The Statewide Title Newsletter and Legal Memorandum

View Current Newsletter - Search The Archive 
Sign UpPrint

Issue  297  Article  452
Published:  10/1/2023

View the Entire Newsletter

Gouch v. Rotunno (COA 23-283) 10/17/23
Restrictive Covenants, Record Notice Where Plat Not Referenced

Chris Burti, Vice President and Senior Legal Counsel

The issue being litigated in this matter is whether the defendants' lot is subject to certain recorded restrictive covenants that were recorded naming the subdivision, but not referencing the recording information of the subdivision plat or describing the affected property. The plaintiff in this case appealed the defendants' successful Rule 12(b)(6) motion to dismiss, which trial court order the Court of Appeals reversed. The defendants own Lot 32, a lot in a subdivision in Gaston County and live in a single-family residence built on the lot. The lot was part of a larger undeveloped tract previously owned by Integrity Builders of NC, LLC ("Integrity") and in 2007, Integrity recorded a plat in the Gaston County Public Registry, subdividing the tract into sixteen residential building lots designated as Lots 1-11, 30-34. The plat does not reference or refer to any type of restrictions.

In 2008, Integrity deeded eleven of the sixteen lots to the plaintiff, specifically exempting the lots 6-1l which were not purchased. Nine years later, while still owning the same eleven lots which it had acquired from Integrity, the plaintiff executed and recorded in a "Declaration of Covenants, Conditions and Restrictions" ("Declaration") which purported to place restrictions on the lots in the named subdivision. It states that the subdivision is made subject to these protective covenants. The opinion observes that "the Declaration does not reference the lots within [the subdivision] subject to the Declaration, offer the legal description of property comprising [the subdivision] or reference the 2007 plat recorded by Integrity or any other map. The Declaration includes a setback covenant, requiring all construction within [the subdivision] to be built at least 110 feet from the lot's front property line and requires the front and sides of each residence be constructed of brick, stone, or a combination of both."

Over two years after filing the Declaration, the plaintiff conveyed Lot 32 to the defendants. The deed contains a description of the land being conveyed, specifically Lot 32, references the 2007 Plat map recorded by Integrity showing Lot 32 as appearing on page 85 of Plat Book 73, and references the Plat book and page number of the deed transferring Integrity's interest to Plaintiff. The deed states, as a general warranty deed, the "Grantor will warrant and defend the title against the unlawful claims of all persons whomsoever, other than the following exceptions: Restrictions and easements of record, and the lien of 2019 ad valorem taxes." The deed, however, did not expressly reference Plaintiff's 2017 Declaration. The plaintiff's assertions in his complaint, alleged that the defendants had knowledge of the existence of the Declaration from both the title search they commissioned on Lot 32 and the title insurance policy purchased in association with the purchase of Lot 32, which specifically listed the Declaration as "an insured exception upon that Policy."

In 2020, the defendants built their home and garage within the Declaration's 110-foot setback and the front and sides of their home were also not constructed with the required brick and stone. After notice and demand to bring their Lot into compliance with the Declaration and refusal to comply, Plaintiff filed a complaint for injunctive relief and monetary damages. After remand by the Court of Appeals issued in Gouch v. Rotunno, 285 N.C. App. 559, 562, 878 S.E.2d 324, 327 (2022), the trial court filed its order on Defendant's motion to dismiss, granting with prejudice Defendant's motion to dismiss pursuant to Rule 12(b)(6).

The plaintiff argued that the facts alleged in his complaint are sufficient to state a cause of action to enforce the covenants and trial court erred in granting Defendants' motion to dismiss and the Court of Appeals agreed. In so concluding, the opinion goes through a fairly standard exegesis of the North Carolina case law supporting the enforceability of restrictive covenants.

Our Supreme Court has stated, "Covenants accompanying the purchase of real property are contracts which create private incorporeal rights, meaning nonpossessory rights held by the seller, a third-party, or a group of people, to use or limit the use of the purchased property." Armstrong v. Ledges Homeowners Ass'n, 360 N.C. 547, 554, 633 S.E.2d 78, 85 (2006) (citations omitted). A restrictive covenant is enforceable at law if it is made in writing, properly recorded, and does not violate public policy. Id. at 555, 633 S.E.2d at 85 (citation omitted). While "all ambiguities will be resolved in favor of the unrestrained use of land," J.T. Hobby & Son, Inc. v. Fam. Homes of Wake Cnty., Inc., 302 N.C. 64, 70, 274 S.E.2d 174, 179 (1981) (citations omitted), restrictive covenants "must be reasonably construed to give effect to the intention of the parties, and the rule of strict construction may not be used to defeat the plain and obvious purposes of a restriction." Black Horse Run Prop. Owners Ass'n. v. Kaleel, 88 N.C. App. 83, 85, 362 S.E.2d 619, 621 (1987).

The opinion next proceeds to delineate the established requirements for putting a property purchaser on notice of such restrictions.

Our case law has long held a restraint on a homeowner's property may not be effectively imposed except by deed or other writing duly registered in the office of the Register of Deeds. Davis v. Robinson, 189 N.C. 589, 601, 127 S.E.2d 697, 703 (1925). Thus, if the restrictive covenant is "contained in a separate instrument or rests in parol and not in a deed in the chain of title and is not referred to in such deed, a purchaser has no constructive notice of it and is not bound." Hair, 95 N.C. App. at 433, 382 S.E.2d at 797. Our law has consistently held "registration is the one and only means of giving notice of an instrument affecting title to real estate." Massachusetts Bonding & Insurance Co. v. Knox, 220 N.C. 725, 730, 18 S.E.2d 436, 440 (1942). Accordingly, a purchaser of real property "is not required to take notice of and examine recorded collateral instruments and documents which are not muniments of his title and are not referred to by the instruments in his chain of title." Morehead v. Harris, 262 N.C. 330, 340, 137 S.E.2d 174, 184 (1964). "A purchaser is chargeable with notice of the existence of the restriction only if a proper search of the public records would have revealed it, and it is conclusively presumed he examined each recorded deed or instrument in his line of title to know its contents." Turner v. Glenn, 220 N.C. 620, 625, 18 S.E.2d 197, 201 (1942) (citations omitted). Therefore, a purchaser "has constructive notice of all duly recorded
documents that a proper examination of the title should reveal." Stegall v. Robinson, 81 N.C. App. 617, 619, 344 S.E.2d 803, 804 (1986) (citations omitted).

This analysis led the Court of Appeals to conclude that the complaint's allegations, taken as true, allege that the defendants "had knowledge of the existence of the Declaration from both the title search they commissioned on Lot 32 and the title insurance policy purchased in association with the purchase of Lot 32, which specifically listed the Declaration as 'an insured exception upon that Policy.'" The defendants, on the other hand argued that the Declaration's "restrictions do not appear in [their] chain of title because [Plaintiff] chose not to refer to the restrictions in [their] deed and chose not to add a legal description or map reference to the Declaration he filed." The opinion held otherwise and the Court's conclusion is clearer if we quote it without edits;

However, the Declaration is a recorded public record with the Gaston County Register of Deeds. Therefore, a "proper search of the public records pertaining to the subdivision would have revealed" the Declaration applying to the Stoney Brook Estates. Harborgate Prop. Owners Ass'n v. Mt. Lake Shores Dev. Corp., 145 N.C. App. 290, 294, 551 S.E.2d 207, 210 (2001). Furthermore, as Plaintiff notes, Chapter 13 of the Gaston County Unified Development Ordinance mandates that "names of new subdivisions and subdivisions roads shall not duplicate or be phonetically similar to the names of existing subdivisions and road names in Gaston County." Gaston County, N.C., Unified Development Ordinance ch. 13, § 13.13A (2023).

By controlling ordinance, there can only be one Stoney Brook Estates subdivision in Gaston County, the subdivision in question here. There is no ambiguity regarding the identification of the real property intended to be subject to the Declaration when there can be no other subdivisions with that name in Gaston County. The Declaration was made by and recorded by the owner of the lot at issue prior to the conveyance of the lot to Defendants. Thus, because the Declaration appears in Lot 32's chain of title and there are no other subdivisions titled "Stoney Brook Estates" in Gaston County, the pleadings support a reasonable inference that Defendants had constructive notice of the restrictive covenant's existence.

The defendants also argued that the covenants were unenforceable because they didn't apply as originally recorded to all lots in the entire subdivision because the plaintiff did not own all of the lots at that time, therefore, the subdivision was not under a uniform plan of development. The defendants' argument relied upon selected language in Reed v. Elmore 246 N.C. 221, (1957), but the Court opined that;

Defendants reliance on Reed is misplaced. Reed states, Uniformity of pattern with respect to a development furnishes evidence of the intent of the grantor to impose restrictions on all of the property and when the intent is ascertained it becomes binding on and enforceable by all immediate grantees as well as subsequent owners of any part of the property; but the fact that there is an absence of uniformity in the deeds does not prevent the owner of one lot from enforcing rights expressly conferred upon him by his contract. Id. at 226, 98 S.E.2d at 364. Furthermore, "[c]ontractual relations do not disappear as circumstances change." Id. (citation omitted).

The Court of Appeals concluded that the plaintiff could impose restrictions on all the lots that he owned and that would evidence a uniform plan of development irrespective of the fact that he did not own all of the lots originally platted in the subdivision. Both lines of analysis, taken together, lead to the conclusion that the plaintiff alleged a sufficient claims for relief to withstand a North Carolina Rules of Civil Procedure Rule 12(b)(6) motion to dismiss and remand the case to the trial court.

There is a significant lesson to be learned from this opinion for title examiners and title insurance underwriters. The consistently stated doctrine in North Carolina is that the intent of the parties controls construction of a description and where that is evident, it will be given effect to uphold the conveyance rather than defeat it by technical defects. In this case, using an unambiguous subdivision name evidenced the intent and will be given effect even where "the Declaration does not reference the lots within Stoney Brook Estates subject to the Declaration, offer the legal description of property comprising Stoney Brook Estates or reference the 2007 plat recorded by Integrity or any other map." Therefore, if there are technical defects in a muniment of title that put a careful searcher on inquiry notice, it should be treated as effective and apt exception made by the searcher. The insurer can then make its informed decision whether to accept the risk or except from coverage.

View the Entire Newsletter -  Search

Follow Statewide_Title on X (Twitter)       View Statewide Title's profile on LinkedIn