February 2008

COA Interprets Validity of Condo Declaration Provision

By Chris Burti , Vice President and Senior Legal Counsel - Statewide T itle, Inc.

At times, it seems as if our appellate court judges need the Wisdom of Solomon to pen decisions dealing with an undecided issue of law that will likely have a significant impact on the interests of the Public. IN RE: Williamson Village Condominiums, COA07-217, filed on December 18, 2007, may well be a case with one of those issues and the divided panel if the Court of Appeals  may be suggested as representing the biblical women contesting motherhood of the infant. T he case is reported as having been appealed to the North Carolina Supreme Court. T hat may well cast the North Carolina Supreme Court in the role of Solomon.

T he facts as set out in the majority opinion are summarized as follows. Williamson Village Partners, LLC, the plaintiff in this action, purchased a tract of land in Iredell County with the intent of constructing two commercial condominium buildings (Buildings One and T wo) on the tract. It was proposed for each building to contain three condominium units. Before the plaintiff began construction, the defendants contracted to purchase one unit in Building One. T he contract referenced the "commercial condominium project to be constructed by [the plaintiff] . . . including T wo (2) separate buildings." Under the terms of the contract, the defendants retained certain rights to approve provisions of the final plat and condominium declaration which the plaintiff was required to record pursuant to the North Carolina Condominium Act.

T he plaintiff and the defendants apparently exchanged communications and concerns regarding construction of Building One without directly referencing Building T wo. T he defendants approved the final version of the Declaration and plat, and the plaintiff recorded the documents in July of 2000. T he plat showed the location of Building One and included the future boundary of Building T wo, with the following notation: "EX T EN T S OF FU T URE BUILDING . . . 'NEED NO T BE BUIL T .'" T he Declaration included the following provision:
        “Section 16.1 Development Rights.  Declarant hereby reserves the right to exercise those Development Rights granted herein and under the Condominium Act on existing and additional properties that will be brought under this Declaration of Condominium and as shown in Condominium Book 1 at Pages 105, 106 & 107 recorded in the Iredell County Register of Deeds.”

T he deeds to the appellants referenced the plaintiff's right, reserved pursuant to the Declaration, to construct additional condominium units on the property. T he plaintiff conveyed the second condominium unit in Building One in 2002 and the last unit in Building One in 2006.   T he plaintiff contended that it intended to begin construction on Building T wo after selling the last unit in Building One. T he facts seem to suggest that the plaintiff may have relinquished control of the association. In late 2005, the defendants objected to the plaintiff’s plans for the new construction asserting that the terms of the Declaration did not permit the plaintiff to proceed with the construction.

T he plaintiff filed a complaint for declaratory judgment. T he defendants filed an answer and moved for summary judgment, claiming that the plaintiff did not retain the right to construct Building T wo because the terms of the Declaration did not comply with the North Carolina Condominium Act. T he trial court granted defendants' motion, voiding the plaintiff’s claim of retaining the right to construct any further buildings. T he Court of Appeals reversed, agreeing with the plaintiff’s arguments that it retained its development rights because “the Declaration substantially complied in good faith with the material requirements of the Condominium Act.”

T he Court of Appeals notes that the North Carolina Condominium Act “lists more than a dozen specific items that must be included in the declaration” and specifically, a “…‘description of any development rights and other special declarant rights reserved by the declarant, together with a legally sufficient description of the real estate to which each of those rights applies, and a time limit within which each of those rights must be exercised[.]’ N.C.G.S. § 47C-2- 105(a)(8) (emphasis added).”  T he Court then observes that the Act “excuses nonmaterial noncompliance with these requirements where the declarant has substantially complied with the statute.”

On the issue of substantial compliance, the Court states that the North Carolina “Supreme Court has defined ‘substantial compliance’ as ‘a compliance which substantially, essentially, in the main, or for the most part, satisfies the [statute's requirements].’ Bank v. Burnette, 297 N.C. 524, 532, 256 S.E.2d 388, 393 (1979).” T he Court of Appeals observes that the Declaration at issue is a comprehensive thirty-five-page document and that it follows the Act's requirements closely. “It is clear from our review of the Declaration that the Declaration ‘essentially, in the main, [and] for the most part, satisfies the [Act's requirements].’ Burnette, 297 N.C. at 532,256 S.E.2d at 393.”

T he plaintiffs argued and the Court agreed that omitting the time limit was not a material omission. T hat may not be the case in this situation nor is likely to be in many cases as we will discuss below. T he majority clearly chooses not to do more than give token recognition to the ramifications that the broad language of this opinion can have on this issue in other instances.

T he majority seems to place much importance on the lack of evidence in the record that the timing of the construction of Building T wo was a disputed issue and that the defendants reserved the right to make certain that the documents reflected their agreement respecting their contemplated use of their unit.  T he opinion asserts that “Plaintiff suggests that the parties purposely omitted the timing clause in order to grant Plaintiff flexibility in determining the most opportune time to begin construction on Building T wo. Defendants do not dispute this contention. Defendants approved the Declaration with the time limit omitted, and never expressed any concern over construction timing until more than five years after they approved the plat and Declaration.”

We would respectfully suggest that since the Act does not impose any limit on the length of time that the Declarant’s reserves development rights (just the mandate to state the time), it may have been contemplated by the parties that the optional second building construction would have occurred in a reasonable time. If the parties had differing views on what constitutes a reasonable time, there arguably was not a “meeting of the minds” on this point and thus no agreement. It should be considered significant that there is apparently no obligation for the plaintiff in this matter to build a second building. T herefore, it does not necessarily follow that the defendants considered that five years was contemplated or was a reasonable a period.  If the defendants considered the development rights abandoned, there would be no evidence of a dispute until it arose in this case.

T he defendants argued that the Legislature did not intend that the "substantial compliance" exception should apply to mandatory requirements such as time limits on reservations of development rights. T he opinion asserts that the defendants rely on the reasoning in a case from the Colorado Court of Appeals. “In Silverview v. Overlook at Mt. Crested Butte, 97 P.3d 252 (Colo. Ct. App. 2004), the Colorado court considered a similar argument regarding the Colorado Common Interest Ownership Act, ... Using language almost identical to N.C.G.S. § 47C-2-105(a)(8), the Colorado statute required that a condominium declaration ‘must contain . . . [a] description of any development rights . . .reserved by the declarant . . . and the time limit within which each of those rights must be exercised.’ … T he appellant's declaration failed to include a development time limit, and the trial court held that the omission rendered the appellant's development rights void ab initio... On appeal, the appellant argued that the omission did not void its development rights. T he appellant pointed to another portion of the statute which declared that ‘[t]itle to a [condominium] is not rendered unmarketable or otherwise affected by reason of an insubstantial failure of the declaration to comply with this article.’ … T he appellate court disagreed. It found that [the statute], by its terms, only applied to disputes concerning title and marketability. T herefore, it was inapplicable because it neither addressed nor excused noncompliance with the statute's development rights provisions… Since the noncompliance provision did not apply, the mandatory language of the statute ‘unambiguously require[d] any reservation of development rights to include a 'time limit within which each of those rights must be exercised.’ …” 

T he majority distinguished the Colorado statute by noting that its savings clause did not apply to omissions of time limits for development rights while the North Carolina statute “forecloses any cause of action that might arise solely due to nonmaterial noncompliance with the Act.” T hey found that the mandatory language “must contain” in N.C.G.S. § 47C-2-105(a), did not prevent the “substantial compliance” clause in N.C.G.S. § 47C-1-104(c) from applying to that portion of the Act under Johnson v. Manning, 63 N.C. App. 673, 306 S.E.2d 137 (1983). “Our holding in Johnson was predicated upon a recognition that even where the General Assembly uses mandatory language such as "shall" or "must," it may still excuse noncompliance with the use of a "substantial compliance" clause. We therefore find that if the General Assembly did not intend for the "substantial compliance" clause in N.C.G.S. § 47C-1-104(c) to apply to the declaration content requirements of N.C.G.S. § 47C-2-105, it would have excluded that section from its reach.”

T he majority’s analysis up to this point does not counter the commercial expectations of those relying on the Act to make ownership of a condominium certain. Blindly following the Colorado court’s rigid analysis would likely lead to a hyper-technical construction of the Condominium Act with substantial likelihood of unintended and undesirable results. In this instance, if the development had actually occurred without objection, the voiding ab initio of the reservation of development rights as under the Colorado approach would invalidate any amendments incorporating the new units into the condominium and end up affecting title and marketability of the subsequently developed units.

Unfortunately the opinion goes on to say: “ T he ultimate question, then, is whether Plaintiff substantially complied with all material portions of the Act. We find that Plaintiff's evidence on substantial compliance set out in Part B above ‘so clearly establishes the fact in issue that no reasonable inferences to the contrary may be drawn.’ …We therefore hold that Plaintiff has substantially complied with all material portions of the Act as a matter of law… T he Act thus prevents Defendants from raising their objection in response to Plaintiff's request for a declaratory judgment regarding its development rights.”

T hey seem to pull back from this a bit when they say: “We recognize that omission of a development time limit may preclude a finding of substantial compliance in cases where the timing of future construction is a material factor in a condominium project.” T hey remand with instructions for the trial court to enter summary judgment in favor of Plaintiff.” T he problem with this summary disposition is that the case is before the Court of Appeals on an appeal of Summary Judgment and the majority is literally saying that the declarant can build on the property whenever it wants to until the end of time! T he facts and the law do not appear to support that kind of a result. T here does not appear to have been a full development of the relevant facts as to whether or not five years was a reasonable period and if so when does it end.

A full evidentiary hearing on substantial compliance and materiality may have developed facts that indicate that the Declarant took actions or failed to act in ways that would change this determination. It does not appear as if those issues were fully developed in the trial court and it appears that the majority may have made inferences from the limited evidentiary requirements of a summary judgment motion. Note that we have not seen the record on appeal and this is merely our own inference from facts as recited in the decision. It is clear from the mandatory requirement that the legislature considered it important enough that it can be fairly argued that if the declarant states no time period, the courts should presume a reasonable one.

Judge T yson, in a well-reasoned dissent argues that the mandatory nature of the statutory provisions should prevail and that as our Act is virtually identical to Colorado’s Act, our courts should find the reasoning and holding of the Colorado court in Silverview to be directly on point and persuasive. T he dissent notes that N.C.G.S. Section 47C‑2‑110(c) dealing with additional declarants rights contained within an instruments documenting a developmental addition provides that “ T his provision does not extend the limit on the exercise of developmental rights imposed by the declaration pursuant to G.S. 47C‑2‑105(a)(8).”

Specifically, the Comment published with the section states; “ T hus the development may continue only within that self-determined constraints originally described by the declarant.” T his seems to militate for the argument that the legislature considered the duration of the developmental rights significant and that they would have a definite end. If this is correct, then it follows that there is a right to know when they terminate. Judge T yson states that “ T he General Assembly's intended purpose in enacting N.C. Gen. Stat. § 47C-2-105(a)(8) was for the declarant to fully disclose to and inform the buyer, upon purchase, of any future development rights the declarant maintains over the property and the timing in which those rights must be exercised. T he buyer can then decide whether to purchase the property based on the present conditions and the disclosed conditions which may exist at a specified time in the future.” We expect that most practitioners working with condominium development projects would agree that this is the common expectation. When you follow that logic and look at those provisions of 47C‑1‑104 that the opinion did not address, you find further support for this position. Subsection (a) provides that “Except as specifically provided in specific sections of this chapter, the provisions of this chapter may not be varied by the declaration or bylaws” and (d) says; “Notwithstanding any other provision of this chapter, a declarant may not … use any other device to evade the limitations or prohibitions of this chapter…”

Judge T yson would adopt an absolute rule holding that the “failure to include this time limitation is a material omission, which renders the development rights void ab initio.” As noted, this rigid interpretation arguably would have the result of invalidating title to any condominium unit in any development that inadvertently omitted a required disclosure if material. T his would be the case even if the omission was not substantial and otherwise not really causing any problems other than being discovered in a title examination.

It would seem that there may be a reasonable middle ground that would support the protections incorporated in the statute without resorting to the hyper-technical solution of the Colorado court thereby avoiding the unintended repercussions discussed above. T he majority's opinion states the plaintiff has substantially complied with the statute and the dissent argues that based upon the “plain and mandatory language of the statute, N.C. Gen. Stat. § 47C-1-104 should not be used to grant the plaintiff future development rights it did not expressly reserve to exercise within a stated time period.” Arguably the threshold issue presented is not “whether the omission of the statutorily required express time limit for future development is nonmaterial”, but rather “what time limit will the court impose when the Declarant fails to state one”. 

T he provisions of N.C.G.S. Section 47C‑3‑103 (d) may provide guidance.  T his section says that “[s]ubject to subsection (e), the declaration may provide for a period of declarant control of the association, ... Regardless of the period provided in the declaration, a period of declarant control terminates no later than the earlier of: (i) 120 days after conveyance of seventy-five percent (75%) of the units (including units which may be created pursuant to special declarant rights) to unit owners other than a declarant; (ii) two years after all declarants have ceased to offer units for sale in the ordinary course of business;  or (iii) two years after any development right to add new units was last exercised. A declarant may voluntarily surrender the right to appoint and remove officers and members of the executive board before termination of that period, but in that event he may require, for the duration of the period of declarant control, that specified actions of the association or executive board, as described in a recorded instrument executed by the declarant, be approved by the declarant before they become effective…”

Accepting the importance of the implicit mandate of the Legislature with regard to these limits, if a declarant does not state a time limit for exercise of developmental rights and fails to exercise them prior to relinquishing control or within two years after ceasing construction, arguably, that time period as set forth in the required relinquishment of control of the association would make a good presumptive limitation of the development rights reserved. If it is important for the developer to retain these rights over a longer term it can be argued that it is required to so state in the declaration. If it is not stated in the declaration and if no additional development is commenced within a reasonable time after construction is complete or within the control period, a unit owner should arguably be permitted to assume that the project is completed when the developer ceases activity. In any event, any such presumptions should always be rebuttable rather than relying on some sort of rigid “Simon says” approach to compliance.  

In the vast majority of condominium developments these issues and the issues of compliance with the Condominium Act are rarely raised outside of a title examination. In such instances, the “no harm, no foul” approach suggested by N.C.G.S. Section 47C-1-104(c) should permit the unit owners to hold and convey their units without questions as to marketability of title that must arise under a more rigid approach. When questions do arise in a timely manner, and if there are facts and circumstances peculiar to the project that militate for a resolution, they should be addressed only after the facts are fully developed after a full and fair hearing in a trial.  

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Last Updated: Tuesday, February 05, 2008