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Issue  202  Article  336
Published:  12/1/2012

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Commercial use not Prohibited by Restrictive Covenants
Chris Burti, Vice President and Senior Legal Counsel

The North Carolina Court of Appeals in Erthal v. May, COA12-603, filed on November 20, 2012 has held that a residential use restriction in an equestrian community permitting stabling and pasturing of horses does not proscribe doing so by the landowner for third parties for payment.

The parties to this case are landowners in Stirrup Downs development which was determined by the Court to be an "equestrian community". The plaintiffs sought an injunction to halt the defendants' commercial use of their land as a horse boarding operation known as "Serenity Acres". The trial court granted the injunction, the defendants appealed, the Court of Appeals reversed the issuance of the injunction and remanded the case directing entry of summary judgment in favor of defendants on that issue and dismissing the plaintiffs' claims the court affirmed the dismissal of the defendants' counterclaims. The developer of Stirrup Downs, which consisted of approximately 110 acres subdivided into six lots, filed "Declarations of Restrictions". The restrictions for Stirrup Downs include the following provisions deemed pertinent by the Court of Appeals:

1. Each lot shall be used for residential purposes only.

. . .

2. There shall be constructed on each lot only one (1) primary single family dwelling, together with accessory buildings and one (1) guest house.

. . . .

9. No illegal, noxious, or offensive activity shall be permitted, on any part of said land, nor shall anything be permitted nor done thereon which is or may become a nuisance or a source of embarrassment, discomfort or annoyance to the neighborhood. No trash, garbage, rubbish, debris, waste material, or other refuse shall be deposited or allowed to accumulate or remain on any part of said land.

. . . .

13. The Developer expressly intends to permit the pasturing of horses upon the various lots. However, such pasturing of horses shall be limited to reasonable use of the land. Because horses are permitted, the phrase "customary outbuildings" is expressed [sic] defined to include storage facilities, barns and stables.

The restrictions did not include a specific prohibition of commercial or business use of the lots. The Court in a footnote significantly observes that "It appears to be undisputed that Stirrup Downs is an equestrian community; in fact, this Court has previously noted that the fact that "horses are specifically allowed by the Restrictive Covenants, and the presence of horses would make the community 'equestrian.'" Steiner v. Windrow Estates Home Owners Ass'n, Inc. ___ N.C. App. ___, ___, 713 S.E.2d 518, 526 (2011).

Shortly after moving into their residence in 1993, defendants begin to board horses for other parties and expanded their operations over a period of time. They constructed a barn, added multiple stables, expanded their pastures, built a hay storage area and built a riding arena. The plaintiffs alleged that the defendants provide "various and multiple commercial services, including but not limited to sales, events, instruction, riding lessons, horse boarding facilities, and horse training" at Serenity Acres. The defendants contended in their appeal that the trial court erred in denying their motion for partial summary judgment based on their affirmative defenses and that the trial court erred in granting summary judgment as to defendants' counterclaims and plaintiffs' claim for injunctive relief.

Both the trial court's order and the Court of Appeals' decision in this matter are a bit confusing at this point. The Court of Appeals states that the defendants raised "several affirmative defenses" in their responses. While the opinion does not state what the specific affirmative defenses may have been, the concurring opinion suggests that at least the defense of laches was raised and one might suppose that the statute of limitations likely would have been pleaded as well. If so, the facts as reported suggest that the use of the property was likely established in 1993 and clearly known to the parties at or before early 2004. Karner v. Roy White Flowers, Inc. 134 N.C. App. 645, 649, 518 S.E.2d 563, 567 (1999), makes it clear that even if the use were not permitted, the defense of the statute of limitations would have been dispositive.

The Court states "We also note that[] . . . while the intentions of the parties to restrictive covenants ordinarily control the construction of the covenants, such covenants are not favored by the law, and they will be strictly construed to the end that all ambiguities will be resolved in favor of the unrestrained use of land. The rule of strict construction is grounded in sound considerations of public policy: It is in the best interests of society that the free and unrestricted use and enjoyment of land be encouraged to its fullest extent. The law looks with disfavor upon covenants restricting the free use of property. As a consequence, the law declares that nothing can be read into a restrictive covenant enlarging its meaning beyond what its language plainly and unmistakably imports. Covenants restricting the use of property are to be strictly construed against limitation on use, and will not be enforced unless clear and unambiguous. This is in accord with general principles of contract law, that the terms of a contract must be sufficiently definite that a court can enforce them. Accordingly, courts will not enforce restrictive covenants that are so vague that they do not provide guidance to the court. Wein II, LLC v. Porter, 198 N.C. App. 472, 479-80, 683 S.E.2d 707, 712-13 (2009) (quotation marks, citations, and brackets omitted).

Whenever an appellate court recites a 'strict construction' litany such as this in an opinion, one may expect that those seeking to enforce restrictive covenants will find tough sledding and such is the case here. The opinion discusses the majority's view of the conflict between the provisions restricting the property to residential use and those permitting pasturing and stables.

The defendants here raised the issue that that the term 'commercial' does not appear in the original or amended restrictions and argued that if the relevant parties to those instruments had intended to prohibit any 'commercial' aspects to the pasturing of horses, the prohibition could have been clearly stated. Instead, the parties are seemingly left with contradictory and ambiguous restrictions. The opinion points out that "'This Court may not restrict the use of the property when the restrictive covenant has failed to do so in a clear manner.' Winding Ridge Homeowners Ass'n, Inc. v. Joffe, 184 N.C. App. 629, 641, 646 S.E.2d 801, 809 (2007)."

The trial court accepted the plaintiffs argument for a minimalistic reading of the term 'pasturing' to mean 'grazing' only, that the term as limited did not conflict with the residential use limitation and that commercial activities were proscribed by the residential use limitation. The majority opinion points out that "the covenants contain absolutely no prohibition of business or commercial use of the lots" and that "any restriction upon commercial or business use can only be inferred from the covenants." (emphasis added). However, the opinion states that there was "no dispute that the covenants allow the boarding and pasturing of horses on the lots—plaintiffs do not contend that horses owned by the parties must be stabled and cared for elsewhere but only put out to graze on the lots. The covenants expressly allow construction of 'storage facilities, barns and stables,' thus allowing owners to construct buildings needed to stable the horses and to store their provisions.

Read in the context of covenant 13, it is apparent that these buildings are related to the boarding and care of horses. The ordinary meanings of these words are clear. A 'stable' is defined as 'a building in which domestic animals are sheltered and fed; [especially]: such a building having stalls or compartments <a horse [stable]>.' A 'barn' is 'a [usually] large building for the storage of farm products or feed and [usually] for the housing of farm animals or farm equipment.' (citations omitted).

"There is no restriction upon the number or size of 'storage facilities, barns and stables' which may be constructed on each lot, although each lot is limited to only 'one (1) primary single family dwelling' and 'one (1) guest house.' Contrary to plaintiffs' argument, there is no indication in the covenants that any other activities related to caring for horses, such as 'cleaning stalls, feeding, turning out, blanketing, bandaging, grooming, and arranging veterinarian and farrier visits' are somehow prohibited; in fact, plaintiffs acknowledge in their responses to discovery that they also care for their own horses in the same manner as defendants. Whether horses are kept for personal use or as paying boarders, all horses need these types of care."

The majority in this panel held that the restrictions "do not prohibit commercial boarding and care of horses in Stirrup Downs so long as this is done in conjunction with the single family residential use of the lot." Reconciling what it considered to be conflicting provisions under the guidance of Belverd v. Miles, 153 N.C. App. 169, 568 S.E.2d 874 (2002) and Bumgarner & Bowman Bldg., Inc. v. Hollar, 7 N.C. App. 14, 171 S.E.2d 60 (1969). "In both cases, one provision of the covenants standing alone was susceptible to one interpretation, but another provision of the covenants created an apparent conflict or ambiguity." (citations omitted) "In both cases, the court examined the covenants in their entirety in seeking to reconcile them, and to the extent that the covenants were still ambiguous when 'when considered together . . . resolve[d] these doubts in favor of the defendants.'"

The Court went on to note and deem significant "that there is no mention of a restriction on commercial or business use of the property." and spent considerable effort and analysis in the opinion to restrict the interpretation of the limitations of the term 'residential use' in the absence of what is often a parallel restriction on 'commercial use'. The concurring opinion went a different direction on this very point. This issue may not have required as much analysis as was discussed in the majority and concurring opinions in order to resolve this matter. In doing so, the Court may have interjected an unnecessary red herring for future litigation. Citing J.T. Hobby & Sons, Inc. v. Family Homes of Wake County , 302 NC 64, 274 S.E.2d 174 (1981), this opinion notes that the fact "'that defendant is compensated for the services it renders does not render its activities at the home commercial in nature.'" The Court concludes that: "Whether or not the owner of the lot maintains the operation for his own personal enjoyment or for a commercial purpose does not change the nature of the use, where the covenants contain no restriction on business or commercial use of the lots." We would suggest that this alone should have been dispositive of the issue. Interestingly, since pasturing and stabling horses are clearly permitted uses, it would seem that both Hobby and the North Carolina Court of Appeals in the unanimous opinion in Russell v Donaldson, COA (12-183) issued on September 4, 2012 suggest clearly that a landowner can charge a third party to engage in a permitted use without violating the restrictions and that no conflict in the provisions of the covenants actually exists at all. In Russell, the Court of Appeals held that short term rental of property restricted to residential used did not violate the restriction.

If a 'commercial use' restriction had been included in the covenants, then, arguably, there would have existed conflicting provisions which would have required invocation of the traditional litany in favor of free and unfettered use under the current line of controlling North Carolina cases. Yet, even this line of analysis would be rendered moot as respects pasturing and boarding in this instance if our North Carolina appellate courts would adopt what we believe to be the better reasoned doctrine adopted in the majority of jurisdictions' considering the issue. Quite simply stated, while reasonable restrictions on use will be enforced by the courts, renting or leasing property is the alienation of an interest in the property for a 'term of years' and therefor, restrictions on rental are unreasonable restraints on alienation and will not be enforced by the courts.

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