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Issue  114
Published:  1/1/2005

Another Contorted Covenant Case
Chris Burti, Vice President and Legal Counsel

Miles v. Carolina Forest Association, COA03-1329, filed on November 16, 2004, (Miles II) is another appellate decision in a line of cases stemming from Allen v. Sea Gate Association, Inc., 119 N.C. App. 761, (1995), that struggles with the dichotomy of conservative restrictive covenant construction and pragmatic protection of property owners. This is the second time that this dispute has been considered by the Court of Appeals, hence we refer to it as Miles II.

In Allen, the Court of Appeals opined that a provision in a declaration of restrictive covenants allowing the covenants to be "altered, amended, or revoked" upon written agreement of two-thirds of the lot owners did not confer the power to extend the covenants beyond the date of expiration stated in the declaration. It seems clear that successive courts faced with the issue have made an effort to protect the interests of property owners faced with the situation of having no viable means to maintain streets and common areas as a result of self-terminating declarations.

This decision resulted from a dispute between the owners of undeveloped property in Carolina Forest subdivision ("plaintiffs") and the subdivision homeowners’ association ("CFA") over the responsibility for certain fees and assessments to be used for improvements to common areas and roads in the subdivision.

In June of 1970, Russwood, Incorporated ("Russwood") prepared covenants and restrictions (the "declarations") to run with Carolina Forest Subdivision, a gated community developed in Montgomery County. These declarations were recorded and included the requirement that each lot owner maintain membership in and abide by the rules of Carolina Forest Association, Inc.

The declarations contain the following paragraph:

"10. These restrictions and covenants run with the land, and shall bind the PURCHASERS, their heirs, executors, administrators, personal representatives and assigns, and if any of them shall violate or attempt to violate any of the covenants or restrictions herein contained, it shall be lawful for any person(s) or corporation(s) owning any such lots in the sub-division to prosecute any proceedings at law or in equity against those violating or attempting to violate any such covenants or restrictions and either to prevent him, them or it from doing so, or to recover damages for such violation. All of the restrictions, conditions, covenants and agreements contained herein shall continue until January 1, 1990, except that they may be changed, altered, amended or revoked in whole or in part by the record owners of the lots in the sub-division whenever the individual and corporate record owners of at least 2/3 of the said platted lots so agree in writing. Provided, however, that no changes shall be made which might violate the purposes set forth in Restrictions No. 1 [limiting lots to residential purposes generally] and No. 8 [providing a perpetual easement and rights of ingress and egress for utility lines]. Any invalidation of any one of these covenants and restrictions shall in no way affect any other of the provisions thereof which shall hereafter remain in full force and effect."

Russwood then conveyed certain land, rights and obligations to CFA by a deed, which was properly recorded. The plaintiffs purchased lots subject to the declaration at various times. As January 1, 1990 neared, CFA requested plaintiffs' consent in writing to amend the declaration to extend it beyond its expiration. Of the 906 lots in the subdivision, 618 of the lot owners agreed to the amendments including approximately half of plaintiffs. In 1997 and 1998, CFA voided some of the plaintiffs' gate cards which prevented access to the subdivision, because they did not pay assessments.

Plaintiffs initiated this action against CFA seeking (1) declaratory judgment regarding their rights and obligations as lot owners; and (2) an injunction to prohibit levying fees and assessments and to allow access to the subdivision and common areas. CFA moved to dismiss these claims under the theory that plaintiffs were bound by the declarations as amended.

The first judgment in the case was appealed to the Court of Appeals. The Court held that there was no authority under the original declarations to extend them beyond 1 January 1990 and reversed the trial court's conclusion of law. Miles I, 141 N.C. App. at 712-13, 541 S.E.2d at 742. The Court of Appeals remanded the case for the trial court to determine whether all of the plaintiffs have impliedly agreed to pay for maintenance, upkeep and operation of the roads, common areas and recreational facilities with the subdivision, and if so, in what amount.

The trial court granted CFA a directed verdict at the close of evidence, concluding, as a matter of law that an implied contract existed between CFA and the plaintiffs. The trial court ordered plaintiffs to pay the fees for benefits they received because of maintenance and upkeep of the roads, common areas, and recreational facilities within the subdivision.

In their only assignment of error, on this appeal, the plaintiffs contended that the trial court erred in granting CFA's motion for directed verdict. Their appeal was based on three alternative arguments: "The first is that the covenants under declaration No. 10 are void as a matter of law, and the doctrine of implied contracts cannot breathe new life into them. The second is that the Statute of Frauds (SOF) requires any of the alleged implied agreements between plaintiff and defendants be in writing, and are otherwise unenforceable. And lastly, that the scope of an implied contract is limited to unjust enrichment and plaintiffs have been in no way so enriched."

The Court of Appeals did not agree with the arguments of the plaintiffs, and affirmed the trial court pursuant to the following analysis.

Citing Allen v. Sea Gate Assn., as their principal authority, the plaintiffs first contended that an implied contract cannot be used to breathe new life into null and void restrictive covenants as a matter of law. While the Court of Appeals based their reversal as to some of the plaintiffs in Miles I on the decision in Allen, the Court determined that "nothing in Allen supports plaintiffs' contention that an implied contract on these facts is precluded as a matter of law."

The plaintiffs’ claimed that if an implied contract existed that it fails for not having been put in writing and signed by plaintiffs violating the Statute of frauds. The plaintiffs asserted that an agreement to pay for maintenance, upkeep and operation of the roads, common areas and recreational facilities within a subdivision concerns an interest in land, that acts as a restrictive covenant, or a negative easement that must not only be in writing, but also must be recorded.
The Court of Appeals states that at issue is "an alleged implied agreement between plaintiffs and CFA for the years of 1998 through 2003. Pursuant to CFA's implied contract theory, they do not argue a duty exists to pay for the benefits conferred which would run with the land to subsequent purchasers of Carolina Forest property. Rather, CFA's implied contract claim is one for services rendered pursuant to an agreement with these plaintiffs. With the exception of restrictive covenants, we can find no case that evokes the SOF in instances where services such as maintenance and upkeep to common areas and roads in a subdivision require the signature by the party to be charged. The SOF is not implicated in this instance, as no interest in land is at issue."

The plaintiffs' final argument alleged that there was insufficient evidence of unjust enrichment for the court to grant a directed verdict in favor of defendant under the theory of an implied contract. The Court of Appeals did not agree. "In the case at bar, plaintiffs' only assignment of error states that CFA's motion for directed verdict should have been denied and plaintiffs' motion for directed verdict should have been granted. Plaintiffs offered no evidence in this case for the trial court to consider because their basis for directed verdict was pursuant to issues of law as set out above. Furthermore, they have made no exceptions to and have not assigned as error any of the trial court's findings of fact. Therefore, in our review, we look to the record to determine whether the findings of fact support the trial court's conclusion of law that an implied contract existed between plaintiffs and CFA."

"The trial court, in the order now on appeal, did not specifically set out which theory of implied contract it used in granting defendant a directed verdict, whether it was a contract implied in law or in fact. The trial court cited Miles I for its conclusion that an implied contract existed, and in Miles I we considered that an implied contract existed pursuant to the initial summary judgment order in this matter... ". With this support the Court went on to say: "We need not look far beyond the trial court's unchallenged findings of fact to determine whether they support the conclusion of law that: There is an implied contract between all of the plaintiffs and the defendant in which the plaintiffs impliedly agreed to pay for the maintenance, upkeep and operation of the roads, common areas and recreational facilities within the subdivision." Thus, affirming the decision of the trial court.

This Court obviously recognized the issues at play and for the general welfare of lot owners everywhere, probably achieved the correct outcome. People buy lots in nice subdivisions in order to enjoy the benefits of a common scheme of development. The uniformity of development and the enhancement provided by well-maintained amenities serve to protect and increase property values. Maintenance of these enhancements costs money and those who would reap the benefit should pay for it. The Court struggled through a tortuous analysis force in large part, to rely on procedural issues to overcome the Draconian holding in Allen.

Many would charge that the Allen Court fumbled the ball out of a lack of understanding of development process and its history. Some jurisdictions have treated restrictive covenants as property interests to which the Rule Against Perpetuities applies. Federal agencies such as HUD have promulgated standardized forms on a National basis in order to bring some continuity to the mortgage lending process. As a result many ‘approved’ forms for subdivision covenants contain provisions designed to avoid application of the Rule. However, the Rule is not applicable to covenants in North Carolina. They are not interests that vest in the future. Rather, when properly created, they are negative easements that may exist in perpetuity.

When one scrutinizes the facts of record in Allen and its progeny, one will readily see a recurring theme. All of the disputed covenants were scheduled to expire in twenty years unless altered or amended. In construing the provisions narrowly, the Court both ignored the plain meaning of the terms ‘amended’ and ‘altered’ as well as missing the real reason for including these provisions. Most residential subdivisions last well beyond twenty years and home purchasers expect that the provisions protecting their home values will continue to exist. Allen thoroughly torpedoes that expectation. Under the reasoning in Allen, such covenants are utterly void. Welcome, commercial development and trailers, where they have previously been legally excluded. One is led to the conclusion that the Allen court failed to consider the consequences of their decision.

One would suppose that this is the reason that our appellate courts have traditionally been extremely reluctant to apply the doctrine of changed Circumstances. Presumably, this is due to the fact that application of the doctrine completely negates all of the covenants for the entire subdivision, not just the affected lots. This concern for the protection of the interests of lot owners is arguably further demonstrated in the Marketable Title Act. Exception number (13) contained in § 47B-3 protects covenants "applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable" from the effect of the Act when they are of record outside of the thirty year period.

Senate Bill 1167 legislatively repealed the North Carolina Supreme Court decision in Wise V. Harrington Grove Community Association, Inc., ___ N.C. ___, (No. 428a02, Filed: 22 August 2003). The question analyzed by the Supreme Court was whether the North Carolina Planned Community Act (the PCA) retroactively authorizes a homeowners association to fine lot owners for violations of restrictive where there is a lack of express authority in the organizational documents (the declaration, articles of incorporation, or bylaws). The Court completely missed the legislative purpose of the Act and held that the PCA does not grant defendant such a power, reversing the Court of Appeals and trial court. The Bill modifies Chapter 47C, referred to as the New Condo Act and Chapter 47F, the Planned Unit Development Act. The addition of the words "unless the declaration expressly provides to the contrary" to the numerous empowering provisions in the Acts that provide retroactive authority.

Will we have a Miles III? It is entirely possible. Since the application of the Act, particularly as revised, was not at issue in this appeal, we may yet see another incarnation. The clear language of §47F-1-102(c) applies the provisions of §47F-1-103, §47F-3-102(1) through (6) and (11) through (17), §47F-3-107(a), (b) and (c) §47F-3-115 and §47F-1-116 to all previously created planned communities. The Act does not specifically address the issue of extinguished covenants. That seems to leave ample fodder for a third try though it should be clear that the intent of the legislation is to provide a mechanism for the maintenance of common elements to protect the interests of all of the lot owners. One is tempted to conclude that the ultimate solution lies with the Legislature unless one has confidence that the North Carolina Supreme Court will resolve the dichotomy appropriately should they ever have the question before them.

As a practical matter, real property attorneys should consider advising prospective buyers that they should consider such covenants enforceable against them and unenforceable against their neighbors until the issues are definitively resolved in the Supreme Court or the Legislature.

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