McInerney v. Pinehurst Area Realty, INC., No. COA03-149, filed on January 20, 2004

James L. McInerney and Elizabeth B. McInerney brought a suit pro se alleging that Pinehurst Area Realty, Inc. committed an unfair trade practice by amending the Declaration of Protective Covenants which govern the properties of the community where the plaintiffs are homeowners. This North Carolina Court of Appeals decision affirmed the holding of the trial court in favor of the defendant.

In 1985, Pinehurst Area Realty, INC. recorded a "Declaration of Protective Covenants" that regulated the property. The Declaration provided, that: "Declarant . . . reserves the right to file in the Office of the Register of Deeds of Moore County, North Carolina supplementary "Declarations of Protective Covenants". The Declarant further reserves the right to file in the Office of the Register of Deeds of Moore County, North Carolina, supplementary or additional "Amendments to Declarations of Protective Covenants", and these Protective Covenants may be modified, changed or stricken from the land by vote of the Owners of 75% of all units in said subdivision."

Plaintiffs purchased their home subject to the Declaration. Twelve years later Mr. McInerney unsuccessfully met with defendant in an attempt to seek modification of one of the covenants. Mr. McInerney decided that the covenants were drawn too heavily in favor of defendant and that "it was time to level the playing field." He attempted to persuade 75% of the property owners to vote to amend the Protective Covenants to eliminate defendant's right to amend unless defendant had obtained agreement from 75% of the property owners. After learning of Mr. McInerney's efforts, defendant recorded its first "Amendment to Declaration of Protective Covenants", deleting the provision allowing the owners to modify the Protective Covenants by a vote of 75% of their membership.

Mr. McInerney subsequently met with representatives of defendant on several occasions in an attempt to resolve matters. He testified: "In each of those meetings we emphasized that reinstatement of owners' right to amend was an absolute show-stopper, that there was no other way we could settle our dispute. In all cases that reinstatement was declined; hence the need for this litigation." However, defendant did recorded a "Supplementary Declaration of Protective Covenants" that restored a modified right of 75% of the owners to amend the Protective Covenants. Subsequently, Mr. McInerney filed a complaint alleging that defendant's first recordation of the amendment was an unfair trade practice in violation of N.C. Gen. Stat. §§ 75-1.1 et seq.

The trial court found "[t]hat the motive and intent of the Defendant in the recordation on June 2, 1999 of the document titled Amendment to Declaration of Protective Covenants was in direct response to the Plaintiffs' initiatives to seek amendment of the Protective Covenants by a vote of 75% of the property owners" and "[t]hat the intent of the Defendant . . . was to exercise exclusive control over any amendments to the Protective Covenants". The trial court concluded that defendant's recordation of the first amendment was an "unfair act" and that defendant had "engaged in conduct which amounted to an inequitable assertion of its power". However, it also concluded that plaintiffs had "failed to demonstrate that the Defendant's conduct proximately caused actual injury to the Plaintiffs" and the dismissed plaintiffs' action, entering judgment in favor of defendant. Both plaintiffs and defendant appealed from the judgment.

The Court of Appeals notes that in "the Unfair and Deceptive Trade Practices Act ("Chapter 75"), "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are declared unlawful." N.C. Gen. Stat. § 75-1.1(a). To establish a claim under Chapter 75, a plaintiff must prove: (1) an unfair or deceptive act or practice or an unfair method of competition; (2) in or affecting commerce; (3) which proximately caused actual injury to the plaintiff or to his business. Furr v. Fonville Morisey Realty, Inc., 130 N.C. App. 541, 551, 503 S.E.2d 401, 408 (1998), disc. review improvidently granted, 351 N.C. 41, 519 S.E.2d 314 (1999)."

In essence, this results in dual responsibilities. "The trier of fact decides whether the defendant committed the alleged acts, but the court decides as a matter of law whether those facts constitute an unfair or deceptive trade practice. United Laboratories, Inc. v. Kuykendall, 322 N.C. 643, 664, 370 S.E.2d 375, 389 (1988). This case was tried without a jury, so the judge would be required to find facts as well as rule on whether those facts constituted an unfair trade practice as a matter of law.

Plaintiffs apparently acknowledged that the first Declaration, unambiguously, permitted the defendant to amend the Protective Covenants. The thrust of the plaintiffs’ argument at trial and on appeal was essentially that the defendant's action in doing so was "unfair" because it was an inequitable exercise of power.

The Court of Appeals observes that the North Carolina "Supreme Court recently recognized that parties to a restrictive covenant "may structure the covenants, and any corresponding enforcement mechanism, in virtually any fashion they see fit." Wise v. Harrington Grove Cmty. Ass'n, 357 N.C. 396, 401, 584 S.E.2d 731, 735 (2003). It is not for the courts to rewrite the parties' agreement should one of the parties, at a later date, desire a change, as this Court pointed out in Rosi v. McCoy, 79 N.C. App. 311, 314, 338 S.E.2d 792, 794 (1986), affirmed in part and modified in part on other grounds, 319 N.C. 589, 356 S.E.2d 568 (1987): [P]laintiffs agreed to accept the deed subject to the right of the developers to modify or amend any of the restrictions. This right appeared in the restrictions in unambiguous language. The developers have exercised that right and have amended the restrictions on defendants' property. The rights of the parties must be determined by the agreement they voluntarily made, and plaintiffs cannot now be judicially relieved of an improvident bargain which provided for such amendments."

The Court reasoned that the plaintiffs agreed to defendant's right to amend the covenants when purchasing their property. As a result, "there can be nothing "unfair" in defendant's subsequent exercise of that right. See Tar Heel Indus., Inc. v. E. I. DuPont de Nemours & Co., 91 N.C. App. 51, 57, 370 S.E.2d 449, 452 (1988) (‘No Chapter 75 claim exists against [defendant] for exercising its right to terminate the contract.’)." The plaintiffs contended that the defendant's contractual rights were "not unfettered," arguing that the defendant could not exercise its rights in a racially discriminatory manner or in breach of other restrictive covenants. The Court notes that "plaintiffs have not pointed to any public policy or law that the amendment in this case implicates. Without some showing by plaintiffs of a reason why they should not be held to the bargain they made when they purchased their property, the underlying dispute in this case does not come within the ambit of N.C. Gen. Stat. § 75-1.1."

The Court left the judgment undisturbed by affirming the lower court, as the outcome was correct while noting that although "its decision rested on other grounds, the trial court properly dismissed plaintiffs' claim." The decision should be of interest to real property practitioners on two levels. First, the decision clearly demonstrates that it is difficult to make a case of unfair trade practices based upon amending a covenant absent a showing of illegal or egregious conduct. Unfortunately, we anticipate further attempts to use this cause of action in the development context. It is interesting to note that the arguments concerning the limitations on the developer’s rights to amend the covenants were not developed further on appeal. We believe that the Court was absolutely correct in its assessment in the context of an unfair trade practice claim. It should be noted that even where the right to amend is stated in unrestricted terms, our courts have imposed a reasonability requirement. For it is well established that where there is an unfettered right to amend on the part of the Declarant, the covenants are illusory for all practical purposes and consistently deemed void. Under these principles we doubt that amendments imposing assessments for obligations undertaken by the developer or changes that run counter to the general scheme of development, would be upheld by our courts. Thus this case should not be construed as authority for a developer to make any changes desired as long as they are not patently illegal.

This decision of the Court of Appeals took a straight-line approach on the issue of dedicated easements. The Court affirmed the appeal from the trial court's judgment granting the defendants motion for directed verdict at the close of plaintiffs' evidence and dismissal of the case with prejudice.

Fulton and Ruth Roper sold 118.62 acres of land to a developer and retained an easement, sixty-foot (60) wide, running through a portion of the northern section of the property. The developer subdivided 111.87 acres of the original tract into six parcels of land, identified as Lots "A" through "F," to create the Stirrup Downs Development by recorded plat and subjected the six lots to a recorded Declaration of Restrictions. The remaining 1.46 acre tract and a 5.29 acre tract were not included in this subdivision. The 1.46 acre tract is located on the northern section of the original 118.62 acre tract and the 5.29 acre tract is located on the southern section. Both of these properties directly adjoin a North Carolina highway.

The developer established a thirty-foot wide access road for the development designated as Stirrup Downs Road on the plat. The road begins at the highway and continues into the development. The road runs concurrently with the southern portion of the sixty-foot wide easement retained by the original sellers. Each of the six lots is subject to and has a right of ingress, egress, and regress along the road. The declaration requires each property owner of those lots to pay one-sixth of the cost of maintaining the road. The declaration makes no reference to the 1.46 acre tract or the 5.29 acre tract retained by the developer.

The plaintiffs were conveyed Lot E expressly subject to the thirty-foot wide and the sixty-foot wide easements. The defendant was conveyed Lot F subject to the same easements as plaintiffs' lot. The defendant subsequently purchased this tract by mesne conveyances referencing the plat. No express language in the deeds of the 1.46 acre tract granted use of the sixty-foot wide easement or the thirty-foot wide road and no language made the 1.46 acre tract subject to the declaration.

The recorded plat showed the northern boundary of the plaintiffs' property running to the middle of the sixty-foot wide easement and stopping at the road. There is a thirty-foot strip running from the north side of the road to the southern boundary of the defendant's 1.46 acre tract. This thirty-foot strip lies on the opposite side of the road from the plaintiffs' land and is contained within the sixty-foot easement. When the defendants purchased their lot, this thirty-foot strip of land contained a thick screen of shrubbery that provided privacy and seclusion from the other properties. Subsequently, the defendant removed the trees and shrubbery from his land and the thirty-foot strip in order to gain access to the sixty-foot easement from his 1.46 acre tract. After fruitless discussions, the plaintiffs filed suit against the defendant alleging trespass, injury to real property, and negligence. The trial court granted defendant's motion for a directed verdict at the close of the plaintiffs' evidence.

The Court of Appeals relied on a well-established line of cases to affirm the trial court’s dismissal. Several of the Court’s citations are useful to real property practitioners and therefore we include them here. "Our Supreme Court, in Wofford v. Highway Commission, stated the general rule of dedication by plat reference and held,
where lots are sold and conveyed by reference to a map or plat which represents a division of a tract of land into subdivisions of streets and lots, such streets become dedicated to public use, and the purchaser of the lot or lots acquires the right to have all and each of the streets kept open. 263 N.C. 677, 683, 140 S.E.2d 376, 381 (1965)."

"Our Supreme Court further held, [i]t is a settled principle that if the owner of land, located within or without a city or town, has it subdivided and platted into lots and streets, and sells and conveys the lots or any of them with reference to the plat, nothing else appearing, he thereby dedicates the streets, and all of them, to the use of the purchasers, and those claiming under them, and of the public. . . . ."

"[W]here lots are sold and conveyed by reference to a map or plat which represents a division of a tract of land into subdivisions of streets and lots, such streets become dedicated to the public use, and the purchaser of a lot or lots acquires the right to have all and each of the streets kept open; and it makes no difference whether the streets be in fact opened. . . . There is a dedication, and, if they are not actually opened at the time of the sale, they must be kept at all times free to be opened as occasion may require . . .
Insurance Co. v. Carolina Beach, 216 N.C. 778, 785-786, 7 S.E.2d 13, 18-19 (1940) (internal citations omitted)."

"In Collins v. Land Co., our Supreme Court held, a map or plat, referred to in a deed, becomes a part of the deed as if it were written therein, and that, therefore, the plan indicated on the plat is to be regarded as a unity, and the purchaser of a lot acquires a right to have all and each of the ways and streets on the plat, or map, kept open. 128 N.C. 563, 565-566, 39 S.E. 21, 22 (1901)."

It is important to distinguish that in this case the original developer conveyed the 1.46 acre tract by reference to the recorded plat and to note that this parcel was part of the original conveyance to the developer. Our courts have distinguished between the private dedication to the lot purchasers and the dedication that may, or may not, exist to the public. This is an important distinction in the case of adjoining landowners. Title insurers are often asked to insure access to adjoining developments over an existing subdivision’s streets. It is fairly common for a developer to anticipate future development by providing street stub-outs to the property line of the development. It is clear that all lot owners deriving title from a deed referencing the recorded plat have a right to use the streets. However, many times the streets on a plat are designated as being private. Presumably, this defeats an inference that they are offered for dedication to the public. As such, the adjoining land developer is not entitled to use those streets for access to the new development. An additional problem arises when it can be inferred that there is an offer of dedication to the public. Our courts have stated that a public body having jurisdiction over the streets must accept this offer. Individual members of the public do not enjoy this right. Even when a developer assumes the right, plats a subdivision connecting the new streets to the old and conveys lots by reference to the plat, there is no actual right for those lot owners to use the old streets unless they have, in fact been accepted for dedication by the proper public body.