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Don’t Panic! Recent NC Court of Appeals Cases Cause Confusion for Older Restrictive Covenants

You may have heard about the recent pair of cases decided by the North Carolina Court of Appeals involving the North Carolina Real Property Marketable Title Act, which is codified at NCGS Chapter 47B.  The two decisions are C Investments 2, LLC v. Auger et al., and C.E. Williams III et al. v. Reardon et al. These decisions will have a significan adverse impact to North Carolina HOAs and condominiums if allowed to stand – but we don’t believe that they will be allowed to stand.

The Marketable Title Act was passed almost 50 years ago and was designed to extinguish certain title flaws or encumbrances, if they had not appeared in any recorded documents within a given chain of title within the past 30 years.  The point was to clarify title and remove minor, old or forgotten matters of title if they had not reoccurred, been rerecorded, or been litigated within the past 30 years of when the title was being examined.  The Marketable Title Act has a number of exceptions for things which are not extinguished even though they may be more than 30 years old, including an exception for “covenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable.”  This exception had always been interpreted by real property and homeowners association lawyers to mean that restrictive covenants for residential subdivisions were excepted from the Marketable Title Act and therefore remain in place in perpetuity, as most covenants specifically provide, even if they are older than 30 years and even if they don’t appear in a given chain of title within the past 30 years.

The Court of Appeals unfortunately ruled contrary to the longstanding common opinion and practice, interpreting the above-quoted provision to mean that residential restrictive covenants which have not appeared in a given chain of title within the past 30 years are completely extinguished, other than any provision specifically restricting the property to residential use only.  While the Court of Appeals took the position that this was a plain reading of the plain words of the statute, that reading if allowed to stand would upend every subdivision with restrictive covenants 30 years or more old and cause chaos in the chains of title of thousands of homes and residential subdivisions statewide.

For example, imagine an older subdivision with residential restrictive covenants of the typical sort, which were originally recorded more than 30 years ago.  Mr. and Ms. Jones reside on Lot 1 and have lived in their home for 31 years.  Mr. and Ms. Smith live on Lot 2 and just bought their home last year.  Based on these Court of Appeals rulings, the covenants are now extinguished on Mr. and Ms. Jones’ property, other than the restriction that it can only be used for single family residential purposes.  So they can quit paying dues, maintain old junked cars on cinderblocks in their front yard, and allow their home to fall into complete disrepair.  On the other hand, what is the situation next door at the Smiths?  It depends on what the deed they received said, and what the deeds of all the other folks in the chain of title for their lot in the past 30 years said.  If the recorded restrictive covenants were mentioned in any of those deeds, then by the Court of Appeal’s reasoning, they have been revived and the Smiths must comply with every provision of those restrictions.  If none of the deeds mentioned the restrictions, then they get to be scofflaws just like their neighbors the Joneses.  What if their deed said something vague like, “This deed is subject to all documents of record”?  Who knows?  The Court of Appeals doesn’t tell us.  Thus, chaos.

It is a universal opinion among real property and homeowners association attorneys in the state that these decisions were wrong.  The General Assembly is currently reviewing legislation to make corrections to the Marketable Title Act that will put things back the way they have always been.  The chaos which will result if that does not happen it is a strong assurance that it will.

Bottom line: We do not believe that this is a situation which should be of concern for North Carolina HOAs or condominiums at this time. We believe the General Assembly will remedy the matter. Of course we will be monitoring the situation and will provide further updates as they occur.