March 2001

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

THE PLANNED COMMUNITY ACT -AMENDMENT OF RESTRICTIVE COVENANTS

1.  General Comments.

As we noted in an earlier newsletter, the North Carolina Planned Community Act (NCPCA) became effective January 1, 1999. G.S. 47F-1-102 governs applicability, with G.S. 47F-1-102(b) exempting certain communities and G.S. 47F-1-102(d) setting forth how to bring prior communities under the act. The act is discussed in detail in P. Hetrick, Of "Private Governments" Arid the Regulation of Neighborhoods: The North Carolina Planned Community Act, 22 Campbell L. Rev. 1 (1999). 

Questions have been raised regarding the extent to which an amendment of restrictive covenants can be binding on owners in the community when the objecting owners do not agree to the amendment. For example, the following specific question has been asked. If the restrictions are recorded first and subsequently, a vacant lot purchaser (which could be a builder) records his deed, can a subsequent recorded amendment raising square footage requirements be binding upon that owner when that owner does not consent to and join in the amendment? The answer is, "it depends." There are several possible situations discussed in 2 through 4 below.

G.S. 47F-2-101 states that a planned community (defined in G.S. 47F-1-103(23))is created by execution and recordation of a declaration, but unlike the condominium act in Chapter 47C (specifically, G.S. 47C-2-105(a)(12)) restrictive covenants are not required to be included but usually are included.  

2. Planned community established after the effective date of the act. 

An amendment is governed by the rules in G.S. 47F-2-117. The rule in G.S. 47F-2-117(a) states: 

Except in cases of amendments that may be executed by a declarant under the terms of the declaration or by certain lot owners under G.S. 47F-2-118(b) [this section applies to termination of a community] the declaration may be amended only by affirmative vote or written agreement signed by lot owners of lots to which at least sixty-seven percent (67%) of the votes in the association are allocated, or any larger majority the declaration specifies or by the declarant if necessary for the exercise of any development right. The declaration may specify a smaller number only if all of the lots are restricted exclusively to nonresidential use. 

Under G.S. 47F-2-117(a), the declaration can contain its own procedure for amendment. That could allow the declarant to reserve the right to amend without the joinder of any owner or, other party. This would be consistent with the rule of Rosi v. McCoy, 79 N.C. App. 311, 338 S.E. 2d 792 (1986), aff'd, 319 N.C. 589, 356 S.E. 2d 568 (1987), discussed at length in M. Winters and E. Fountain, Decision In Drafting Restrictive Covenants And Architectural Guidelines, appearing in Real Property Section Annual Meeting Manuscript, pp. vii-1 through vii-29, at pp. vii-12, et seq. (April 1989). Also see P. Hetrick and J. McLaugblin, Webster's Real Estate Law in North Carolina 18-8 (5th ed.) and E. Urban and G. Whitney, North Carolina Real Estate 21-8(c) (Harrison Co. 1996, suppl. 1999). [The declarant can also act alone in the exercise of any "development right," a term not defined in the act (see G.S. 47F-1-103) (but, interestingly, the term is defined in G.S. 47C-1-103(11) of the condominium act). "Development rights" as set out in the condominium act, does not include the right to amend restrictions.] 

It is noted that when an owner's vote or consent is required under the rules of G.S. 47F-2-117(a), "lot owner" does not include (and specifically excludes) "a person having an interest in a lot solely as security for an obligation" such as a deed of trust. See G.S. 47F-1-103(20). Therefore, an amendment need not be approved or signed by a holder of a deed of trust. Voting is governed by G.S. 47F-3-110. It is noted that G.S. 47F-2-117(a) does not require the owners voting for the amendment to join in its execution, although they certainly could. G.S. 47F-2-117(a) requires an "affirmative vote or written agreement signed by [the requisite number of lot owners]." Therefore, it seems implicit that the amendment could be executed by either the requisite number of owners or by the association for the owners based on the vote or written agreement. (G.S. 47F-2-117(c) and (e) govern recording and indexing.) However, since the act is not as precise as it could be, it would be advisable for any vote or agreement to specifically authorize not only the amendment but also the association to act for the owners by having the association sign the amendment for the owners, if it is desired for the association to act in that capacity. Supplemental principles of law apply except to the extent inconsistent with Chapter 47E G.S. 47F-1-108. That should include the law of agency. Of course, a well-drafted declaration can resolve procedural details not expressly prohibited by G.S. 47F-2- 117. Perhaps G.S. 47F-2-117 should be amended to be more precise in this regard. In a lot of cases, the amendment will be sent to the owners with a signature page and instructions-in such a case, the amendment is signed by the required number of owners and the amendment is recorded and indexed. That avoids the issue of the association signing for the owners when the act and declaration is unclear. 

Since the act exists as law prior to the conveyance to the lot purchaser, an amendment under G.S. 47F.2-117 to change square footage would seem to bind the purchaser (and the purchaser's lender, if any), whether or not the recorded declaration contains a clause tracing G.S. 47F-2-117. This means that as long as G.S. 47F- 2-117(a) is followed, less than all of the owners need agree to the amendment in order for it to be effective. In fact, in our example, the objecting owner would not have to agree in order to be bound. It is noted that the Uniform Planned Community Act (UPCA) 2- 117(d) was included by the NCPCA's draftsmen (one of which was Jay Hedgepeth of our Winston-Salem office) but was "lobbied out." UPCA 2-117 (d) states: "Except to the extent expressly permitted or required by other provisions of this Act, no amendment may create or increase the special declarant rights, increase the number of units, change the boundaries of any unit, the allocated interests of a unit, or the uses to which any unit is restricted, in the absence of unanimous consent of the unit owners." If changing "the uses to which any unit is restricted" includes changing square footage (not exactly a clear proposition), UPCA 2-117(d) would require unanimous consent to change restrictions since UPCA 2-117(d) would apparently control over G.S. 47F-2-117(a), had UPCA 2-117(d) been enacted.

3. A planned community existing before the act's effective date which is brought under the act. 

Any planned community created prior to the effective date of the act can elect to make the act applicable by amending the declaration in accord with G.S. 47F-l-l02(d). That section also states: "The amendment may be made by affirmative vote or written agreement signed by lot owners of lots to which at least sixty-seven percent (67%) of the votes in the association are allocated or any smaller majority the declaration specifies. To the extent the procedures and requirements for amendment in the declaration conflict with the provisions of this subsection, this subsection shall control with respect to any amendment to provide that this Chapter applies to that planned community." 

See 2 above for a discussion of execution of amendments. 

EXAMPLE 1: The planned community exists before the effective date of the NCPCA, the declaration requires unanimous consent of the owners to amend the declaration, the lot purchaser records its deed before the NCPCA's effective date and before the amendment pursuant to G.S. 47F-1-102(d). 

EXAMPLE 2: Same facts as in EXAMPLE 1 except that the lot purchaser records its deed after the NCPCA's effective date and before the amendment pursuant to G.S. 47F-1-102(d).

In EXAMPLE 1, G.S. 47F-1-102(d) is not limited to a situation where a lot owner purchases its lot after the effective date of the NCPCA. Therefore, in EXAMPLE 1, and EXAMPLE 2, the "67% rule" in G.S. 47F-1-102(d) applies for the purpose of making the NCPCA applicable. The last sentence of G.S. 47F-1-102(d) controls over the original declaration. In EXAMPLE 1 and EXAMPLE 2, an amendment to change square footage would be an amendment under G.S. 47F-2-117(a). In G.S. 47F-2-117(a), the "67% rule" seems to be subject to the phrase "or any larger majority the declaration specifies or by the declarant if necessary for the exercise of any development right."

Therefore, in EXAMPLE 1 and EXAMPLE 2, the unanimous consent requirement in the declaration would control. "Development right" is not defined in the NCPCA as noted above. G.S. 47F-2-117(a)'s reference to "development right" would have dubious application where a lot owner purchased as in EXAMPLE 1.

4. Conclusion. 

The NCPCA could be improved by clearly stating how amendments are to be executed and who are bound by amendments in certain cases. It probably would have been better to include UPCA 2-117(d). Other principles of law apply, but the act controls in case of conflict. G.S.47F-l-l08. The Title Company of North Carolina can help evaluate amended restrictions in a planned community or other context.

ESTATES -RENUNCIATION, DISCLAIMER AND FEDERAL TAX LIENS IN VIEW OF DRYE, JR. 

The U.S. Supreme Court case of Drye, Jr., 120 S. Ct. 474 (1999), has been brought to our attention.

Prior to his mother's death, the IRS filed several federal tax liens against Mr. Drye under 26 U.S.C. 6321. Subsequent to that, his mother died intestate. Mr. Drye was appointed administrator. Six months later, Drye filed a disclaimer disclaiming all interest in his mother's estate. Under Arkansas law, this created the legal fiction that Mr. Drye predeceased his mother. This meant that Drye's daughter, Theresa, took the estate. She was appointed administrator. She set up a spendthrift trust. Her parents were beneficiaries during their lifetimes. She was a beneficiary. Under state law, creditors of Drye could not reach the property due to the disclaimer and the spendthrift trust. The IRS filed a federal tax lien against the trust and Drye's interest in the trust.

The Supreme Court granted certiorari to resolve a conflict between the Eighth Circuit, where the case was pending and the Fifth and Ninth Circuits. The, Eighth Circuit held that state law determines whether a given set of circumstances creates a right or interest; federal law then dictates whether that right or interest constitutes "property" or the "right to property" under 26 U.S.C. 6321. The Fifth and Ninth Circuits held that state law is the determinative factor. That is, if the effect of disclaimer was that the disclaiming party never had title, the lien could not attach, whereas if title became vested in the disclaiming party and then was divested by the disclaimer, the lien could attach.

Under 26 U.S.C. 6321, the government can impose a lien. If "any person liable to pay any tax neglects or refuses to pay the same after demand, the amount...shall be a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to such person." 26 U.S.C. 6331(a) states: "If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax. ... by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax."

Inheritances or devises disclaimed under state law are not listed as exempt in 26 U.S.C. 6334(a). 26 U.S.C. 6334(c) makes 6334(a)'s list exclusive. The Court noted that the absence of any recognition of disclaimers in 6321, 6322, 6331(a), 6334(a), and 6334(c) (the relevant tax collection provisions) contrasts with 2518(a), which renders qualifying state-law disclaimers "with respect to any interest in property" effective for federal wealth-transfer tax purposes and for those purposes only.

Consistent with past rulings on similar issues the Supreme Court held that it looks initially to state law to determine what rights a taxpayer has in the property the government seeks to reach, and then to federal law to determine whether the taxpayer's state-delineated rights qualify as "property" or "rights to property" within the federal tax lien legislation. 

The court felt that, while a donee of an inter vivos gift declining that gift restored the property to the donor, in this circumstance, Drye had the power to accept the inheritance or decline it and channel it to a close family member-a valuable property right. The court said: "This power to channel the estate's assets warrants the conclusion that Drye held 'property' or a 'right to property' subject to the Government's lien." The tax liens attached, therefore. It would appear that the decision would have been the same if Drye had merely disclaimed and was not the beneficiary under the spendthrift trust. 

Chapter 31B allows renunciation by an heir or devisee. G.S. 31B-l(a). An instrument of renunciation is required. G.S.31B- l(c). If real property is renounced, a copy of the renunciation must be recorded in the office of the register of deeds of the county where all or any part of the real property is located. G.S.31B-2(d). Under G.S. 31B-2(c), the renunciation must also be filed where the administration of the estate is pending. Once recorded, the renunciation bars marital interests or any other interest in the real property that would have gone to the renouncing party. G.S.31B-2(d). 

G.S. 31B-2 also pertains to the time of filing the renunciation. G.S. 31B-2(a) states when a renunciation must be filed to be a qualified disclaimer for federal or state inheritance, estate and gift tax purposes.

G.S. 31B-3 governs effect of renunciation. G.S. 31B-3(a) was amended effective September 18, 1998 to apply to all renunciations executed on or after that date. G.S. 31B-3(a) provides in part that unless the decedent or creator of an interest under an inter vivos instrument has otherwise provided in the instrument creating the interest, the property or interest renounced devolves as follows: (1) If the renunciation is filed within the time period described in G.S. 31B-2(a), the property or interest renounced devolves as if the renouncer had predeceased the date the transfer of the renounced interest to the renouncer was complete for federal and State inheritance, estate, and gift tax purposes. Any such renunciation relates back for all purposes to the date the transfer of the renounced interest to the renouncer was complete for the purpose of those taxes. (2) If the renunciation is not filed within the time period described in G.S. 31B-2(a), the property or interest devolves as if the renouncer had died on the date the renunciation is filed. G.S. 31B-3(a)(3) contains a rule for future interests. 

G.S. 31B-3(b) provides that in the event that the property or interest renounced was created by testamentary disposition, the devolution of the property or interest renounced shall be governed by G.S. 31-42(a), the statute governing lapses, notwithstanding that in fact the renouncer has not actually died before the testator. G.S. 31-42(a) deals with a situation where a devisee predeceases a testator. This statute is discussed in our July, 2000 newsletter. G.S. 31B-3(c) states that in the event that the decedent dies intestate, or the ownership or succession to property or to an interest is to be determined as though a decedent had died intestate, and the renouncer has living issue who would have been entitled to an interest in the property or interest if the renouncer had predeceased the decedent, then the property or interest renounced shall be distributed to such issue, per stirpes. If the renouncer does not have such issue, then the property or interest shall be distributed as though the renouncer had predeceased the decedent. 

It would seem that G.S. 31B-3(b) and G.S. 31B-3(c) govern the title to the property. And, the otherwise beneficial effect of these statutes is subject to the Drye, Jr. case. The handling of state court judgments might be a different matter. Old G.S.31B-3(a) was clearer in providing that the effect of the renunciation was as if the renouncer predeceased the decedent and that the renunciation related back to the death of the decedent. New G.S. 31B-3(a)(1) refers to relation back to the date of transfer. New G.S. 31B-3(a)(2) refers to devolution as if the renouncer died on the date the renunciation was filed, without mention of relation back. It may be that, notwithstanding G.S. 31B-3(a)(1) and (2), there is enough in G.S. 31B-3(b) and (c) to prevent a pre-existing state court judgment from attaching to property subsequently devised to or inherited by the judgment debtor who thereafter renounces, pursuant to Chapter 31B.

There is a further possible implication of Drye, Jr. In our January, 2000 newsletter we ventured the opinion that a federal tax lien should be treated as a judgment in state court for purposes of assessing when a pre-existing lien against an heir or devisee subsequently obtaining property when a decedent dies attaches or does not attach to that property if and when the P.R. must sell the land to pay debts of the estate or for other reasons. There is enough language in Drye, Jr. for the real property community to distinguish how a federal tax lien would be treated in that situation, although Drye, Jr.'s facts are distinguishable. In the context of a sale by a P.R. of the estate, the only absolutely safe course is to conduct a procedure under Chapter 28A (discussed in our earlier newsletter) to sell the property and to join not only the heir or devisee under G.S. 28A-17-4 but also the United States under G.S. 28A-17-6 for purposes of determining lien attachment and priority. Even then, the United States might appeal an adverse ruling based on Drye, Jr. If no appeal is filed and if the judgment establishes that the sale is free of the federal tax lien, the sale can be insured without exception to that lien, assuming proper service on the United States. The same would be true if any appeal resulted in such a judgment being affirmed. We will be doing some additional research in this area regarding federal tax liens. We understand that certain language in Drye (pertaining to the renouncer's control over who gets the title by virtue of renunciation) may provide a basis for a different result in a situation where a federal tax lien is filed against someone who subsequently becomes an heir or devisee and then the P.R. sells the property. However, when it comes to federal tax liens, extreme caution is required.

PROPOSED 2000 FORMAL ETHICS OPINION 8 [OCTOBER 18, 2000] 

In our December, 2000 newsletter, we cited and discussed the case of NationsBank of North Carolina, N.A. v. Parker, 535 S.E. 2d 597 (N.C. App. 2000), involving a closing attorney sued in his capacity as a notary and attorney.

The above-captioned ethics opinion should be studied by attorneys. The opinion states that it is unethical for an attorney to fail to follow the applicable statutes. Notarizing a document when the signer has not acknowledged its execution in the attorney's presence is not in accord with the law. The opinion also states that it is unethical for an attorney to direct an employee to act in violation of the law. The opinion states that "this provision of Chapter 10A is widely ignored," referring to G.S. 10A-3(1). Such deviation from proper notary requirements could cast doubt upon validity of acknowledgments and, therefore, the effectiveness of recording. Supply Co. v. Nations, 259 N.C. 681, 131 S.W. 2d 425, Hifort, Inc. v. Burnette, 42 N.C. App. 428, 257 S.E. 2d 85.

DID YOU KNOW THAT. ..

            ...Subject to the provisions of the articles of incorporation or the declaration, an association in a planned community governed by Chapter 47F can grant easements, leases or licenses over the common elements without complying with G.S. 47F-3-112's requirement to obtain a percentage of the owners to approve the transaction, to be distinguished from when a conveyance or encumbrance of the common elements occurs under G.S. 47F-3-102(8). See G.S. 47F-3-102(9). G.S. 47C-3-102(a)(8) and (9) of the Condominium Act are the same in this regard.  

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