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Issue  284
Published:  9/1/2022

Matthews v. Fields (COA 21-589) 7/19/2022
Installment Land Sales Contract - Equitable Title

Chris Burti, Vice President and Senior Legal Counsel

This appears to be a well-reasoned appellate decision. It is important to note that heirs and devisees are not purchasers for value and the recording acts were not adopted for their protection with respect to matters between the deceased and their grantees. The opinion relates the facts that Ms. Anna Burwell Headley appointed Denise Jones as her attorney-in-fact by a recorded power of attorney, authorizing her to "sell and convey real estate, and to lease, encumber, or exchange real estate; . . . [and] to accept payment . . . ." Jones, as Ms. Headley's Attorney in Fact, and Ernest Fields entered into a "Property Rental Agreement" and an "Offer to Purchase and Contract" with regard to property owned by Ms. Headley. The Rental Agreement designates Jones as the Landlord and Fields as the Tenant and contains the following provisions among others:

3.1 The initial period of the lease shall start on the 1st day of February in the year 2014
3.2 Tenant shall lease the property with the right to purchase. See Offer to Purchase and Contract Agreement hereto attached.
. . . .
4.1 The monthly rental for the premises for the initial period is an amount of $450.00 (Four hundred-Fifty dollars).
4.2 Rental shall be paid monthly in advance on or before the first day of the month, at the following address: 1345 N Chavis Rd, Kittrell NC 27544
4.3 All monthly rents shall be credited to the purchase price of $50,000 at the time of closing. This shall be reflected in the purchase agreement
. . . .
4.6 Eviction can occur when the Landlord determines that Tenant(s) can no longer meet his/her obligations.
5.1 The Tenant shall from the date of commencement of this Agreement promptly pay for all expenses incurred by means of electricity and sanitary fees, rubbish disposal and all charges arising out of any telephone or other service installed on the Premises.

The referenced Offer to Purchase and Contract is completed on a standard real estate form. Jones is listed as the Seller and Ernest Fields is listed as the Buyer of property located at 20 Perkinson Street. The following provisions were significant to the opinion:

The Purchase Price of $50,000 is to be paid "in cash at Settlement" and the Settlement Date is "To Be Decided."
Under Section 15. OTHER PROVISIONS AND CONDITIONS, an "x" is placed next to "OTHER: Residential Rental Agreement, all rents shall be credited toward the purchase price on the settlement date[.]"
Section 18. PARTIES indicates, "This Contract shall be binding upon and shall inure to the benefit of Buyer and Seller and their respective heirs, successors, and assigns."

Neither document was recorded. Ms. Headley died and the North Carolina Department of Medicaid Recovery filed a claim in the amount of $9,170.62 with the Clerk of Superior Court requesting the appointment of an administrator in the Estate. Becky Matthews was appointed administrator of the Estate. Matthews and Linda M. Perry, Ms. Headley's cousin or niece and purported heir to the Estate, filed an action against Jones and Fields alleging, in part, the following:

Fields had paid $14,850 in rent to Jones from 1 February 2014 to October 2017, but had not paid rent to Jones or the Estate since October 2017. The Fields told Matthews that after October 2017, the Fields had paid rent into an escrow account, which should contain $8,550 as of 1 April 2019. The Fields had not provided Matthews with information about the account. Matthews and Perry had "made demand in writing to the . . . Fields, by and through their attorney, that they vacate the property immediately" but the Fields "have refused to vacate the house when requested." The Fields indicated to Matthews that they believed that "pursuant to the 'alleged' rental agreement and option to purchase contract . . . they 'own' the house," but Matthews and Perry "believe and so allege that the . . . Fields never intended to purchase the house from the [E]state[.]" Matthews and Perry asserted claims for breach of contract and conspiracy to commit fraud and conversion, and sought to recover possession of the property.

Matthews filed a Motion for Declaratory Judgment and Order to Vacate the Residence as to the Fields alleging:

At some time prior to May 2020, Matthews attempted to evict the Fields from the property. At the eviction hearing, the Fields' attorney presented the Property Rental Agreement and Offer to Purchase and Contract to the magistrate and argued the Fields could not be evicted as they owned the property. In May 2020, the Fields indicated they would buy the property if they were given credit for all payments made. Matthews "searched the Vance County Register of Deeds offices and found the documents . . . from [Ms.] Headley has not been recorded . . . and therefore is not enforceable." Matthews informed the Fields that that they "are 'hold over tenants' and they have been given the required notice that they breached the terms of the Lease" and must vacate the property. Matthews sought to recover certain rents paid by the Fields. Further, Matthews moved the court to clear title to 200 Perkinson Street and order the Fields to vacate the property.

The Fields appealed the order where trial court found, in relevant part, as follows:

2. The real property involved in this action is located in Vance County, NC, at 200 Perkinson Street, Kitrell, NC.
3. This real property was owned by Anna B. Headley, who died on 18 December 2014.
4. On or about 16 May 2015, the Department of Medicaid Recovery filed a claim with the Vance County Clerk of Superior Court, requesting the appointment of an administrator in the Headley estate since there was a Medicaid Lien in the amount of $9,170.62 against the estate.
5. Plaintiff Becky I. Matthews (hereinafter Plaintiff Matthews) became the duly appointed Administrator of the Estate of Anna Burwell Headley by the Vance County Clerk of Superior Court on 22 August 2017.
6. Plaintiff Matthews learned that prior to decedent's death, decedent owned property located at 200 Perkinson Street in Kittrell, NC.
7. Defendant Jones was "Power of Attorney" for decedent.
8. Prior to decedent's death, Defendant Jones executed an "Offer to Purchase" contract with Defendant Ernest Fields and Defendant Vanessa Fields (hereinafter Defendants Fields) for the real property and residence owned by decedent located at 200 Perkinson Street, Kittrell, NC.
9. Plaintiff Matthews searched the records of the Vance County Register of Deeds offices and learned the "Offer to Purchase" contract between Defendant Jones and Defendants Fields was not recorded as required by the provisions of N.C.G.S. § 47G-2(d).
10. Under the terms of the "Offer to Purchase" lease, Defendants Fields were to pay $450.00 per month for rent which will be credited towards the purchase price of $50,000.00 for the property located at 200 Perkinson Street, Kittrell, NC.
11. Plaintiff Matthews sought to collect the back rent on the Perkinson Street property and to sell such real property in order to satisfy the Medicaid lien against that property, and to distribute any excess funds to the heirs of the Estate of Anna Burwell Headley.
12. Plaintiff Matthews informed Defendants Fields that they are "hold over tenants" and that they have been given the required notice that they have breached the terms of the Lease, and that they must vacate the 200 Perkinson Street property.
13. Plaintiff Matthews made several demands upon Defendants Fields to vacate the property, and has advised them, through their attorney at the time, that they were in default of the terms of the Lease and would not benefit from the terms of the Lease.

Based on these findings, the trial court concluded in relevant part:

4. Defendant Jones did not fulfill the statutory requirements pursuant to N.C.G.S. § 47G-2, et seq. in her attempt to execute an "Offer to Purchase" of the property located at 200 Perkinson Street, Kittrell, NC.
5. Because the "Offer to Purchase" the 200 Perkinson Street property was not recorded with the Vance County Register of Deeds pursuant to N.C.G.S. § 47G-2(d), it is not an enforceable contract for purchase. Rather, it is only a rental agreement.
6. Defendants Fields do not have an ownership interest in the 200 Perkinson Street, Kittrell, NC real property or the residence thereon.
7. The Estate of decedent Anna Burwell Headley is the sole owner of the real property located at 200 Perkinson Street, Kittrell, NC.

The trial court ordered:

1. The sole owner of the property located at 200 Perkinson Street, Kittrell, NC is the Estate of Anna Burwell Headley.
2. Defendants Fields do not have an ownership interest in the 200 Perkinson Street, Kittrell, NC property.
3. Defendants Fields are granted 30 days from the file stamped date of this ORDER to remove themselves and their personal property from the 200 Perkinson Street, Kittrell, NC property.

On appeal, the Fields contended that the trial court erred; by concluding that the "Offer to Purchase" is only a rental agreement and is not an enforceable option contract for purchase because it was not recorded; by concluding that the Fields have no ownership interest in the property; and by ordering the Fields to vacate the premises.

Because the documents failed to include a provision stating that Jones, acting for Ms. Headley, agreed to sell the property to the Fields at the Fields' request within a specified period of time, as required by N.C.G.S. Section 47G-2(b)(7) and as stated in Murray v. Deerfield Mobile Home Park, LLC, 277 N.C. App. 480 (2021), the Court of Appeals agreed with the trial court that the documents do not form an option contract.

The Fields also contended in the alternative, that the agreements taken together constituted an installment land contract governed N.C.G.S. Chapter 47H. The Court of Appeals noted that N.C.G.S. Chapter 47G and North Carolina 47H were enacted into law in order to protect purchasers who enter into "real estate purchase contracts with financing arrangements that are alternative to traditional mortgage financing."

Chapter 47H governs Contracts for Deeds.
A contract for deed is [a]n agreement whether denominated a "contract for deed," "installment land contract," "land contract," "bond for title," ["lease to buy,"] or any other title or description in which the seller agrees to sell an interest in property to the purchaser and the purchaser agrees to pay the purchase price in five or more payments exclusive of the down payment, if any, and the seller retains title to the property as security for the purchaser's obligation under the agreement. N.C. Gen. Stat. § 47H-1 (2014).
An installment land contract is a financing device in addition to being a contract dealing with the necessary details of the sale and purchase . . . . [T]he vast majority of [installment land contracts] transfer possession to the vendee at the beginning of the payment period. Legal title remains in the vendor as security for payment of the purchase price. Boyd v. Watts, 316 N.C. 622, 626-27, 342 S.E.2d 840, 842 (1986) (quoting J. Webster, Real Estate Law in North Carolina § 138 (Hetrick Rev. 1981)).

The opinion notes that:

...while the buyer is making payments to the seller, the buyer is considered to have "equitable title" to the property. In re Foreclosure of Deed of Tr. Given by Taylor, 60 N.C. App. 134, 139, 298 S.E.2d 163, 166 (1982) (holding that "the installment contract for sale of the security property transferred equitable title therein to the purchaser and constituted a 'conveyance' within the meaning and intent of that term as used in petitioner's due on-sale clause"); Barnes v. McCullers, 108 N.C. 46, 52, 12 S.E. 994, 996 (1891) ("The contract of sale of the land in question between the son of the feme plaintiff and the defendant, as embodied in the bond for title and the notes for the purchase-money, had the effect to put the equitable title to the land in the son."). As an equitable title holder, the buyer has an interest in the property that is the subject of the land installment contract. See id.; see also Skinner v. Terry, 134 N.C. 305, 309, 46 S.E. 517, 518 (1904) ("That the owner of the perfect equitable title may maintain ejectment or other possessory action under our system of procedure may be regarded as settled beyond controversy." (citing Taylor v. Eatman, 92 N.C. 601; Condry v. Cheshire, 88 N.C. 375)).

The Court of Appeals was satisfied that the documents in this case "unambiguously formed an installment land contract, not a lease." Under N.C.G.S. Section 47H-8, "A purchaser may bring an action for the recovery of damages, to rescind a transaction, as well as for declaratory or equitable relief, for a violation of this Chapter." While neither the Property Rental Agreement nor the Offer to Purchase and Contract Agreement were recorded, the Court determined that "it was Jones, on behalf of Ms. Headley as the seller, who was required to cause a copy of the Writings to be recorded. The purpose of recordation is to put the world on notice of the Fields' interest in the property, preventing Jones, or Headley's heirs, successors, or assigns, from conveying the property outright to another investor who could take the property without notice of the Fields' rights, or from encumbering the Property with a mortgage that could deplete the value of the Property. Jones' failure to record does not transform the purchase contract into a rental agreement, nor does it entitle Ms. Headley, her "respective heirs, successors, [or] assigns," to rescind the contract. See Scott v. Jordan, 235 N.C. 244, 248, 69 S.E.2d 557, 561 (1952) ('When an owner of land contracts to sell and convey it and dies intestate without doing so, his heirs take the property subject to (1) the equities of the purchaser under the contract, and (2) the rights of the administrator and the distributees of the owner under the doctrine of equitable conversion.')."

The Court of Appeals concluded that the agreements, taken together, formed a land installment contract, that the Fields have equitable title in the subject property; that the failure to record does not convert the land installment contract into a lease, that the trial court erred by declaring the Estate the sole owner of the property and ordering the Fields to vacate the property. From this conclusion we can take away the importance of taking notice and addressing such matters when reported, even when not of record. In Anderson v. Walker (17-782) 7/3/18, the Court of Appeals enforced an unrecorded right of first refusal of which the purchasers had actual knowledge. This outcome was addressed by Section 10 of Session Law 2021-91 which amended N.C.G.S. Section 47-18 to include a right of first refusal. However, the statute does not explicitly address land installment contracts per se and this begs the question of whether they will be treated as a "contract to convey" covered by the statute or whether the courts will carve out an exception for an aggrieved vendee in possession who has substantially paid the purchase price or made significant improvements. One would assume that it is generally accepted that the meaning of "contract to convey" is inclusive of installment land contracts and bonds for deed, but our courts have traditionally made every effort to protect the vendees and it might be better to forestall litigation by a legislative technical correction.

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