Goodbye Covenants, Hello Free Use of Land
The North Carolina Court of Appeals recently issued a landmark opinion regarding the North Carolina Real Property Marketable Title Act (the "Act"). The case is C Investments 2, LLC v. Auger et al., 2021-NCCOA-209 ("C Investments"), and it is almost certain that it is heading to the Supreme Court of North Carolina.
The Act has been on the books for almost 50 years. In general terms, it provides that, when a person, alone or together with prior owners, owns real property for 30 years, certain interests created more than 30 years earlier are extinguished, giving the owner marketable record title free of those extinguished interests. Before that happens, however, the beneficiaries of such interests can protect themselves and extend the life of the interests by following the Act’s procedures and re-filing the interests with the register of deeds. Such interests include commonly-used restrictive covenants that restrict a property owner’s use of their real property. These types of restrictive covenants are often found in neighborhoods and include restrictions like limiting the property to certain uses, prohibiting certain actions like farming, imposing setback requirements or even minutia such as restricting what type of porch can be constructed on the property.
However, the Act has exceptions that allow some interests to survive longer than 30 years. Of importance in C Investments is the Act’s exception 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. The excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use . . . ." The property at issue in C Investments was subject to a variety of restrictive covenants, which included a covenant limiting the property to only residential use.
The question before the Court was whether only the residential-use covenant survived, or whether all other covenants survived because they were part of a general or uniform scheme of development. Interestingly, in 2017, Smith Anderson argued this same issue before the Court of Appeals; however, the Court declined to reach the issue and instead ruled in favor of our clients on other grounds. The Court of Appeals finally addressed the issue in C Investments and determined that only the covenant limiting the property to residential use survived. Accordingly, all of the other covenants were extinguished. The covenants that did not survive included limitations on the number of residences on a particular lot, setback requirements and square footage requirements.
The Court’s opinion—if not overturned by the Supreme Court—is likely to have a significant impact on real property in North Carolina. The use of restrictive covenants and other impairments on real property is very common. In our experience, restrictive covenants are rarely extended by re-filing with the register of deeds. Therefore, a significant number of restrictive covenants greater than 30 years old are likely extinguished. While this certainly achieves the General Assembly’s stated purpose of favoring free and marketable title, it could fundamentally alter people’s expectations with respect to the use of residential properties. If C Investments is further appealed, the Supreme Court may not finally decide the issue until 2023.
If you have any questions related to this alert, please do not hesitate to contact any member of the Real Estate Development group or your regular Smith Anderson lawyer.