Davis v. Davis (COA 16-400) 11/1/2016
Court of Appeals Quashes Self-imposed Restraint on Alienation
Chris Burti, Vice President and Senior Legal Counsel

This case resulted from a family dispute over beach property in Dare County. The defendant and her husband purchased the property in the 1980s and occasionally rented it to vacationers through a real estate agency in order to offset expenses. They decided to transfer a remainder interest in it to three of their children and executed the deed at issue in this case conveying a remainder interest and reserving a life estate for themselves. The deed contained the following language:

The Grantors hereby reserve unto themselves, a life estate in the Property, said life estate to be personal to the use of the Grantors, or the survivor thereof, and may not be utilized by any other person, nor may it be reduced to a cash value for the benefit of the Grantors, or the survivor thereof, but must remain always during the lifetime of said Grantors, or the survivor thereof, available for their individual and personal use without interference from either the remaindermen or any other person.

Mr. Davis died, leaving the defendant as the sole life tenant and within two weeks, the plaintiffs prepared a letter advising their mother that the deed required that the property "remain available for [her] personal use and [could] not be used to provide income to [her]." Ignoring this demand, the defendant arranged for a real estate agency to rent the property to vacationers as she and her husband had done in the past. As a result, the plaintiffs commenced this suit to enjoin her from renting it during her lifetime to vacationers, contending that the deed language restricts her from renting out the property.

This matter was designated a mandatory complex business case by the Supreme Court and the assigned trial judge granted the defendant's request for summary judgment, holding that the restrictive language in the deed was void to the extent that it could be construed to restrict the defendant's ability to rent the property. Relying upon the following analysis that the deed language is void because it created an unreasonable restraint on the alienation the defendant's life estate, the Court of Appeals affirmed the trial court's summary judgment order.

The opinion points out the doctrine recited in Smith v. Mitchell , 301 N.C. 58, (1980) balancing the dogmatic doctrine that restraints on alienation are generally disfavored in North Carolina due to the "necessity of maintaining a society controlled primarily by its living members and the desirability of facilitating the utilization of wealth" by the fundamental importance of a property owner's ability to "be able to convey [property] subject to whatever condition he or she may desire to impose on the conveyance." Id.

The Court aptly states that in order to "balance these competing policy interests, our Supreme Court has held that any unlimited restraint on alienation 'is per seinvalid.'Id. However, restrictions which 'provide only that someone's estate may be forfeited or be terminated if he alienates, or that provides damages must be paid if he alienates, may be upheld if reasonable.' Id. (emphasis added). That is, our courts will generally uphold any reasonable restraints on alienation except unlimited restraints, which are per se unreasonable."

Citing Lee v. Oates, 171 N.C. 717, (1916), the court notes that the doctrine applies to life estates as well. In dealing with the plaintiffs' argument that Lee should be distinguished because the defendant was not only the life tenant, but was also a grantor, the Court of Appeals held: "that whether the life estate was created by conveyance by a third party or by reservation by the life tenant herself is irrelevant. An unlimited restraint is against public policy; it makes no difference if the restraint is self-imposed." The court notes: "Indeed, the adverse party in Lee argued that the conveyance restraint should nonetheless be upheld as the life tenant herself signed the deed, "thereby agree[ing] ... not to alien her estate[.]" Lee, 171 N.C. at 724, 88 S.E. at 892. Our Supreme Court, however, rejected this argument, holding that an otherwise invalid restraint on alienation is not validated merely because the life tenant assented to the restraint by signing the instrument: "[To conclude otherwise] would enforce a restriction by estoppel[,] which the law declares void. The covenant was a 'dead letter' when it was entered into, and we do not think it can be vitalized in this way."Id. We include this extended quote because this where the Court of Appeals may have erred in coming to the opposite conclusion its opinion in Wilner v The Cedars of Chapel Hill, LLC, (COA 14-380)