47F - Transfer of Special Declarant Rights Bill Adopted
Chris Burti, Vice President and Senior Legal Counsel

The "Declarant" forming a planned community typically subjects land to restrictions described in a recorded "Declaration" adopted for the orderly management of the planned community. In most modern developments, the Declaration will typically reserve certain rights that the developer may choose to exercise as the Declarant in order to make necessary adjustments to the development plan or to continue development and expansion of the community. Although there is no statutory or common law requirement for the developer to reserve such rights, it is now most commonly done and might even be considered somewhat unusual to not do so. Technically, any party who subsequently lawfully holds any of the reserved declarant rights is also a "Declarant."

When Declarant rights are properly reserved, they are treated by the courts as part of a contract among the lot owners, the home owners association (HOA), and the Declarant. The developer of real property is generally free to restrict that real property in any lawful manner, subject only to a very few common law or statutory limitations,  and those purchasing lots or assuming responsibility of the HOA, by doing so, agree to and become bound by the lawful provisions of the Declaration. Therefore, a Declarant is free to establish and reserve any lawful declarant rights at the time that a planned community is formed.

Declarant rights are property rights that can be transferred, in whole or in part. The standard method of transferring declarant rights in a planned community is pursuant to an Assignment of Declarant Rights, executed by the transferor and by the new transferee and recorded in the office of the Register of Deeds in the county where the planned community is located. Technically, any properly recorded instrument executed by both the Declarant and the transferee that adequately describes the declarant rights transferred will be sufficient to transfer the rights.

The survival of declarant rights after the Declarant is no longer actually exercising them is a problem for all interested parties. They may explicitly or implicitly obligate the developer to make improvements in the way of amenities or may require the developer to maintain common elements, potentially imposing liability on the Declarant, which makes them undesirable to the Declarant who no longer has use for them. Extant rights also create issues for owners and owners associations who must deal with the potential for their exercise long after their actual utility has ended. Although a Declaration may provide that some or all of the declarant rights expire upon the Declarant's sale of the last lot or after an a stated period of time, they often make no explicit provision for termination and all development activity pragmatically may well have been completed long before the Declarant sells its last lot. The Declarant's authority ends when all of the declarant rights for that particular development expire or terminate and while there are some limited statutory provisions that require the expiration of certain specific declarant rights, they will otherwise endure until they either expire by their own terms or are voluntarily terminated by the Declarant. expiration date.

Although the North Carolina Planned Community Act implicitly permits declarant rights, defines them, and, regulates them to a limited extent, there are no statutorily established specific declarant rights. More problematic is that heretofore, the existing statutory provisions regarding transfer have been considered ambiguous and they make no provision for dealing with the liability of the transferee with regard to any liabilities or obligations of the transferor.

With respect to the transfer of special declarant rights, N.C.G.S. Section 47F-3-104 simply provided as follows prior to this Legislative amendment: "Except for transfer of declarant rights pursuant to foreclosure, no special declarant right (G.S. 47F-1-103(28)) may be transferred except by an instrument evidencing the transfer recorded in every county in which any portion of the planned community is located. The instrument is not effective unless executed by the transferee." The provision is relatively unambiguous with respect to what is required for a voluntary transfer. Much of the debate about the requirements of this section revolves around involuntary transfers "pursuant to foreclosure" and the imposition of an original declarant's obligations upon involuntary transfer.

Before looking at the changes wrought by this legislation, it may serve well to analyze what the existing law suggests. Hawthorne v. Realty Syndicate, Inc., 43 N.C. App. 436 (1979), aff'd, 300 N.C. 660 (1980) was a case in which that court found an action to enforce violations of restrictive covenants enforceable when filed within six years of the violation, reasoning that a restrictive covenant was a negative easement, that easements are incorporeal hereditaments and therefore NCGS Sec. 1-50(3) applied. The analyses of the North Carolina Supreme Court in Shingleton v. State, 260 N.C. 451, 133 S.E.2d 183 (N.C., 1963) (citation omitted) is very helpful in making it clear that Declarant rights are appurtenant to the developer's retained property interests and are not negative easements in gross.

"An appurtenant easement is one which is attached to and passes with the dominant tenement as an appurtenance thereof; it is owned in connection with other real estate and as an incident to such ownership. An easement in gross is not appurtenant to any estate in land or not belonging to any person by virtue of his ownership of an estate in other land, but is a mere personal interest in or right to use the land of another; it is purely personal and usually ends with the death of the grantee. ... An easement appurtenant is incapable of existence apart from the particular land to which it is annexed, it exists only if the same person has title to the easement and the dominant estate; it must bear some relation to the use of the dominant estate, and it must agree in nature and quality to the thing to which it is claimed to be appurtenant. An easement appurtenant is incident to an estate, and inheres in the land, concerns the premises, pertains to its enjoyment, and passes with the transfer of the title to the land, including transfer by descent. ... If an easement is in gross there is no dominant tenement; an easement is in gross and personal to the grantee because it is not appurtenant to other premises. ... An easement in gross attaches to the person and not to land. ..."

"The easement in the instant case is by deed, which is of course a contract. 'The controlling purpose of the court in construing a contract is to ascertain the intention of the parties as of the time the contract was made, and to do this consideration must be given to the purpose to be accomplished, the subject-matter of the contract, and the situation of the parties.' ... 'If there is any doubt entertained as to the real intention, we should reject that interpretation which plainly leads to injustice and adopt that one which conforms more to the presumed meaning, because it does not produce unusual and unjust results.' ... 'Whether an easement is appurtenant or in gross is controlled mainly by the nature of the right and the intention of the parties creating it, and must be determined by the fair interpretation of the grant * * * creating the easement, aided if necessary by the situation of the property and the surrounding circumstances. If it appears from such a construction of the grant * * * that the parties intended to create a right in the nature of an easement in the property retained for the benefit of the property granted, * * * such right will be deemed an easement appurtenant, and not in gross, regardless of the form in which such intention is expressed. On the other hand, if it appears from such a construction that the parties intended to create a right to be attached to the person to whom it was granted * * *, it will be deemed to be an easement in gross. An easement is appurtenant to land, if it is so in fact, although it is not declared to be so in the deed or instrument creating it; and an easement, which in its nature is appropriate and a useful adjunct of land owned by the grantee of the easement, will be declared an 'easement appurtenant,' and not 'in gross,' in the absence of a showing that the parties intended it to be a mere personal right.'. In case of doubt, an easement is presumed to be appurtenant and not in gross..."

Since the negative easements run with the land owned by the Declarant and are assignable with the land only and not independently, it should be clear that they are appurtenances. Thus, the statutory provision for transfers "pursuant to foreclosure" make sense without further explanation as the rights would transfer as appurtenances both with the deed of trust and with the Substitute Trustee's foreclosure deed. If high bidders in foreclosure did not wish to receive the Declarants' Rights under the existing statute, they should have requested an express provision in the deed excluding such rights. Many lenders bidding in failed developments have been conflicted as to whether they desired to acquire such rights due to the possibility of incurring liability as described above and yet might desire the ability to convey the rights to a purchaser in order for the purchaser to complete the development and enhance the value of the lots acquired by the lender in foreclosure. As a result of the ambivalence, some lenders adopted a strategy of not mentioning the rights so that they could argue it either way as to whether they were transferred transfers "pursuant to foreclosure".

This strategy left intentions in question and often made subsequent attempts to transfer the rights uninsurable. Often, the questionability of subsequent attempts to effect a transfer has been exacerbated by having the developer, who no longer owns any land in the development, attempt to make a purported transfer of the Declarant rights. As stated in Hawthorne, "An easement appurtenant is incapable of existence apart from the particular land to which it is annexed, it exists only if the same person has title to the easement and the dominant estate; it must bear some relation to the use of the dominant estate, and it must agree in nature and quality to the thing to which it is claimed to be appurtenant. An easement appurtenant is incident to an estate, and inheres in the land, concerns the premises, pertains to its enjoyment, and passes with the transfer of the title to the land..."  Therefore, the Developer whose equity of redemption has been foreclosed no longer has anything to convey and such attempts are a nullity.

House Bill 330 enacted as Session Law 2014-57 goes a long way in addressing these issues without doing any harm to the underlying common law principles. This act is effective 60 days after the Legislature finally adjourns and last sentence of G.S.47F-3-104(c) shall be applicable to any mortgage, deed of trust, tax lien, or other conveyance providing for foreclosure recorded on or after January 1, 1999. In summary, the Session Law makes the following changes:

N.C.G.S. Section 47F-2-103 makes the statute applicable to Declarant rights in all planned communities created in this State before January 1, 1999. SECTION 2.G.S.47F-1-103 reads as rewritten:

N.C.G.S. Section 47F-1-103(1) defines "Affiliate of declarant" and "means any person who succeeds to any special declarant rights and who controls, is controlled by, or is under common control with a declarant. A person "controls" a declarant if the person is any of the following:

a. A general partner, officer, director, or employer of the declarant.

b. Directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries, owns, controls, holds with power to vote, or holds proxies representing more than twenty percent (20%) of the voting interest in the declarant.

c. Controls in any manner the election of a majority of the directors of the declarant.

d. Has contributed more than twenty percent (20%) of the capital of the declarant.

A person "is controlled by" a declarant if the declarant

(i)                  is a general partner, officer, director, or employer of the person;

(ii)                directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries, owns, controls, holds with power to vote, or holds proxies representing more than twenty percent(20%)of the voting interest in the person;

(iii)              controls in any manner the election of a majority of the directors of the person; or

(iv)              has contributed more than twenty percent(20%)of the capital of the person. Control does not exist if the powers described in this subdivision are held solely as security for an obligation and are not exercised."

N.C.G.S. Section 47F-1-103(11) now defines "Development rights" to mean "any right or combination of rights reserved by a declarant in the declaration

(i) to add real estate to a planned community;

(ii) to create lots, common elements, or limited common elements within a planned community;

(iii) to subdivide or combine lots or convert lots into common elements; or iv) to withdraw real estate from a planned community....."

N.C.G.S. Section 47F-3-104 now makes separate provisions for a transfer of special declarant rights pursuant to a conveyance and pursuant to foreclosure. Subsection (a) remains essentially unchanged with respect to conveyances and (c) was added for mortgages. Subsection (b) deals with the liability of a transferor (unless an affiliate) upon transfer of any special declarant right. Transferors retain liability for obligation and warranties arising before the transfer and lack of privity does not deprive any lot owner of standing to maintain an action to enforce any obligation of the transferor. When a transferor retains any special declarant rights after transferring any other special declarant rights, the transferor remains liable for any obligations or liabilities imposed by the Chapter or by the declaration relating to the retained special declarant rights and arising after the transfer. A transferor has no liability arising from the exercise of a special declarant right by a successor declarant who is not an affiliate of the transferor.

N.C.G.S. Section 47F-3-104(c) provides that a person acquiring title to all the property being foreclosed or sold in any foreclosure of a lien of any lots or real estate owned by the declarant in a planned community subject to development rights succeeds to all special declarant rights, but only upon the person's request in a properly recorded instrument. The judgment or instrument conveying title shall provide for transfer of only the special declarant rights requested. The mortgage, deed of trust, tax lien, or other conveyance to be foreclosed under this subsection is not required to contain specific reference to an assignment of special declarant rights but shall be deemed to include the special declarant rights as part of the title encumbered, codifying the analysis of the common law set forth above.

N.C.G.S. Section 47F-3-104(d) codifies the statement in Hawthorne such that upon foreclosure or any form of judicial sale of all interests in a planned community owned by a declarant, the declarant ceases to have any special declarant rights and the period of declarant control terminates unless the conveyance expressly provides for the transfer of all special declarant rights held by that declarant to a successor declarant or the declarant previously transferred special declarant rights related to the appointment of executive board members lawfully to another person prior to the foreclosure or sale.

N.C.G.S. Section 47F-3-104(e) provides that the liabilities and obligations of a person who succeeds to special declarant rights are as follows: Any successor to declarant rights who is an affiliate of a declarant is subject to all obligations and liabilities imposed on the transferor. A transferee obtaining the rights pursuant to a lien enforcement is subject to the obligations and liabilities expressly imposed by this Chapter or the declaration other than:

1. Misrepresentations by the transferor or any previous declarant;

2. Warranty obligations on improvements made by the transferor or any previous declarant or made before the planned community was created;

3. Obligations and liabilities arising out of contractual agreements between the transferor or any previous declarant and third parties other than the declaration;

4. Breach of any fiduciary obligation by the transferor or any previous declarant or his or her appointees to the executive board; or

5. Any liability or obligation imposed on the transferor or any previous declarant as a result of the transferor's acts or omissions after the transfer.

And except for:

(1) a successor to a right reserved in the declaration to only maintain sales offices, management offices, signs advertising the planned community, and models, if the successor is not an affiliate of the declarant and may not exercise any other special declarant right and is not otherwise subject to any liability or obligation as a declarant and

(2) a successor to rights held by a transferor who is not an affiliate of the declarant who succeeded to those rights pursuant to a deed or other instrument of conveyance in lieu of foreclosure or a judgment or instrument conveying title under subsection (c) who may declare in a recorded instrument the intention to hold those rights solely for transfer to another person.