A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
JULY 2003 TCNC
SUBORDINATION AGREEMENTS – A NEW STATUTE PASSES
1. G.S. 39-6.6 – general
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
G.S. 39-6.6 appears as follows:
39-6.6. Subordination agreements.
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.
The trustee of a deed of trust shall not be a necessary party to a
subordination agreement unless the deed of trust provides otherwise.
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
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.)
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
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:
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):
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
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.
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
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:
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.