NC Shores Up Protection Afforded to Restrictive Covenants under the Marketable Title Act
Law clarifies that the exception for restrictive covenants under the MTA covers entire Declaration -- albeit only under certain circumstances.
Apparently reacting to a decision of the North Carolina Court of Appeals ‒ and affirmed by the North Carolina Supreme Court ‒ the General Assembly has clarified the scope of protection afforded to communities with older sets of restrictive covenants under the Marketable Title Act (N.C. Gen. Stat. § 47B-1 et seq.)(“MTA”).
A bit of background is necessary to appreciate the importance of the change. Enacted in 1973, the MTA modernized the process by which real estate attorneys researched and certified title ownership ahead of real estate transactions; namely, by limiting the “look back” period for their search to thirty years. Previously, among a host of other requirements, attorneys were forced to look as far back as the 1700s when the State of North Carolina initially issued land grants ‒ a cumbersome process to be sure. In essence, the MTA provided that any interest in land must be apparent in the title record within the 30-year period or that interest is extinguished by operation of law.
But that general rule ‒ helpful though it was and remains ‒ is riddled with many exceptions, one of which applies to “covenants applicable to a general or uniform scheme of development which restrict the property to residential use only . . . .” § 47B-3(13). In other words, even if the chain of title does not reveal the existence of restrictive covenants for the past 30 years, the covenants remain an encumbrance on the subject property by virtue of the statutory exception.
Despite the exception being on the books for decades, reasonable minds differed on the meaning of it; namely, did the exception apply narrowly just to singular covenant provisions restricting property to residential use, or did the exception apply to whole sets of restrictive covenants (commonly known as “Declarations”) provided that one of the provisions within the Declaration restricted the subject property to residential use?
Fast forward now to 2021 when the Court of Appeals tried to lay that issue to rest in an opinion entitled C Invs 2, LLC v. Auger wherein the Court concluded that the “plain language” of the exception necessitates a finding that the exception applied narrowly just to a provision that restricts the subject property to residential use only. The balance of provisions in the Declaration, the Court held, were extinguished by the MTA.
Interestingly, in its Auger opinion the Court of Appeals all but begged the General Assembly to spot check its interpretation of the statutory exception, writing: “We will apply the plain language and . . . if the result is unintended, the legislature will clarify the statute.” (Emphasis added.)
And that’s exactly what happened! Barely a year later, SL 278 (2022) was passed into law, breathing new life into the idea that the exception for restrictive applied to all of the provisions in the Declaration rather than just to the ones limiting the property to residential use. Even so, and somewhat curiously, the law limits its applicability to residential subdivisions that can meet two criteria: one, the community must be subject to North Carolina’s Planned Community Act in whole or in part; and, two, the community must have had an active owners’ association as of July 1, 2022. If either of those criteria are not met, then the exception does not apply.
So where does that leave the Court of Appeals’ decision in Auger? In good shape, actually. After SL 278 became law in July 2022, the NC Supreme Court issued an opinion in which it upheld the Court of Appeal’s decision ‒ and it did so with nary a mention of the recent enactment of SL 278.
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MTA Exception for all residential covenants applies |
MTA exception for single residential covenant applies |
MTA exception for single residential covenant applies |
Community has an active association as of July 1, 2020
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Yes |
No |
Yes |
At least one provision of the NC PCA applies to community
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Yes |
Yes |
No |
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Yes |
No |
No |
Accordingly, it looks like Auger remains good law for older communities in which either the Planned Community Act does not apply, or no homeowner association is active. As to those, their Declarations are subject MTA’s general rule of extinguishment but for the single provision restricting use of the subject property to residential purposes.
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