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Issue  287
Published:  12/1/2022

C Invs. 2, LLC v. Auger (2022-NCSC-119) 12/16/2022
Real Property Marketable Title Act Exception for Residential Covenants

Chris Burti, Vice President and Senior Legal Counsel

In a May 2021 opinion (277 N.C. App. 420) from a divided panel, the North Carolina Court of Appeals determined that if no deed within a residentially restricted subdivision lot owner's thirty-year chain of title recites the subdivision's covenants, all such restrictions except that of residential use are eliminated. This decision was received by the practicing real property Bar with mixed opinions, often shocked outrage. To this writer it appears that the analysis and the outcome are in error. The North Carolina Supreme Court reviewed the matter and held in this opinion that "the Court of Appeals correctly determined that the Act's thirteenth exception did not apply to save all of the nine restrictive covenants."

The majority states:

In this case we are called upon to determine the proper interpretation of North Carolina's Real Property Marketable Title Act, N.C.G.S. § 47B-1 to 47B-9 (2021) and its thirteenth enumerated exception. See N.C.G.S. § 47B-3(13). Defendants appeal from a divided Court of Appeals decision, which affirmed the trial court's grant of summary judgment to plaintiff and held that eight of the nine restrictive covenants governing plaintiff's lots within the parties' residential subdivision were extinguished by operation of the Act. Our review in this matter concerns whether the Court of Appeals correctly determined that the Act's thirteenth exception did not apply to save all of the nine restrictive covenants. By applying this Court's well-established principles of statutory construction and affording the Legislature's words their plain and unambiguous meaning, we conclude that the eight covenants at issue do not fall within the scope of the Act's exceptions and are therefore extinguished by operation of law. Accordingly, we affirm the opinion of the Court of Appeals.

The case involves a residential subdivision located in Mecklenburg County, North Carolina, which was developed in the 1950s. The developers recorded nine restrictive covenants intended to govern the subsequent development of the subdivision. The covenants are typical for the era and require that:

1. All lots in the tract shall be known and described and used for residential lots only.
2. No structure shall be erected, altered, placed or permitted to remain on any residential building plot other than one detached single-family dwelling not to exceed two and one-half stories in height and a private garage, and other outbuildings incidental to residential use of the plot.
3. No building shall be erected on any residential building plot nearer than 100 feet to the front lot line nor nearer than 20 feet to any side line.
4. No noxious or offensive trade or activity shall be carried on upon any lot nor shall anything be done thereon which may be or become an annoyance or nuisance to the neighborhood.
5. No trailer, basement, tent, shack, garage, barn or other outbuilding erected in the tract shall at any time be used as a residence temporarily or permanently, nor shall any structure of a temporary character be used as a residence.
6. No dwelling costing less than $10,000.00 shall be permitted on any lot in the tract. The ground floor area of the main structure, exclusive of one story open porches and open car ports, shall be not less than 1200 square feet in case of a one story structure. In the case of a one and one half, two or two and one-half story structure, the ground floor area of the main structure, exclusive of one-story open porches or open car ports, shall not be less than nine hundred square feet. (It being the intention to require in each instance the erection of such a dwelling as would have cost not less than the minimum cost provided if same had been erected in January, 1952.)
7. A right of way is and shall be reserved along the rear of each lot and along the side line of each lot where necessary, for pole lines, pipes and conduits for use in connection with the supplying public utilities service [sic] to the several lots in said development.
8. In the event of the unintentional violation of any of the building line restrictions herein set forth, the parties hereto reserve the right, by and with the mutual written consent of the owner or owners, for the time being of such lot, to change the building line restrictions set forth in this instrument; provided, however, that such change shall not exceed ten percent of the original requirements of such building line restrictions.
9. None of the lots shown on said plat shall be subdivided to contain less than two acres and only one residence shall be erected on each of said lots.

The plaintiff owns seven lots in the subdivision that each have a title chain more than thirty years old that either fails to mention, or does not specifically raise by reference to book and page of record, these covenants. Plaintiff's complaint sought declaratory relief regarding the validity and enforceability of these covenants. Plaintiff argued that the covenants as applied to its lots are invalid under the North Carolina Real Property Marketable Title Act. The trial court entered an order granting plaintiff's motions for summary judgment, finding that the Act operated to extinguish all but the first of the restrictive covenants as applied to the plaintiff's property. The trial court found that none of the Act's thirteen exceptions applied to preserve these covenants, except for the first covenant, which restricted the subject property to use for residential lots only.

The defendants appealed to the Court of Appeals, arguing that the trial court erroneously concluded that N.C.G.S. Section 47B-3(13), which prevents application of the Act to "[c]ovenants applicable to a general or uniform scheme of development which restrict the property to residential use only," did not save the other eight covenants from termination under the Act. The Court of Appeals affirmed the trial court's grant of summary judgment, the Court of Appeals majority holding that eight of the nine covenants regulating the type, location, and appearance of structures that can be erected on lots in the subdivision did not fit within the plain language of the Act. This opinion is discussed in our May 2021 issue No. 272 of the Statewide Title Newsletter and Legal Memorandum.

The Supreme Court opinion was from a divided court and the majority opinion's analysis begins with:

After careful consideration of the Act's plain words and legislative history, as well as our own precedent interpreting substantially identical language, we conclude that only the first of the nine covenants at issue survives operation of the Act. We therefore affirm the decision of the Court of Appeals.

The opinion states:

This case presents a question of statutory interpretation of first impression before this Court, which warrants a review of our pertinent tenets of construction. "According to well-established North Carolina law, the intent of the Legislature controls the interpretation of a statute." State v. Fletcher, 370 N.C. 313, 327-28 (2017) (extraneity omitted). "[W]here the language of a statute is clear and unambiguous, there is no room for judicial construction and the courts must give [the statute] its plain and definite meaning, and are without power to interpolate, or superimpose, provisions and limitations not contained therein." (Citations omitted)

The problem with this conclusion is that the panel of the North Carolina Court of Appeals did not agree that the meaning was plain and unambiguous, nor did the dissenters on the Supreme Court. That highly qualified jurists don't agree seems to militate strongly that the statute is in fact ambiguous. Further, the fact the bulk of the opinion is devoted to parsing grammar in order interpret the 'plain' meaning without ever discussing the fact the distinctions the statute makes apply to differentiate its application between commercial schemes of development and residential ones rather than segregation of a single covenant that has little purpose without the accompanying development scheme.

As the dissenting opinion aptly states:

When carefully reviewing subsection 13's language within the context of the exception's purpose, it becomes apparent that the General Assembly intended to except all the covenants that are part of a general or uniform "residential only" scheme of development. The first sentence explains that in order for covenants to be excepted, they must meet three elements: (1) the covenants must be "applicable to a general or uniform scheme of development"; (2) the covenants must operate to "restrict the property to residential use only"; and (3) the covenants must be "otherwise enforceable." Id.

Unfortunately after stripping older subdivisions of the efficacy of their development schemes, the Supreme Court majority glibly offers its view of the ability of lot owners to preserve their property rights:

Our construction of N.C.G.S. § 47B-3(13) is in tandem with the statute's other provisions. Rather than stripping older neighborhoods of their character without recourse, the exception's limited applicability directs affected property owners to preserve their covenants through the procedures expressly afforded later in the Act. Residents of neighborhoods governed by sets of restrictive covenants who wish to preserve them may follow the procedure established by N.C.G.S. § 47B-4 in order to record a notice to be indexed in the relevant chains of title throughout their community and to keep potential buyers on notice of the restrictions for another thirty years to come:

The problems with this bit of wisdom are that the opinion strips all affected lots of the applicable covenants. There is no way to save the ones that are stripped by this decision and it is the opinion of this writer that the majority of practicing real property bar has interpreted the statute as the Dissent did leaving lot owners unadvised and unaware of the need to protect their rights. The Supreme Court is requiring all lot owners to file a notice before the end of every 30 years in order to protect their property rights. Note that this will apply to subdivisions developed as recently as the 1990's.

We do not use the term "property rights" lightly. The opinion totally ignores the fact the our North Carolina Supreme Court has long and consistently held that such covenants are incorporeal hereditaments and, as such, are vested appurtenant property rights held by all of the owners of lots in the subdivision so restricted.

The dissent aptly points out in a footnote:

2 This contextual reading is also more appropriate because it avoids a potential constitutional question regarding the extinguishment of property rights without notice or hearing. See In re Arthur, 291 N.C. 640, 642, 231 S.E.2d 614, 616 (1977) ("Where one of two reasonable constructions will raise a serious constitutional question, the construction which avoids this question should be adopted."); see also U.S. Const. amend. V.

As interpreted by this Court, it may be argued that the statute is unconstitutional under its holding in McDonald's Corp. v. Dwyer 338 N.C. 445 (1994). The statute provides no notice to the adjoining owners because the deeds failing to include the references such as the one at issue are not in the chain of title of the other lot owners holding the enforcement rights and there is no constructive notice under the recording acts. Even more significant, these covenants at common law in North Carolina are considered to be in the nature of appurtenant negative easements that run with the land and are transferred with the lot owner's deed whether referenced or not. Clearly the legislature is not empowered without Constitutional protections to terminate ordinary easements simply because they are not referenced in a deed and the Act also explicitly exempts such easements from its application.

The opinion does not address the point that such uniform schemes of development contain more covenants than residential use and structure limitations. If this decision stands, subdivision communities formed as recently as 1990 are at risk of having their ability to collect assessments to fund street and common element repairs stripped without notice. Farm animals and noxious activities will no longer be proscribed unless by governmental ordinance. More problematic is that the decision will only apply to individual lots whose chain of title failed to take exception explicitly within the statutory period. The opinion does not negate the application of the covenants in their entirety. Arguably, the plaintiff in this case will still be able to enforce the covenants against lot owners whose deeds contain explicit references while remaining free to park pink trailers on its lots.

The opinion assures us that a property owner can avail themselves of the right to preserve the restrictions under N.C.G.S. Section 47B-4. Unfortunately, if this decision stands, all rights already extinguished under it will have been cut off without prior notice and with most unaware. There is no way under the statute to revive them, including ones stripped by deeds made as recently as 1991 failing to recite the restriction. In order to be aware of the right, a lot owner will have to have been advised of the issue, which seems highly unlikely to have occurred very often previously, and the homeowner would have to commence a timely title search of every lot in the subdivision to determine whether the Act applies and to whom to give notice, which would be prohibitively expensive. There seems little doubt that before this opinion, few attorneys would have thought to counsel their clients on the issue.

To complicate matters, if the decisions stands and should the legislature deem it necessary to clarify its intent by revising the statute, all stripped provisions will not be able to be revived by the new legislation. Needless to say it is reasonable to expect that if this decision stands it will likely generate much more litigation than existed before, contrary to what the opinion supposes.

The very likely result of this decision is the real probability of residential subdivision restrictive covenants enforceable in a checkerboard fashion resulting from inconsistent deed drafting. It doesn't appear that the justices in the majority considered that this case could have personal application. We suppose that if pink mobile homes were to begin popping up next door, the Dissent's interpretation might be considered more insightful. In any event, it seems highly likely that title insurers will continue to take exception to the covenants in their title policies, leaving the owners no option but seek declaratory judgments if they wish or need to eliminate the exception.



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