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New NC Appellate Case: C Investments 2, LLC v Auger (Covenants and Real Property Marketable Title Act)

Today, Tuesday, May 18, 2021, the NC Court of Appeals issued its decision in C Investments 2, LLC v Auger. The decision may impact restrictions in planned communities based on the Marketable Title Act, and is a “published” decision. That means the decision is controlling legal authority and can be cited in other cases.

The Marketable Title Act

To understand the decision, you need to understand what the NC Real Property Marketable Title Act (“MTA”) is and why it is important. Prior to 1973, anyone buying real estate who wanted to know what restrictions applied to that property had to go back, as far as records existed, to review land records for possible restrictions or limitations on property usage. This was time-consuming, expensive, and invariably mistakes were made, frequently leading to litigation. In 1973, the General Assembly adopted a law designed to simplify real property title transactions by allowing parties to rely on a record chain of title going back thirty years. The MTA basically states that if someone has a recorded ownership interest in real estate that spans at least thirty years, and nothing appears in that chain of title within the thirty year period that is contrary or against the owner’s interest (including any restrictions against property use)  that owner has “marketable title” to the property–that is, the ability to sell the property free and clear of any restrictions.  

So, if an owner can establish title and all encumbrances that existed as of a set date, after thirty years any and all restrictions on that property are limited to those established by that owner. [Note discussion below on the impact of recorded covenants creating planned communities.] One important exception to the MTA was carved out for residential use restrictions. Covenants that restricted the development to residential use only (including single and multi-family residential use) were not extinguished by the adoption of the MTA, even if they did not show up in the chain of title for the prior 30 years. The adoption of the MTA was welcomed by real estate attorneys, buyers and sellers alike, and greatly simplified the transfer of real property in this State.

C Investments 2, LLC v. Auger et al.

This case grew out of a dispute over use of certain lots located in an historic 1950s development in Charlotte. Plaintiff owns property in the Country Colony development . When Country Colony was created in 1952, “Restrictive Covenants” were filed which contained nine limitations on the use of the land. The first restrictive covenant limited lot usage to residential use only. The remaining restrictive covenants limited the type of structure that could be constructed on a lot; established building setbacks; prohibited the placement of certain items on lots; and otherwise restricted lot usage. Plaintiff acquired a number of lots in the community in approximately 2016, via an unbroken chain of title going back more than thirty years that was devoid of any reference to the Restrictive Covenants. In June 2018 Plaintiff filed a declaratory judgment action against the other Country Colony lot owners, seeking a declaration that the Restrictive Covenants were null and void under the MTA. If Plaintiff was successful, this would significantly relax restrictions on properties and potentially allow, for example, multiple dwellings per lot with smaller setbacks from property lines. In February 2019, a Superior Court Judge in Mecklenburg County entered summary judgment in the case, finding that the undisputed material facts showed that under the MTA, only the residential use restriction remained valid.

On appeal, the Defendants—owners of remaining lots in the Country Colony development— argued that all of the Restrictive Covenants fell under the MTA’s exception for “Covenants applicable to a general or uniform scheme of development which restrict the property to residential use only…” These owners argued that the other restrictions were all part and parcel of the residential restrictions and thus were all valid. The Court of Appeals disagreed, and found that the language of the Act clearly limited the exception to residential use—but not any provision related to residential use. The Court of Appeals rejected an invitation to broaden the exception, and stated that if the legislature wished to do that, it was their place—but not the judiciary’s place—to do so.

This case was vigorously litigated by multiple parties, with six different amicus curiae (friends of the court) briefs offered for further perspective. Judge Dillon dissented from the opinion of the majority of the court, arguing that two additional restrictive covenants (which restrict lot usage to single family residential structures) were also exempted under the Act’s language and should have been saved. He contended that the court did have authority to discern the intent of the drafters of the restrictions, and that this supported upholding these additional restrictions. However, none of the judges would have upheld restrictive covenants not directly related to residential use, so it is clear that those restrictions were uniformly seen as unenforceable under the MTA.

Impact of Decision

This decision may be reconsidered or possibly heard by the NC Supreme Court, but it is unlikely the case will be overturned.  If the decision stands, it will have a significant impact on the use of property in North Carolina.

For communities like Country Colony that are not subject to the Planned Community Act (NCGS 47F), non-residential restrictions that do not appear in the chain of title for thirty years are likely unenforceable. Voided restrictions could cover setbacks, limitations on the number of dwellings per lot, aesthetic considerations, height restrictions, etc.  Given the booming real estate market, we can expect to see developers and property owners alike running to check what restrictions appear in their chain of title for the last thirty years.

For property that is subject to the Planned Community Act, or where the property is part of a mandatory HOA, the impact of the case is less clear. This case did not involve a planned community created pursuant to NC Statute, and to date the appellate courts have not looked at the interplay between the MTA and the Planned Community Act. The Act provides that the provisions of the Planned Community Act control over inconsistent statutes, but that specific statute is not retroactive to planned communities created prior to January 1, 1999. For a community that has restrictions recorded prior to that date, and which has not opted in to the Planned Community Act, it remains a question as to whether the Marketable Title Act could result in some or all of the restrictive covenants being rendered unenforceable. If the Planned Community Act does not automatically save HOA restrictions, it may also be possible for the Association to record a Notice in the relevant County of the existence of the restrictions to keep them viable. This is likely a better option for communities with covenants of less than 30 years’ duration.

TAKEAWAY: The issues raised by this case are complicated and unresolved. If the Auger decision is not changed by the Courts, the NC General Assembly should amend the Marketable Title Act or the Planned Community Act to protect planned communities and their development schemes. We will continue to monitor this case and its impact and provide updates on how this decision may impact your community.

The full decision can be found at: https://appellate.nccourts.org/opinions/?c=2&pdf=39189


If you have questions about this or any other real estate or community association issue, please contact a Law Firm Carolinas attorney at any of our five offices for assistance.

Author: Harmony Taylor
Articles have been Reprinted with permission from Black, Slaughter, Black.

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