July 2003

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

JULY 2003 TCNC NEWSLETTER 

 

SUBORDINATION AGREEMENTS – A NEW STATUTE PASSES 

1. G.S. 39-6.6 – general comments. 

G.S. 39-6.6 has been enacted. It applies to subordination agreements filed or recorded on or after its effective date, October 1, 2003. It is part of Senate Bill 629. 

G.S. 39-6.6 is a result of our putting the problem of subordination agreements on the Real Property Law Section (RPLS) agenda and North Carolina Land Title Association (NCLTA) agenda in 2001, with a draft proposal outlined in “Subordination Agreements,” a detailed article appearing in two parts in our October 2001 and November 2001 newsletters, available at www.oldrepublictitle.com/nc.  

G.S. 39-6.6 appears as follows: 

§ 39-6.6. Subordination agreements.

(a) A written commitment or agreement to subordinate or that subordinates an interest in real property signed by a person entitled to priority shall be given effect in accordance with its terms and is not required to state any interest rate, principal amount secured, or other financial terms. For purposes of this section, an “interest in real property” shall include all rights, title, and interest in and to land, buildings, and other improvements of an owner, tenant, subtenant, secured lender, materialman, judgment creditor, lienholder, or other person, whether the interest in real property is evidenced by a deed, easement, lease, sublease, deed of trust, mortgage, assignment of leases and rents, judgment, claim of lien, or any other record, instrument, document, or entry of court.

(b) The trustee of a deed of trust shall not be a necessary party to a subordination agreement unless the deed of trust provides otherwise.

(c) For purposes of G.S. 1-47, a commitment or agreement described in subsection (a) of this section is deemed a conveyance of an interest in real property.

(d) The section is not exclusive. No agreement that is otherwise valid shall be invalidated by failure to comply with the provisions of this section.” (Emphasis added.) 

2. The MCB Limited fiasco revisited – briefly. 

G.S. 39-6.6 is intended to overrule MCB Limited v. McGovern, 86 N.C.App. 607, 359 S.E.2d 50 (1987), discussed at length in “Subordination Agreements – Part I”, appearing in our October, 2001 newsletter, available at www.oldrepublictitle.com/nc. The case dealt with an agreement to subordinate to an interest that came into effect in the future. The case did not deal with a subordination of one existing interest to another existing interest. And so, the case voided an attempt at an agreement to subordinate as outlined in the case, but was not an in point holding on the subordination of one existing interest to another existing interest, such as the subordination of M-1’s existing deed of trust to M-2’s deed of trust existing at the time the subordination is executed by M-1. As we stated in our October, 2001 newsletter in reference to MCB Limited:  

The court, stating that the case was one of first impression in North Carolina, held that the subordination provisions in the contract and deed of trust were void for indefiniteness, stating, “If any portion of the proposed terms is not settled, or no mode agreed on by which they may be settled, there is no agreement.” The court found the reasoning of the California courts persuasive, stating that the subordination, at a minimum, must stipulate the amount and interest rate of the loan subordinated to. Particularly troublesome for the court was the fact that the contract clause contained neither element and the clause in D’s deed of trust stated that D would subordinate to a future loan “in such amount as may reasonably be requested by” P, requiring D and P to reach agreement in the future, a void provision. 

3. Situations where G.S. 39-6.6 is clearly applicable. 

G.S. 39-6.6 clearly applies when M-1 subordinates M-1’s existing deed of trust to M-2’s deed of trust existing when the subordination is executed. Of course, as noted above, MCB Limited is not a direct holding as to this type of subordination. 

G.S. 39-6.6 clearly applies when M-1 subordinates to a deed of trust to come into existence in the future, as long as the agreement is definite enough to identify the type of deed of trust to which M-1 is subordinating, notwithstanding lack of compliance with MCB Limited

When a deed of trust is to be subordinated to another interest (usually another deed of trust), in our article entitled “Subordination Agreements – Part 1” appearing in our October, 2001 newsletter we took the position that under current law, a trustee in a deed of trust did not have to join in the execution of a subordination by the lender—beneficiary unless the deed of trust said otherwise. Our reasoning was that the subordination was not a conveyance of title vested in the trustee, but it was merely a change of priority by agreement. Subsection (e) of our proposal made its way into G.S. 39-6.6(b) set forth in 1. above.

 

G.S. 39-6.6 clearly applies when any other recorded interest is subordinated to any other recorded interest existing at the time of the subordination’s execution. However, we had thought that additional language was necessary in the following instance, as one example: 

T’s  lease for more than 3 years is recorded prior to M’s deed of trust, and does not contain an “automatic subordination clause.” T executes a subordination of his lease to M’s recorded deed of trust. This is not recorded. (This could be part of an “SNDA”; that is, a “Subordination, Nondisturbance and Attornment Agreement.”) T then assigns his interest to A and A records his assignment. 

In the above example, A should be able to rely upon what the record shows and the record does not show T’s prior unrecorded subordination. However, G.S. 47-18(a), the recording act, does not mention subordinations. While G.S. 47-18(a) refers to “conveyances,” a subordination is not a conveyance. The conveyance occurred when the owner conveyed title to the trustee named in the deed of trust. The subordination is merely a document changing priority. Likewise, a subordination is not a “contract to convey,” an “option to convey” or a “lease …” within the purview of G.S. 47-18(a). In Lawing v. Jaynes, 285 N.C. 418, 206 S.E.2d 162 (1974), discussed in E. Urban and G. Whitney, North Carolina Real Estate § 21-102, an option to purchase was found not to be within the class of those documents which must be recorded under then existent G.S. 47-18(a) in order to be valid against purchasers for value and lien creditors. The same thing could happen for subordination agreements. Therefore, we had suggested a clause in the subordination statute which would have clarified things. See our October, 2001 newsletter. However, perhaps such a provision would be more appropriately placed in G.S. 47-18(a). The first sentence of G.S. 47-18(a) could be amended to read as follows: 

No (i) conveyance of land, or (ii) contract to convey, or (iii) option to convey, or (iv) lease of land for more than three years or (v) subordination of an interest when the interest is required to be evidenced of record pursuant to this section shall be valid to pass any property interest or affect priority as against lien creditors or purchasers for a valuable consideration from the donor, bargainor or lessor but from the time of registration thereof in the county where the land lies, or if the land is located in more than one county, then in each county where any portion of the land lies to be effective as to the land in that county. (Italics indicates added language.) 

4. Other situations where G.S. 39-6.6 is probably applicable. 

As noted in 1. above, the session laws made G.S. 39-6.6 applicable “to subordination agreements filed or recorded” on or after October 1, 2003. However, as noted in 2. above and 3. above, MCB Limited, to the extent that it is a holding at all, applies to, essentially “self-executing subordinations.” That is, for example, a subordination in a lease. A lease for a total term of three years or less need not be evidenced of record by recording either the lease or a memorandum of lease pursuant to G.S. 47-118. See G.S. 47-18(a)(iv). These unrecorded leases will often contain a clause subordinating the lease to any deed of trust that comes into existence in the future as long as the deed of trust is within the provision’s defined class of deeds of trust. The session law quoted above does not refer to unrecorded subordinations. G.S. 39-6.6(d), quoted in 1. above, does not help fix this “session law applicability oversight,” since the issue is, does G.S. 39-6.6 apply to unrecorded subordinations? The issue, in reference to unrecorded subordinations, is not did the unrecorded subordination fail to comply with the provisions of G.S. 39-6.6 merely because the subordination was unrecorded? There is no requirement in G.S. 39-6.6 that subordination agreements be recorded. The session law should be amended to state: “Section 1 of this act becomes effective October 1, 2003 and applies to subordination agreements executed on or after that date.” There are other unrecorded subordinations at issue due to this problem such as the subordination of an unrecorded mechanics’ lien right. Perhaps, as presently drafted, a court would hold that the session law clause pertaining to applicability of G.S. 39-6.6 is not exclusive, but who knows? 

5. Condominium association and planned community association liens. 

In our October 1, 2001 newsletter entitled “Subordination Agreements – Part 1” we had proposed a subsection (c) as follows: 

A provision in a declaration of condominium or a declaration of a planned community subordinating an assessment lien to another interest is a valid subordination if the subordination provision is within the definition of “subordination agreement” set forth in this section, notwithstanding the fact that the association in whose favor the assessment lien arises has not executed the declaration or a separate subordination agreement. 

In discussing our proposal regarding a clause pertaining to assessment liens, the only RPLS criticism was that perhaps the new rule should be placed within G.S. 47C-3-116 and G.S. 47F-3-116. The only explanation that we have received from the RPLS Legislative Committee Chairman is that our suggestion was forgotten about. Therefore, we recommend to the RPLS and the NCLTA the following addition to G.S. 47C-3-116 (condos) and G.S. 47F-3-116 (planned communities): 

[insert subsection designation] Any provision in a recorded declaration which subordinates an assessment lien to any other interest in real property shall be given effect in accordance with its terms notwithstanding G.S. 39-6.6(a), and is not required to state any interest rate, principal amount or other financial terms of the other interest in real property. 

This suggested provision is necessary because G.S. 39-6.6(a) applies only when the party holding the interest to be subordinated has signed the document subordinating the interest. A unit owner’s association does not usually sign the declaration. 

G.S. 47C-1-103(10) and G.S. 47F-1-103(10) define “declaration” to expressly include any amendment thereto. It is believed that the above suggested addition to G.S. 47C-3-116 and G.S. 47F-3-116 need not be as lengthy as G.S. 39-6.6(a) for obvious reasons. 

We did note that a careful reading of MCB Limited would allow a court to distinguish the facts of that case from the case of assessment liens. See “Subordination Agreements – Part 2” in our November, 2001 newsletter. 

SIMULTANEOUS RECORDING 

Senate Bill 629, noted above, also added the following to G.S. 47-18(a) and G.S. 47-20(a), our recording statutes governing priority: 

Unless otherwise stated either on the recorded instrument or on a separate recorded instrument duly executed by the party whose priority interest is adversely affected, instruments registered in the public record shall be presumed to have priority based on the order of recordation as determined by the time of recordation. If instruments are recorded simultaneously, then the order of recordation shall be presumed as follows, in order of priority:

 

(1) The earliest document number set forth on the recorded instrument.

 

(2) The sequential book and page number set forth on the document if no document number is set forth on the recorded instrument.

 

The presumptions created by this subsection are rebuttable. (Emphasis is added.) 

These changes become effective October 1, 2003, and apply to all instruments filed or recorded on or after that date. 

We do not feel that the presumptions referred to in the amendments should be rebuttable. The first sentence of the addition refers to existing recording law. If, by way of example, M-1’s deed of trust is clearly recorded on November 1, 2003 and M-2’s deed of trust is clearly recorded on December 1, 2003, on what basis would the presumption that M-1 would prevail over M-2 be rebutted if there was nothing in the chain of record title requiring rebuttal of the presumption? Further, in the event of simultaneous recordings where, under the new statutory criteria, M-1 prevails over M-2 we would have the same question. Clearly, anything that should change obvious record priority will appear of record, with the possible exception of certain lease situations where subordination is at issue. In this regard, the amendments already have an exception which states, “Unless otherwise stated either on the recorded instrument or on a separate recorded instrument duly executed by the party whose priority interest is adversely affected …” Where the public records are clear, should M-2 be able to produce twenty credible witnesses that, notwithstanding the record, M-2 was to have priority? We recommend the references to presumptions be removed. 

The bill is necessary to overcome Hood v. Landreth, 207 N.C. 621, 178 S.E. 222 (1935), where there were two instruments dated July 10, 1928 and probated on July 14, 1928, with the notation thereon by the register of deeds stating: “Filed for registration on July 14, 1928, at ten o’clock a.m. and duly recorded.” The temporary sheet index showed that both mortgages were indexed on July 14, 1928. The order on the index listed the Loudermilk mortgage then the McAllister mortgage. Both contended that his mortgage was a first mortgage. It was held that both mortgages “have parity of registration.”

 

RESTRICTIVE COVENANTS – LEASES, SHOPPING CENTERS AND THE WAL-MART CASE 

In Wal-Mart Stores, Inc v. Ingles Markets, Inc., __N.C.App.__, 581 S.E.2d 111 (2003), Horne leased property in a shopping center to Ingles so that Ingles could operate a grocery store. Horne and Ingles signed and recorded a memorandum of lease. § 6 of the memorandum set out a radius restriction which stated as follows: 

6. The lease provides that during its term, Landlord covenants and agrees not to lease, rent, occupy, or suffer or permit to be occupied, any part of the Shopping Center or any other area owned or controlled, . . . by Landlord, its successors, heirs or assigns, or Landlord’s principal owners, stockholders, directors, or officers, or their assignees (hereinafter sometimes referred to as the “Owners”), which is within five (5) miles of the Shopping Center for the purpose of conducting therein or for use as, [a] supermarket, [or] food store, . . . and further, that if Landlord or Owners own any land, or hereinafter during the term of the Lease Landlord or Owners acquire any land within such distance of the Shopping Center, neither will convey the same (other than the Wal-Mart Premises as defined in the Lease) without imposing thereon a restriction for a period of twenty (20) years which secures compliance with the terms of the Lease. This Section 6 shall not be applicable to the portion of the Shopping Center to be purchased by Wal-Mart Properties, Inc. (Emphasis is court’s.) 

Horne then sold “a small section of the shopping center parking lot” to Wal-Mart. This did not include the Ingles leasehold tract. The deed to Wal-Mart, which Wal-Mart did not sign, contained a restrictive covenant that provided: 

The property conveyed hereby has been transferred subject to the following covenants running with the land: (i) The Grantee and any person(s) or entity hereinafter owning or leasing an interest in the Property shall comply with the terms, covenants, and restrictions found in Section Six (6) of the Memorandum of Lease . . . between Ingles Markets, Incorporated and the Grantor. . . . (Emphasis is court’s.) 

The Wal-Mart property was not identified in Ingles’ lease or in the above referenced deed to Wal-Mart. 

About ten years later, Wal-Mart began constructing a Wal-Mart center including a grocery department. This site for the center was not within the shopping center, but it was within the five-mile radius of the shopping center mentioned in the lease memorandum. 

The Court of Appeals held that § 6 of the lease memorandum was a personal covenant by Horne, the landlord. It seems that the court is saying because of the contents of the lease memorandum, standing alone, without reference to the Wal-Mart deed, the lease memorandum, particularly § 6 thereof, did not constitute a restrictive covenant enforceable by Ingles against Wal-Mart as to the center site. Wal-Mart was never Ingles’ landlord and is not subject to personal covenants in the lease. Horne complied with its personal covenants in the lease memorandum by placing a restrictive covenant in the deed to Wal-Mart for the parking lot tract. This restrictive covenant in the deed to Wal-Mart restricted only the parking lot tract and not the Wal-Mart center tract. To this extent, as to the parking lot tract, there was a real covenant running with the land. 

FLIPPING – FHA INSURANCE RULES 

The new FHA Property Flipping Rules (68 Red. Reg. 23375) went into effect on June 2, 2003. The legal cite is 24 CFR Part 203. The rules can be accessed at the following website: 

http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.

gpo.gov/2003/pdf/03-10778.pdf 

The rules do not extend to VA loans or conventional loans. Let us know if you would like a copy of Old Republic’s summary of the rules.

 

PUBLIC HOLIDAYS – AFFECT ON TIME LIMITATIONS 

House Bill 394 seems headed toward approval. You can check that at www.ncleg.net. This topic of concern was discussed in “Public Holidays – Affect On Time Limitations,” appearing in our December, 2002 newsletter, discussing In Re County Lake Enterprises, Inc., 284 B.R. 223 (E.D.N.C. 2002) which held that if the tenth day of the upset bid period fell on a holiday set out in G.S. 103-4(a), when the clerk’s office was open, the tenth day would not fall on that day. The bill would change this and other problem areas. 

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