Found At: www.statewidetitle.com
Muirfield Condominium Association ("Muirfield") is a condominium association, the defendant and third party plaintiff. The individual plaintiff owns a unit in one of the condominium buildings that was destroyed by fire in 2018. Complete exterior and interior repairs to the building were estimated at $1,360,000 to $1,460,000. The condo association's insurer only paid $933,421 in insurance proceeds toward the repairs and the association's board held a special meeting voting not to obtain a loan to cover the remaining deficiency, which included the completion of the units' interior upfit. The plaintiff filed suit against Muirfield and its directors for declaratory relief, for violations of the Condo Declaration (the "Declaration"), for violations of the Condo Act, for breach of fiduciary duties, and for negligence; contending that Muirfield failed to maintain the requisite insurance coverage on the buildings.
The plaintiff's motion for partial summary judgment sought declaratory relief "that the Association must promptly repair and restore the damage to Plaintiff's condominium unit and the building in which Plaintiff's unit is situated," as well as a mandatory injunction requiring Muirfield to repair her unit. Muirfield contended that the Declaration required it to insure only the building's exterior and that it had therefore complied with both the statute and its governing Declaration. The trial court granted her motion for partial summary judgment for declaratory relief but denied injunctive relief. The trial court ordered:
[t]hat the Association's failure to purchase insurance sufficient to cover at least 80% of the replacement value of Building 5 constituted a violation of the COA's declarations, covenants, and restrictions and Chapter 47A of the N.C. General Statutes[,]
. . . .
[and] [t]hat the Association must comply with Chapter 47A of the N.C. General Statutes, including but not limited to N.C. Gen. Stat. § 47A-25, which provides that "damage to or destruction of the building shall be promptly repaired and restored by the manager or board of directors . . . using the proceeds of insurance on the building for that purpose, and unit owners shall be liable for assessment for any deficiency," . . . .
Muirfield's position on appeal, was that the Declaration's provisions are ambiguous regarding its insurance coverage obligations which created an issue of fact that could not be resolved by summary judgment. The Court of Appeals disagreed with this contention and affirmed the partial summary judgment order of the trial court.
In establishing the basis for its analysis, the opinion cites Erthal v. May, 223 N.C. App. 373, (2012) as it points out that interpreting a restrictive covenant is a question of law reviewed de novo and Friends of Crooked Creek, L.L.C. v. C.C. Partners, Inc., 254 N.C. App. 384, (2017) for the rule that "In construing restrictive covenants, the fundamental rule is that the intention of the parties governs, and that their intention must be gathered from study and consideration of all the covenants contained in the instrument or instruments creating the restrictions."
Muirfield contended that the Declaration provisions are ambiguous arguing that that the word "building" only refers to the outside structure and not the interior units. The Court disagreed and state that "when considered in the context of the language in the entire Declaration, we conclude the word "building" is not ambiguous." The court points out that the Condo Act requires an association to procure whatever insurance may be required "by the declaration, bylaws or by a majority of the unit owners. . . "
The opinion sets out the requirements of the Declaration:
Section 20 of the Declaration provides:
(A) The following insurance coverage shall be maintained in full force and effect by the Association covering the operation and management of the Condominium Units and Common Property:(1) Casualty insurance covering the building and all improvements upon the land and all personal property subject to this Declaration and any additions added by amendment, except such personal property as may be owned by the Condominium Unit Owners, shall be procured in an amount equal to the maximum insurable replacement value thereof (exclusive of excavation, foundations, streets and parking facilities) as determined annually by the insurance company affording such coverage; and provided that such policies may be written on a co-insurance basis of not less than eighty percent (80%). . . . Such coverage shall afford protection against:(a) loss or damage by fire or other hazards covered by the standard extended coverage endorsement . . . .
Section 21 of the Declaration states who has responsibility for repairs in the event of a casualty, including a total destruction of the building:
(A) If any part of the Common Areas and Facilities shall be damaged by casualty, the determination of whether or not to reconstruct or repair it shall be made as follows:. . . .
(2) Total destruction shall be destruction of more than two-thirds (2/3) of the building. In the event of total destruction, the Common Areas and Facilities shall not be reconstructed or repaired if . . . Condominium Unit Owners who own three fourths (3/4) or more of the building vote against reconstruction or repair.
(3) Any such reconstruction or repair shall be substantially in accordance with the plans and specifications contained herein.(B) If the damage is only to those parts of one or more Condominium Units for which the responsibility for maintenance and repair is that of the Unit Owner, then the Condominium Unit Owner shall be responsible for reconstruction and repair after casualty. In all other instances, the responsibility of reconstruction and repair after casualty shall be that of the Association as follows:(1) Immediately after the casualty causing damage to property for which the Association has the responsibility for maintenance and repair, the Association shall obtain reliable and detailed estimates of the cost to place the damaged property in condition as good as that before the casualty. Such costs may include professional fees and premiums for such bonds as the Boards of Directors deem appropriate. (2) When the damage is to both the Common Areas and Facilities and Condominium Units, the insurance proceeds shall be applied first to the costs of repairing the Common Areas and Facilities and the balance to the Condominium Units.
Section 4 of the Declaration provides the following description of the term "units":
Each unit shall include all the space within the boundaries thereof. . . . It is the intent that each unit will include all interior drywall, panelling [sic] and molding and any surface finish, or wallpaper, and all finished flooring, such as exposed wooden flooring, vinyl or linoleum floor covering, matting and carpeting, but will not include studs, supports and wall insulation, concrete slabs, floor or ceiling joists. Each unit shall be deemed to include the interior and exterior of any and all doors, windows, sliding glass doors and other closures. . . . Included also as part of a unit are the following: (a) the heating and air conditioning systems serving the unit . . . (b) all electrical switches, electrical outlets and light fixtures . . . (c) the electrical wiring and service system . . . (d) the plumbing for water service . . . and (e) the drainage or sewer plumbing . . . .Section 20(A) of the Declaration provides that the insurance will cover both "the Condominium Units and Common Property." (Emphasis added). Moreover, the casualty insurance required by Section 20(A)(1) is to cover the "building" and only excepts "such personal property as may be owned by the Condominium Unit Owners[.]" The word "building" is in a subsection that mandates insurance coverage for "Condominium Units," disclosing that the building includes such units, which aligns with the definition of "building" as "containing" units.
Muirfield didn't contest that it failed to procure coverage for 80 percent of the estimated cost of replacing both the interior and exterior of the building and the Court rejected its argument that the coverage requirement applied only to the exterior building structures and not the units, finding the definitional language of the Declaration unambiguously requiring the Association to maintain insurance on the building and the units. Muirfield also contended that Section 21 of the Declaration defined who is responsible for repair in the case of a casualty and interpreted it to mean that it is not responsible for repairing the interior of buildings because unit owners must repair and replace damage to their units. The opinion points out that this section of the Declaration provides:
(2) When the damage is to both Common Areas and Facilities and Condominium Units, the insurance proceeds shall be applied first to the costs of repairing the Common Areas and Facilities and the balance to the Condominium Units. (Emphasis added).
The opinion interprets this language of the Declaration to require the unit owners to repair only in the event of unit only damage. In the event of "total destruction," however, the coverage responsibility shifts to Muirfield and implicitly the repair liability. The Court concludes:
Accordingly, we hold that by the express terms of the Declaration, Muirfield was required to procure insurance sufficient to cover 80 percent of the "building," including the interior upfits of the individual units. And, because the Declaration required said insurance, the plain language of Sections 47A-24 and -25 compelled the Association to insure and apply insurance proceeds to the building structure and the units. Therefore, the trial court did not err in granting Ms. Hayes's motion for partial summary judgment as to these issues.
The question of whether this opinion has broader implications than deciding the rights of the respective parties in this case lies in whether the language used in the declaration that created the Association's obligation to insure and thus repair, lies in whether similar language has been widely employed in condominium declarations in North Carolina. As these covenants as incorporeal hereditaments are property rights, one may question whether the Legislature is empowered to permit amendments to take them away with less than 100 percent unit owner approval due to Fourteenth Amendment Constitutional restraints.