Homeowners across the state may not realize it, but the Court of Appeals just triggered a bomb buried in a North Carolina statute for nearly 50 years.
A ruling Tuesday effectively struck down any restrictive covenant that doesn’t specifically limit a property to residential use once the covenant has been in place 30 years, unless within that period someone records sufficient notice of renewal for another 30 years.
That means covenants governing the types of structures that can be placed in neighborhoods, architectural requirements, setbacks, and other matters often overseen by homeowners’ associations and their architectural review committees may be kaput.
This decision, C Investments 2, LLC v Auger, doesn't just shake the foundations of older HOAs; it might threaten their reason for being.
The decision interprets provisions of the North Carolina Real Property Marketable Title Act, enacted in 1973. The purpose of the law was to relieve some arduousness in title searches every time property changes hands by declaring that evidence of an unbroken chain of title need only go back 30 years for title to be deemed marketable. It eliminates all rights and interests in property that predate the lookback period, with 13 exceptions.
One exception is for “[c]ovenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable.” But the statute goes on to say that “covenants other than those mentioned herein which limit the property to residential use only are not excepted from” the elimination of rights and interests older than 30 years.
The Court of Appeals held that the statute unambiguously voids any covenant not specifically restricting a property to “residential use” after three decades. A dissenting opinion argued that term should include covenants governing the construction of residential “structures,” but the three-judge panel’s majority distinguished between “use” and “structures,” eliminating covenants involving the latter and anything not actually restricting property to residential "use." Walk through downtown Wilmington and see how many residential structures are used for lawyers’ offices and you can see how a structure's design doesn't dictate its use.
The majority recognized their decision blows a mighty big hole in older neighborhood self-governance schemes, but the judges left it to the General Assembly to change the law it enacted if that’s what lawmakers want to do. To be sure, there are lots of potential gray areas the decision doesn't address, like the effect, if any, of newer amendments to covenants that are too old.
The property owners trying to enforce their common covenants in the case have a right to appeal to the Supreme Court based on the dissent, but even the dissent agreed that many common covenants, such as prohibitions on outbuildings and setback requirements, don’t fall within the exception. Meaning that unless the Supreme Court agrees to hear the entire case anew, this decision could still deal a major blow to HOAs and neighborhoods with common covenants throughout the state.
Depending on your perspective, this decision is either a blessing or a curse. Plenty of folks walk through our law firm’s doors ticked off at an overbearing HOA board or picky architectural review committee. They would say it’s about time for a comeuppance.
Of course, when a neighbor starts to build a commercial-grade sawmill in his side yard to support a new woodworking “hobby,” this decision
may have imploded anyone's grounds to complain.
[UPDATE: The North Carolina Supreme Court upheld this decision in December 2022. The General Assembly amended the relevant statute to exempt most planned residential communities from the effects of the law and this ruling. Planned residential communities established before 1999 and lacking a homeowners association as of July 1, 2022, however, would suffer the full impact of the decision.]