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Issue  118  Article  202
Published:  5/1/2005

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Legislative Update II, May 2005
Chris Burti, Vice President and Legal Counsel

We noted last month that it appears as if this session of the North Carolina Legislature is likely to produce some significant changes affecting real property practitioners. We did not have space to address all the proposed bills. Here is a further summary of legislation that is currently on the table.

Attorneys’ Fees to HOA’s

Senate Bill 666 proposes to allow attorneys' fees to be awarded to the prevailing party in an action to enforce provisions of The Articles of Incorporation, Declaration, Bylaws, or Rules of a Planned Community created prior to January 1, 1999, if recovery of attorneys' fees is allowed in the declaration. Since covenants are interpreted under contract principles and attorney fees provisions are enforceable in contract we are not sure that this legislation really adds anything to the existing body of law other than eliminating any doubts. Clearly, it does not create any authority for pre-Act developments under the holding in Wise v. Harrington Grove HOA.

SECTION 1. G.S. 47F-1-102(c) would read as follows:

"(c) Notwithstanding the provisions of subsection (a) of this section, G.S. 47F-3-102(1) through (6) and (11) through (17) (Powers of owners' association), G.S. 47F-3-107(a), (b), and (c) (Upkeep of planned community; responsibility and assessments for damages), G.S. 47F-3-115 (Assessments for common expenses), and G.S. 47F-3-116 (Lien for assessments), apply to all planned communities created in this State before January 1, 1999, unless the articles of incorporation or the declaration expressly provides to the contrary. contrary, and G.S. 47F-3-120 (Declaration limits on attorneys' fees) applies to all planned communities created in this State before January 1, 1999. These sections apply only with respect to events and circumstances occurring on or after January 1, 1999, and do not invalidate existing provisions of the declaration, bylaws, or plats and plans of those planned communities. G.S. 47F-1-103 (Definitions) also applies to all planned communities created in this State before January 1, 1999, to the extent necessary in construing any of the preceding sections."

SECTION 2. This act is effective when it becomes law and applies to actions commenced on or after that date.

Subordination and Recording Priority Revisited

Senate Bill 667 is intended to validate certain subordination agreements and to clarify the law on the priority of instruments registered in the office of the register of deeds. This revisits the 2003 legislation to make some technical corrections and to extend its substantive effect to instruments recorded prior to October 1, 2003. It should be noted that many observers commenting on the effect of this bill limit their discussions to the provisions that make it clear that the Trustee of a deed of trust is not required to execute an enforceable subordination agreement. Of equal importance is that the legislation unequivocally overturns a long line of appellate cases that limited enforcement of these instruments.

The courts have generally disfavored subordination agreements. This prejudice is somewhat understandable in instances where Mom and Pop purchase money deeds of trust were unconscionably subordinated to high-flying finance instruments that effectively avoided the original debt without providing any benefit to the beneficiaries of the subordinated instrument. It is a well-known maxim that bad facts make bad law. This distrust of subordination has led to decisions in cases where the parities were experienced commercial lenders with equitable bargaining positions and knowledgeable representation.

Essentially, this legislation provides that if you sign subordination, you live with it and the courts cannot refuse to enforce it based on failure to include financial disclosures. As a result, blanket subordinations may now be enforceable. Since such provisions are commonplace in subdivision covenants, the courts would have a difficult time disavowing the clear legislative intent of this section.

SECTION 1. G.S. 39-6.6 reads as rewritten:

"§ 39-6.6. Subordination agreements.

(a) A written commitment or agreement to subordinate or that subordinates an interest in real property signed by a person entitled to priority subordination agreement shall be given effect in accordance with its terms and is not required to state any interest rate, principal amount secured, or other financial terms. For purposes of this section, an "interest in real property" shall include all rights, title, and interest in and to land, buildings, and other improvements of an owner, tenant, subtenant, secured lender, materialman, judgment creditor, lienholder, or other person, whether the interest in real property is evidenced by a deed, easement, lease, sublease, deed of trust, mortgage, assignment of leases and rents, judgment, claim of lien, or any other record, instrument, document, or entry of court.

(b) The trustee of a deed of trust shall not be a necessary party to a subordination agreement unless the deed of trust provides otherwise.

(c) For purposes of G.S. 1-47, a commitment or subordination agreement described in subsection (a) of this section is deemed a conveyance of an interest in real property.

(d) The This section is not exclusive. No subordination agreement that is otherwise valid shall be invalidated by failure to comply with the provisions of this section.

(e) This section applies to a subordination agreement regardless of when the agreement was signed by the party or parties thereto, except that this section does not apply to an agreement that (i) is the subject of litigation pending on the effective date of this subsection, and (ii) was filed or recorded before October 1, 2003.

(f) In this section:

(1) 'Interest in real property' includes all rights, title, and interest in and to land, buildings, and other improvements of an owner, tenant, subtenant, secured lender, materialman, judgment creditor, lienholder, or other person, whether the interest in real property is evidenced by a deed, easement, lease, sublease, deed of trust, mortgage, assignment of leases and rents, judgment, claim of lien, or any other record, instrument, document, or entry of court.

(2) 'Subordination agreement' means a written commitment or agreement to subordinate or that subordinates an interest in real property signed by a person entitled to priority."

SECTION 2. G.S. 47-18(a) reads as rewritten:

"(a) No (i) conveyance of land, or (ii) contract to convey, or (iii) option to convey, or (iv) lease of land for more than three years shall be valid to pass any property interest as against lien creditors or purchasers for a valuable consideration from the donor, bargainer or lesser but from the time of registration thereof in the county where the land lies, or if the land is located in more than one county, then in each county where any portion of the land lies to be effective as to the land in that county. Unless otherwise stated either on the recorded registered instrument or on a separate recorded registered instrument duly executed by the party whose priority interest is adversely affected, (i) instruments registered in the public record shall be presumed to office of the register of deeds shall have priority based on the order of recordation registration as determined by the time of recordation. If registration, and (ii) if instruments are recorded registered simultaneously, then the order of recordation the instruments shall be presumed as follows, in order of priority: to have priority as determined by:

(1) The earliest document number set forth on the recorded registered instrument.

(2) The sequential book and page number set forth on the document registered instrument if no document number is set forth on the recorded registered instrument.

The presumptions presumption created by this subsection are is rebuttable."

SECTION 3. G.S. 47-20(a) reads as rewritten:

"(a) No deed of trust or mortgage of real or personal property, or of a leasehold interest or other chattel real, or conditional sales contract of personal property in which the title is retained by the vendor, shall be valid to pass any property as against lien creditors or purchasers for a valuable consideration from the grantor, mortgagor or conditional sales vendee, but from the time of registration thereof as provided in this Article; provided however that any transaction subject to the provisions of the Uniform Commercial Code (Chapter 25 of the General Statutes) is controlled by the provisions of that act and not by this section. Unless otherwise stated either on the recorded registered instrument or on a separate recorded registered instrument duly executed by the party whose priority interest is adversely affected, (i) instruments registered in the public record shall be presumed to office of the register of deeds shall have priority based on the order of recordation registration as determined by the time of recordation. If registration, and (ii) if instruments are recorded registered simultaneously, then the order of recordation the instruments shall be presumed as follows, in order of priority: to have priority as determined by:

(1) The earliest document number set forth on the recorded registered instrument.

(2) The sequential book and page number set forth on the document registered instrument if no document number is set forth on the recorded registered instrument.

The presumptions presumption created by this subsection are is rebuttable."

SECTION 4. This act is effective when it becomes law.

Uniform Real Property Electronic Recording Act

Senate Bill 671 contains the proposed version of the Uniform Act as recommended by the General Statutes Commission. Chapter 47 of the General Statutes would be amended by adding a new Article 1A. We have discussed this legislation at length in previous articles, therefore we will reserve comment until further progress is made in the Legislature.

Rather than legislate the operative provisions in a recording act this Act creates a Electronic Recording Council with the responsibility to promulgate standards for adoption by the Secretary of State. This permits the standards to be adjusted as technology changes with having to wait for the Legislature to take action. It should be noted that this administrative structure is the one advocated by the Secretary of State. Many knowledgeable observers that have been involved in providing input to the study commission that worked on this legislation have strong opinions that the Council should be more than a mere advisory body. Unless the Secretary of State is willing to employ personnel with substantial transactional expertise there will be serious concerns about that office’s ability to craft standards that work effectively in commerce. The make up of the Council assures the likelihood of good input, but nothing in this Act requires the Secretary of State to pay it any heed.

We have not included the full text due to space limitations, but the substantive provisions follow.

"§ 47-16.2. Definitions.

In this Article:

(1) "Document" means information that is:

a. Inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form; and

b. Eligible to be recorded in the land records maintained by the register of deeds.

(2) "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(3) "Electronic document" means a document that is received by the register of deeds in an electronic form.

(4) "Electronic signature" means an electronic sound, symbol, or process attached to or logically associated with a document and executed or adopted by a person with the intent to sign the document.

(5) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government, or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.

"§ 47-16.3. Validity of electronic documents.

(a) If a law requires, as a condition for recording, that a document be an original, be on paper or another tangible medium, or be in writing, the requirement is satisfied by an electronic document satisfying this Article.

(b) If a law requires, as a condition for recording, that a document be signed, the requirement is satisfied by an electronic signature.

(c) A requirement that a document or a signature associated with a document be notarized, acknowledged, verified, witnessed, or made under oath is satisfied if the electronic signature of the person authorized to notarize, acknowledge, verify, witness, or administer the oath, and all other information required to be included, is attached to or logically associated with the document or signature. A physical or electronic image of a stamp, impression, or seal need not accompany an electronic signature.

"§ 47-16.4. Recording of documents.

(a) In this section, "paper document" means a document that is received by the register of deeds in a form that is not electronic.

(b) A register of deeds:

(1) Who implements any of the functions listed in this section shall do so in compliance with standards adopted by the Secretary of State.

(2) May receive, index, store, archive, and transmit electronic documents.

(3) May provide for access to, and for search and retrieval of, documents and information by electronic means.

(4) Who accepts electronic documents for recording shall continue to accept paper documents as authorized by law and shall place entries for both types of documents in the same index.

(5) May convert paper documents accepted for recording into electronic form.

(6) May convert into electronic form information recorded before the register of deeds began to record electronic documents.

(7) May accept electronically any fee or tax that the register of deeds is authorized to collect.

(8) May agree with other officials of this State or a political subdivision thereof on procedures or processes to facilitate the electronic satisfaction of conditions to recording and the electronic payment of fees and taxes.

"§ 47-16.5. Administration and standards.

(a) Standard-Setting Agency. – The Secretary of State shall adopt standards to implement this Article upon recommendation of the Electronic Recording Council. The Secretary of State may direct the Council to revise any portion of the recommended standards the Secretary deems inadequate or inappropriate. Technological standards and specifications adopted by the Secretary of State to implement this Article are engineering standards for the purposes of G.S. 150B-2(8a)h.

(b) Electronic Recording Council Created. – The Electronic Recording Council is created in the Department of the Secretary of State to advise and assist the Secretary of State in the adoption of standards to implement this Article. The Council shall review the functions listed in G.S. 47-16.4 and shall formulate and recommend to the Secretary standards for recording electronic documents and implementing the other functions listed in G.S. 47-16.4. The Council shall report its findings and recommendations to the Secretary of State at least once each calendar year. The Council shall advise the Secretary of State on a continuing basis of the need to adopt, amend, revise, or repeal standards. The Council may advise the Secretary of State on any other matter the Secretary refers to the Council.

(c) Council Membership, Terms, and Vacancies. – The Council shall consist of 13 members as follows: (edited for space)

(d) Council Meetings and Officers. – The Secretary of State shall call the first meeting of the Council. At the first meeting and biennially thereafter, the Council shall elect from its membership a chair and a vice-chair to serve two-year terms. Meetings may be called by the chair, the vice-chair, or the Secretary of State. Meetings shall be held as often as necessary, but at least once a year.

(e) Council Compensation. – None of the members of the Council shall receive compensation for serving on the Council, but Council members shall receive per diem, subsistence, and travel expenses in accordance with G.S. 138-5 and G.S. 138-6, as applicable.

(f) Staff and Other Assistance. – As soon as practicable and as needed thereafter, the Council shall identify the information technology expertise it needs and report its needs to the Secretary of State. The Council shall also report any other expertise needed to fulfill its responsibilities. The Secretary of State shall provide professional and clerical staff and other services and supplies, including meeting space, as needed for the Council to carry out its duties in an effective manner. The Secretary of State may appoint additional committees to advise and assist the Council in its work.

The Council shall consult with the North Carolina Local Government Information Systems Association, and may consult with any other person the Council deems appropriate, to advise and assist the Council in its work.

(g) Uniformity of Standards. – To keep the standards and practices of registers of deeds in this State in harmony with the standards and practices of recording offices in other jurisdictions that enact substantially this Article and to keep the technology used by registers of deeds in this State compatible with technology used by recording offices in other jurisdictions that enact substantially this Article, the Secretary of State and the Council shall consider all of the following in carrying out their responsibilities under this Article, so far as is consistent with its purposes, policies, and provisions:

(1) Standards and practices of other jurisdictions.

(2) The most recent standards promulgated by national standard-setting bodies, such as the Property Records Industry Association.

(3) The views of interested persons and other governmental officials and entities.

(4) The needs of counties of varying size, population, and resources.

"§ 47-16.6. Uniformity of application and construction.

In applying and construing this Article, consideration must be given to promoting uniformity of interpretation of the Uniform Real Property Electronic Recording Act among states that enact it.

"§ 47-16.7. Relation to Electronic Signatures in Global and National Commerce Act.

This Article modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 7001, et seq.) but does not modify, limit, or supersede section 101(c) of that act (15 U.S.C. § 7001(c)) or authorize electronic delivery of any of the notices described in Section 103(b) of that act (15 U.S.C. § 7003(b))."

SECTION 3. This act is effective when it becomes law.


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