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Issue  272  Article  426
Published:  5/1/2021

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C Invs. 2, LLC v. Auger (COA 19-976) 5/18/2021
Real Property Marketable Title Act Exception for Residential Covenants

Chris Burti, Vice President And Senior Legal Counsel

In a May 2021 opinion from a divided panel, the North Carolina Court of Appeals has 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 has been 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 opinion starts off with what we would characterize as a broad overstatement:

For much of our State's history, a title search in North Carolina was a costly, often risky endeavor. Buyerstypically through their real estate attorneyshad to carefully comb back through deeds and other property records, sometimes going back for centuries, to ensure they found every recorded interest in the property, including things like easements and restrictive covenants attached to the land.

First, the vast majority of title searches have not been particularly expensive nor inordinately complex and it's rare for them to exceed sixty years. Second, risk is relative and in the modern era, largely mitigated by inexpensive title insurance. The opinion goes on to state:

In the early 1970s, our State enacted the Real Property Marketable Title Act to simplify these title searches and reduce the costs they imposed on our society. Now, if a property owner has an unbroken chain of title dating back thirty years, earlier rights and interests in the land are extinguished, barring a few narrow exceptions.

Actually, there are thirteen exceptions and they are not narrow as they include easements, mineral rights, deeds of trust, rights of the United States, railroad rights of way, and others plus residential covenants which are the subject of this decision

The opinion states:

The parties in this case own property in a residential subdivision created in the 1950s. The lots are subject to a restrictive covenant limiting them to residential use only, as well as a number of other covenants that govern the number, size, location, and various design elements of structures located on each lot. The trial court entered a declaratory judgment holding that only the first covenantthe one restricting the properties to residential usesurvives under the Marketable Title Act and that the remaining challenged covenants were extinguished.

The opinion affirms the trial court's order holding:

"...that the plain and unambiguous language of the Act, (emphasis added) the covenants governing the type of structures that can be erected on the property, where they are located, and what they look like are not covenants concerning residential use or, more narrowly, multi-family or single-family residential use. This is confirmed by long-standing precedent from our Supreme Court interpreting language in covenants nearly identical to those at issue in this case."

We believe this to be in error in two ways. First, the language used in the statute: "Covenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use. Restrictive covenants other than those mentioned herein which limit the property to residential use only are not excepted from the provisions of Chapter 47B." is anything but clear or unambiguous as evidenced by the recent contention among lawyers about the meaning of the provision. Further, the analysis should be not about the language of the covenants, of which the citations the majority uses to support its analysis, but rather the language of the statute as the dissent aptly points out.

The majority appears to be reading the statute as if it says:

[Individual] [c]ovenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use. Restrictive covenants other than those mentioned herein which limit the property to residential use only are not excepted from the provisions of Chapter 47B.

The statute may fairly be read:

[A declaration or set of] [c]ovenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use. Restrictive covenants other than those mentioned herein which limit the property to residential use only are not excepted from the provisions of Chapter 47B.

The ambiguity exists in the fact the word "covenants" used in the statute is not directly modified in any way nor is there any context to guide in interpretation. The word is commonly used identically in both contexts, individually and collectively. The court appears to err when it states:

"The flaw in this argument is that the verb "restrict" is in its plural form, which means that, in the phrase "Covenants applicable to a general or uniform scheme of development which restrict the property to residential use only," the phrase "which restrict" is modifying the plural "covenants" and not the singular "scheme of development."

As we have noted, the term "covenants" is commonly used both in the singular form and the plural, thus "restricts" is used neither as a plural nor singular modifier. Once the ambiguity is properly recognized, the analysis should then focus upon the intent of the legislature, which did not occur in this decision.

Firstly, our courts have long recognized that reasonable restrictions enhance the value of lots in a subdivision and North Carolina decisions have carved out a broad exception to the common law restrictions on restraints on alienation for reasonable covenants. These subdivision covenants not only restrict lots to residential use, but they also define the essential character of the neighborhood and serve to protect the lot owner's property values. A purchaser buying a home in a residential subdivision expects to have some assurance that neighbors will not be allowed to deviate from that subdivision's planned character, to diminish the purchasers' enjoyment of their home, or to potentially reduce the fair market value of their home. There is no rational reason to strip the covenants that create a uniform scheme of development while leaving the solitary residential use restriction with little if nothing to justify its existence. If, in fact, the character of the neighborhood should change significantly over time it is common for the property owners to agree to amendments that will enhance their property.

Secondly, 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. It may be argued that the statute is unconstitutional as interpreted by this Court under the decision of the North Carolina Supreme Court in McDonald's Corp. v. Dwyer 338 N.C. 445 (1994). The statute provides no notice to the adjoining owners as 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 recoding acts. Even more significant, these covenants at common law in North Carolina are considered to be in the nature of appurtenant negative easements which 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 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.

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, and the homeowner would have to commence a timely title search of every lot in the subdivision to determine whether the Act applies 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.

Of further concern, it may be argued that a "clear and plain" reading of N.C.G.S. Section 47B-4 would suggest that in order to preserve their enforcement rights, every lot owner in a subdivision and every Owner's Association would have to timely record a compliant notice to every other lot owner in lieu of doing a title search for every lot to determine who might be in default. Nothing in the subsection explicitly spreads its protection among all lot owners by one owner's filing. It hardly seems likely that Legislature intend valuable rights to be so easily stripped and be so difficult to preserve.

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. It iseems 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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