Filed on December 28, 2001 is one of those less common cases applying the doctrine of radical changes to negate restrictive covenants. It is somewhat rare to find an opinion that actually finds that sufficient change exists to justify a denial of enforcement. This is understandable because the remedy is somewhat draconian. When this relief is appropriate, the restrictions are invalid as to all lots in the subdivision, not just the lots affected. As an interesting aside, this controversy involved lots in the Myers Park subdivision in the City of Charlotte, a subdivision that has over 15 appellate decisions construing covenants. It is well settled that the various portions of the area or individual blocks constitute separate subdivisions.
At issue is a residential restriction covering twelve of fourteen lots in Block 37 of the Myers Park subdivision. Two lots are not subject to residential restrictions or involved in the litigation. The case presents an extensive history of the changes that occurred in that one block over a period of 85 years running from the inception of the development of that particular block to the filing of the instant action. Suffice it to say, that since the completion of Block 37, Meyers Park Baptist Church acquired seven of the twelve restricted lots, removed or demolished at least five structures, and built several buildings for the church complex. One of the remaining five restricted lots belongs to the C.D. Spangler Foundation, Inc., which also demolished the house on its lot. Two lots belong to Queens College Inc., and they are used for parking, classes and social events. The remaining two restricted lots belong to petitioners, who use both lots for a single residence.
Petitioners sought a declaratory judgment to determine their rights to enforce a covenant restricting the property to residential use. This was done in order to prevent respondents from expanding the church complex by building the Cornwell Family Life and Learning Center, named after the Spangler family. The trial judge granted summary judgment to the respondents after concluding that the property had undergone such a radical change as to negate the restrictive covenant, and that the petitioners waived their right to enforce the restriction.
The court begins the opinion with a summary outline of the law on restrictive covenants, including the rule of strict construction, enforcement doctrine, and termination theories such as express provisions, radical changes, waiver, estoppel and laches. The Court then proceeds on to an in-depth discussion of termination beginning with radical change after observing that the record did not disclose that the covenant has a termination provision.
The Court noted that Lots 9 and 10 are owned and occupied by the Medearis family, are being used for residential purposes and therefore, comply with the restrictive covenants.
Lots 5, 7 and 8 were used for parking as early as 1963. The opinion notes that parking lots do not constitute such a radical change as to nullify the residential restrictive covenants, citing Tull v. Doctors Bldg., Inc., 255 N.C. 23, 39-40, 120 S.E.2d 817, 828 (1961); H. L. Mills v. HTL Enters. 36 N.C. App. 410, 418-19, 244 S.E.2d 469, 474-75 (1978). The Court observes that this is not an absolute rule and whether "a radical change has taken place depends on the facts and circumstances of each case. Karner v. Roy White Flowers, Inc., 351 N.C. 433, 437, 527 S.E.2d 40, 43 (2000)." This panel distinguishes Mills and Tull in the basis of the relative numbers of the lots involved. "In Tull, unlike this case, only a small percentage of restricted lots were being used for parking in violation of the restrictive covenant. As stated earlier, one quarter of the lots in Block 37 are currently used for parking. Based on the facts of the instant case, we find H. L. Mills and Tull distinguishable, and hold that parking could, under certain circumstances, constitute such a radical change as to destroy the restrictive covenant." The Court characterizes the use of Lot 13 as a vehicle turn-around for church activities and for recreational purposes as being substantially similar to the lots being used for parking. It therefore, is a factor considered in determining the nature of the change as a violation of the covenant restricting use of the lot to residential purposes. Lots 3 and 14A were used for offices and classrooms for over thirty years in violation of the restrictive covenant and are also factors considered in determining whether radical change exists.
Lot 4, 6, 11 and 12, which once contained structures that were residential are vacant. In summary, six of the twelve lots containing a residential restriction in Block 37 were in obvious violation of the restriction. Of the remaining six lots, four are vacant and two have been combined containing one residential structure.
Apparently, in light of the history of the development, the Court of Appeal’s math may be characterized as; two are unrestricted, two in residential use and ten not so. It appears that the Court was careful not to get into the trap of engaging in a numerical holding based on a ratio. Nonetheless, one can not help but interpret this opinion as holding that when a substantial majority of lots are no longer being used as contemplated by the developer, a radical change has occurred. The Court held that the trial court did not err in granting summary judgment. The Court affirmed for respondents because the changes to Block 37 were "‘so radical as practically to destroy the essential objects and purposes of the agreement’" and that "in this case, the changes have destroyed ‘the uniformity of the plan and the equal protection of the restriction.’ Starkey v. Gardner, 194 N.C. 74, 79, 138 S.E. 408, 410 (1927)."
The Court of Appeals then went on to agree with the trial court that the petitioners had no right to enforce the restrictive covenant because of the doctrine of waiver. The Court found that the respondents properly raised waiver as an affirmative defense in their answers. A waiver may be express or implied and not finding anything in the record, briefs or arguments to indicate that petitioners expressly waived their right to enforce the residential restriction, the Court determined there was an implied waiver by conduct.
The opinion states that "A waiver is implied when a person dispenses with a right ‘by conduct which naturally and justly leads the other party to believe that he has so dispensed with the right.’ The case at bar is analogous to Rodgerson [Rodgerson v. Davis, 27 N.C. App. 173, 218 S.E.2d 471 (1975)]. In this case, petitioners first learned of MPBC's [Meyers Park Baptist Church] plans to construct the Cornwell Center in June 1998 when they were invited as prospective homeowners to a meeting with the church. Petitioners purchased their house from Mr. Medearis's parents in December 1998. On 16 June 1999, Mr. Medearis sent a petition to neighbors requesting support to oppose a zoning variance needed by MPBC because it did not have enough land to meet the floor-to-area ratio needed to build the Cornwell Center. In the petition, Mr. Medearis stated that his understanding of the petition was that it would not stop the building; rather, it would only limit its size. Petitioners moved into their residence on 31 October 1999. Thereafter, on 24 November 1999 the Foundation purchased Lot 11 and on 3 February 2000 demolished the Baldwin House to eliminate MPBC's need for a zoning variance. Mrs. Medearis testified that shortly after the demolition, she told the church congregation, "[M]y family did not oppose the building of the [Cornwell Center] and . . . we were prepared to go to the zoning hearing and tell them so." The first time petitioners raised the issue of enforcing the residential restriction was on 18 May 2000. Prior to that time, petitioners did nothing to prevent MPBC from constructing the Cornwell Center; rather, they negotiated to reduce the size, orientation and placement of the building on MPBC property. Petitioners had negotiated with MPBC fifty-five times to redesign the plans for the Cornwell Center so that they would support a zoning ordinance. Notwithstanding the numerous negotiations, Mr. Medearis never requested that MPBC not build the Cornwell Center." The Court noted that the respondents had incurred significant expenses preparing to build the Cornwell Center prior to the filing of the petition for relief. Basing its ruling on this information, the panel affirmed the trial court’s conclusion that the petitioners had waived their right to enforce the restrictions. Moreover, by their conduct and statements, impliedly led the respondents to believe that they waived their right to challenge the proposed violation.This opinion highlights the difficulty that title insurance companies have in affirmatively insuring transactions that involve a prospective violation of an old and apparently obsolete restriction.
It is also important to note a significant distinction between issues that were not discussed in this case, as they are sometimes confused. This opinion did not address the six-year limitations statute. It would be inappropriate to do so because if the limitation period applies, only the enforcement of a valid restriction is prohibited. If there is a cessation of a proscribed use or a destruction of a nonconforming structure, the restriction may be enforced to prohibit or remove any subsequent violation. As noted above, when the doctrine of radical change is applicable, the restriction is entirely negated. As a consequence, Meyers Park Baptist Church will be unable to prevent a future non-residential use by the Medearises. Assuming that the zoning regulations would permit it, they could operate an adult bookstore on their property and the Church would not be able to enjoin that activity based upon the restrictive covenants.
Beware – Missing Date of Note!
By Bonnie Windom, Eastern Operations Director
By Bonnie Windom, Eastern Operations Director
You may have noticed that some of the pre-printed deeds of trust that you have been receiving in your loan packages have a space that is easily overlooked for inserting the date of the note. It is typically on the second page, and it is not a blank to be filled in but rather a blank space. It is easy to overlook, and, therefore, oftentimes left blank, thereby creating a real problem. This is occurring more commonly on form deeds of trust from BB&T and Dover Mortgage. When discovered, it is usually after recording, and many times, the first instinct is to ask the title company to issue an endorsement giving affirmative coverage over the omission. This does not solve any problem; it only puts on a weak blow-out patch for the moment. If the matter should go into foreclosure, most of the Clerks of Court would consider the document defective and reject the document for lack of note date. Therefore, when this problem is discovered, the date should be inserted and the document initialed and re-recorded. For the protection of all parties, Statewide Title has made the business and underwriting decision NOT to give affirmative coverage over the omission of the date of the note and to require the re-recording of the deed of trust.
EMPLOYEE OF THE MONTH
The Statewide Employee of the Month is Bonnie Windom. She serves as Eastern Operations Director and works from our Regional Office in Greenville. Her duties are varied but include marketing in the forty-two eastern counties covered by the Greenville office; serving as a senior underwriter; overseeing operations and supervising personnel in the Greenville office; and coordinating the company newsletter. Bonnie has been with Statewide Title since March of 1998, but she is really an old-timer in the title insurance business, having begun in 1981, when she was just a baby and had to be burped after typing each policy! (Yes, each policy actually had to be typed back then on an IBM selectric typewriter -- not keyed in on the computer. In fact, there were no computers -- not in most business offices, anyway. Computers were in big banks, etc.)
Greene County is home to Bonnie and her husband of thirty-five years, J.E., and their two cats, Miss Baxter and Molly. Both Bonnie and J. E. are Pitt County natives, having grown up in and around Greenville. Bonnie attended Free Will Baptist Bible College in Nashville TN and Princess Anne College in Virginia Beach, VA. She worked as a legal assistant and a court reporter before getting into the title insurance business.
Bonnie is very active in her local church, Mt. Calvary Free Will Baptist Church in Hookerton, NC, where she sings alto in the choir and helps her husband, who is church treasurer. She also enjoys baking, and as a hobby, she does custom picture framing.
