A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA
[In our last
newsletter, October, 2001, Part I of this article appeared. It dealt with
pertinent general comments, reported cases affecting validity of
subordination agreements, a proposed "first draft" statute
governing subordination agreements and subordination of one mortgage or
deed of trust to another. This is a continuation of that article.]
- Part II
Condominium and planned community assessment liens and declaration
"old" and "new" condominium acts provide for unit
owners' association assessments and assessment liens. For condominiums the
lien must be filed in the clerk of superior court's office and will have
priority from that date. G.S. 47A-22(a); G.S. 47C-3-116(a) and (b). The
planned community act contains similar provisions. G.S. 47F-3-116(a) and
(b). Prior to the planned community act, the declaration governed the
method of lien perfection. However, none of the above acts deal with the
subordination of the assessment lien. This is particularly unfortunate
given MCB Limited. This is
because a condominium or planned community declaration will usually
contain a provision subordinating any assessment lien that may come into
existence to a specifically defined class of future mortgages and deeds of
trust. The class might be defined as "any first
Lease subordinating to a mortgage or deed of trust.
lease will often contain a subordination section. Typically; the
subordination will specifically define the class of mortgages and deeds of
trust to which the lease will become subordinate. Certain subordinations
automatically subordinate the lease to any future mortgage or deed of
trust within the class. Some of those provisions will obligate the tenant
to give what is a confirmatory subordination agreement, confirming the
automatic subordination, upon request of the landlord. Certain
subordination clauses seem to constitute an agreement to subordinate
later, when the particular mortgage or deed of trust comes into existence.
Obviously, an "automatic" subordination provision in a lease
"will raise "MCB Limited concerns."
A title insurer will be asked to insure a lender that a lease containing
such a provision is subordinate to the insured deed of trust. It should be
remembered that, in North Carolina, only a lease for more than three years
must be recorded in order to be valid against a subsequently recorded
mortgage or deed of trust. G.S. 47-18(a)(iv) (recording act); G.S. 47-118
(statutory form of memo of lease); G.S. 47-120 (priority effect of
recording memo of lease). A lease for a lesser term need not be recorded
or, for that matter, be in writing. G.S. 47-18(a)(iv); G.S. 22-2 (statute
of frauds). However, those leases can be recorded and the memo of lease
provisions in G.S. 47-118 and G.S. 47-120 can be taken advantage of. If a
lease has an option to renew that, if renewed, would make the term longer
than three years, it would seem that G.S. 47-18(a)(iv) would apply: Note
how G.S. 47-118(a)(3), pertaining to the form of a memorandum of lease and
its contents, refers to "the term of the lease, including extensions,
renewals or options to purchase, if any..." An assignment of a lease
for more than three years must be recorded in order to be enforceable
against a purchaser for value, lien creditor
or holder of a mortgage or deed of trust. Herring
v. Volume Merchandise, Inc., 249 N.C. 221, 106 S.E. 2d 197 (1958).
would seem that, based on the same logic set out in 4. pertaining to
association liens, a title
insurer should insure the subordinate status of a lease, notwithstanding
MCB Limited, if the subordination is otherwise definite and applicable to
the deed of trust to be
insured. An additional reason exists. A lender may require a
subordination, non-disturbance and attornment agreement (an SNDA) from
the lease has no subordination provision, the SNDA will be the sole
subordination document. If that is true, MCB Limited can be strictly
complied with or MCB Limited is distinguishable and not applicable. Also,
a tenant will be unlikely to con- test the matter given the
non-disturbance and attornment provisions in the SNDA that are protective
of the tenant. The same should be true if the SNDA is given in addition to
a subordination clause in a lease.
Trying to establish and, for a title insurer, to insure priority based upon a subordination can present several problems for analysis. This analysis is made no easier by MCB Limited, discussed above. The closing attorney should bring any uncertain subordination issues to the attention of the title insurer. A title insurer can help by taking a practical risk. Legislation should be proposed by the Real Property Section and the North Carolina Land Title Association to resolve doubts created by MCB Limited. A discussion of a subordination of a "mechanics' lien" will be the subject of a future article.
HOMEOWNERS' ASSOCIATIONS -- PLANNED COMMUNITIES -- RIGHT TO ENFORCE RESTRICTIONS
case of Creek Pointe Homeowners'
Association, Inc. v. Happ,_____
N.C. App. _____ , 552 S.E. 2d 220 (2001), deals with the
standing of a homeowners' association to enforce restrictive covenants.
Happ, the owner
of Lots 27 through 31 lying on both sides of a subdivision street known as
Deep Creek Road, erected a fence across that road in violation of the
covenants (which covenants granted an easement in the subdivision streets
to all subdivision lot owners). Kremer, the owner of Lot 22, and the
Homeowners' Association, brought an action to get an injunction requiring
Happ to remove the fence, to bar him from replacing it, and to hold him
accountable for compensatory and punitive damages and for attorneys' fees.
The case contains several significant holdings and observations.
1. The lower
court ruling that the association lacked standing to sue was
interlocutory; but affected a substantial right and, therefore, was
G.S. 47F-3-102(4) applied to the planned unit development retroactively.
G.S. 47F-3-102(4) states that "Subject to the provisions of the
articles of incorporation or the declaration and the declarant's rights
therein, the [homeowners'] association may: . ..(4) Institute, defend, or
intervene in litigation or administrative proceedings on matters affecting
the planned community[.]" The court also cited G.S. 47F-l-l08, which
makes other North Carolina law applicable, unless inconsistent with the
North Carolina Planned Community Act (Chapter 47F), and which applied
Court of Appeals held that "the NCPCA does not automatically
confer standing upon homeowners' associations
in every case, and that questions of standing should be resolved by our
courts in the context of the specific factual circumstances presented and
with reference to the 'principles of law and equity as well as other North
Carolina statutes' that supplement the NCPCA." (Emphasis is court's,
quoting G.S. 47F-1-l08).
respect to the standing of the association, the court noted that an
association might have standing to bring an action in its own name or in
its representative capacity; depending on the circumstances and cited
prior North Carolina case law and the "leading case" of Hunt
v. Washington State Apple Advertising Commission, 432 U.S. 333, 97 S.
Ct. 2434, 53 L. Ed. 2d 383 (1977), which established three prerequisites
for the association to sue in its representative capacity:
[A]n association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization's purpose; and (c) neither the claim asserted, nor the relief requested, requires the participation of individual members in the lawsuit.
The Court of Appeals found that the association met the first two elements of the Hunt test with respect to the association's standing to sue over the obstruction of a subdivision street, to the extent injunctive relief was being sought, since Hunt "contemplated situations in which only injunctive or declarative relief was sought." 552 S.E. 2d, at 226. The Court of Appeals held that the association did not meet the third element of the Hunt rule because, instead of seeking only declaratory or injunctive relief, the association sought compensatory and punitive damages and attorneys' fees.
3. The association had standing to bring the action in its own behalf. 552 S.E. 2d, at 227. This was limited to pursuing claims alleging injury to the association itself.
Judge Walker dissented in part. The dissent argued that the NCPCA (Chapter
47F) confers representative standing upon the association to enforce the
easement rights of the lot owners consistent with the declaration,
articles of incorporation and bylaws, citing G.S. 47F-3-102(4). He stated
that G.S. 47F-3-102(4) did not confer representative standing in every
case. (Emphasis his.) He stated: "Nevertheless, I construe the
NCPCA to allow a homeowners' association, both as a real party in interest
and in a representative capacity; to pursue litigation in matters
affecting the common areas within the planned community; provided such
actions are consistent with its declaration, articles of incorporation and
bylaws." The dissent stated that the association, in its
representative capacity; would have to show that compensatory and punitive
damages were appropriate to a situation where the erection of a fence
damaged the planned community; including all the lot owners. Thus, the
dissent disagreed with the majority's finding that the third element of Hunt
had not been satisfied. He would not have required the participation
of individual lot owners in the action, particularly given the fact that
the common area was at issue. (Judge Walker made instructive comparisons
to the rights conferred to the association under G.S. 47F-3-112; G.S.
47F-1-107 and G.S. 47F-2- 118(e).)
The case should
have the same impact on the condominium act, since the act contains G.S.
47C-3-102(a)(4) and G.S. 47C-l-l08, similar to the provisions discussed
SALES BY TENANTS IN COMMON -- NOTICE
SETTING ASIDE SALES
In Goodson v. Goodson, ____N.C. App. ___, 551 S.E. 2d 200 (2001), a tenant in common petitioned for partition of five parcels, including Tract C. The trial court appointed two commissioners and ordered a "sale by partition." Tract C was offered for private sale. A contract to sell to Pittman-Korbin for $172,335 was negotiated by one of the commissioners, subject to the property's suitability for residential purposes. On that day; the commissioner served on all par- ties to the petition a notice of sale to Pittman-Korbin, which stated that, pursuant to G.S. 46-28(b), the commissioners would report the sale to the court on June 5, 1997, at which time there would be a 10 day upset bid period. Pittman- Korbin terminated its contract when the property failed a percolation test. Freeman offered $128,310 for Tract C with no contingencies. The commissioners accepted the offer on June 2. The commissioners said they then gave notice of sale to all parties. Two parties said they did not receive notice. On June 17, after the upset bid period lapsed with no upset bid, the trial court entered an order confirming the sale of Tract C. The sale closed on August 29, a final report of sale was filed and the commissioner's deed was recorded the same day: Freeman conveyed Tract C to his parents. They subdivided Tract C into five lots. They conveyed five lots to another son who constructed a house on each of the five lots. The Court of Appeals refused to upset the lower court's finding that the commissioners were negligent in not serving notice and not being entitled to a commission. The plaintiffs also wanted the court to set aside the com- missioner's deed. The Court of Appeals upheld the lower court's refusal to do so. The Freemans, who purchased at the commissioner's sale, were innocent purchasers who were protected in their purchase at the judicial sale.
Courts stated: 'A person is an innocent purchaser for value and without
notice when he purchases without notice,
actual or constructive, of any infirmity; pays valuable consideration, and
acts in good faith. Morehead v.
Harris, 262 N.C. 330,338, 137 S.E. 2d 174, 182 (1964). In Morehead, our Supreme Court held that, when there has been a bona
fide purchase for valuable consideration, the deficiencies in the
conveyance must be expressly or by reference set out in the muniments of
record title, or brought to the notice of the purchaser so as to put him
on inquiry. See id. at 340-41,
137 S.E. 2d at 184. In short, an innocent purchaser takes title free of
equities of which he had no actual or constructive notice."
well settled in North Carolina that, in the absence of fraud or the
knowledge of fraud, one who purchases at a judicial sale, or who purchased
from one who purchased at such sale, is required only to look to the
proceeding to see if the court had jurisdiction of the parties and of the
subject matter of the proceeding, and that the judgment on its face
authorized the sale.' Cherry v.
Woolard, 244 N.C. 603, 610, 94 S. .2d 562, 566 (1956) (holding the
purchaser at a judicial sale acquired good title, despite contentions of
defective service to minor defendants)."
Thus, the court
stated that the sale should be upheld as long as the trial court had
proper jurisdiction over the parties and the subject matter; and the
judgment on its face authorized the sale. Also, the plaintiffs had failed
to join as necessary parties the present owners of the five lots - a
joinder necessary when a court is asked to void a conveyance to them.
FUNDS SETTLEMENT ACT AMENDED
has been amended effective January 1, 2002. Even if a deposit does not
constitute collected funds, a settlement agent may cause a
disbursement of settlement proceeds if the deposit is one of the kinds
listed in G.S. 45A- 4, including subdivision (2)'s reliance upon "[a]
check issued by the State, the United States, or a political subdivision
of the State, or an agency or instrumentality of the United States,
including an agricultural credit association;" G.S. 45A-4(7) has been
amended twice. G.S. 45A-4(7), effective January 1, 2002, reads as follows,
regarding a permitted deposit:
check drawn on the account of or issued by a mortgage banker registered
under Article 19 of Chapter 53 of the General Statutes that has posted
with the Commissioner of Banks a surety bond in the amount of at least
three hundred thousand dollars ($300,000). The surety bond shall be in a
form satisfactory to the Commissioner and shall run to the State for the
benefit of any settlement agent with a claim against the license for a
change to G.S. 45A-4(7), effective July 1, 2002, substitutes
"licensed under Article 19A” for "registered under Article
-ALTA CHANGES LEASEHOLD COVERAGE
ALTA Leasehold Loan and Leasehold Owner's policies were withdrawn as
approved forms by the ALTA effective October 13, 2001. Therefore, to
insure a leasehold loan interest, the ALTA Loan Policy (1992) will be used
and to insure a leasehold owner's interest, the ALTA Owner's Policy (1992)
will be used, with the appropriate new endorsement referred to below.
In order to clarify how damages will be computed, the ALTA has promulgated two forms, effective October 13, 2001: ALTA Endorsement 13.1 (Leasehold-Loan) (10/13/01) and ALTA Endorsement 13 (Leasehold-Owners) (10/13/01). These can be accessed on the ALTA’s website: www.alta.org. The forms clarify how damages particular to a leasehold estate are determined, particularly with respect to tenant leasehold improvements and relocation expenses.