Found At: www.statewidetitle.com
Issue
306
Published:
9/1/2024
This case is an unpublished opinion of the North Carolina Court of Appeals and as such it does not constitute controlling legal authority. While citing such cases is generally not favored, citation may be permitted by an appellate court under the appellate rules. It is being discussed here because the issue in question is frequently at play in planned communities these days. The defendant Homeowners Association, et al appealed the trial court's finding that an amendment to a restrictive covenant that barred short-term rentals was unreasonable as applied to the plaintiffs or their properties and the Court of Appeals affirmed the order.
Basically, the facts were that the neighborhood:
"...developed as a quiet residential area with large lots, limited entry, and privately maintained narrow roads, was initially governed by restrictive covenants ("Restrictive Agreement") recorded in 1992. This agreement, pre-dating modern rental platforms like Airbnb and Vrbo, established a comprehensive framework of covenants and restrictions to preserve the character of the subdivision, including the type, location, and number of dwellings, minimum square footage, and prohibitions on various commercial and disruptive activities. The Restrictive Agreement also prohibited "commercial, business, or trade venture, manufacturing establishment, factory, apartment house, multi-unit dwelling or house or building to be used for a sanatorium or hospital of any kind, or at any time, use or suffer to be used, any house or building erected thereon for any such purpose." Additionally, it stated that "[n]o office serving the public may be maintained within the Subdivision" and expressly prohibited "noxious, obnoxious, noisy, unsightly, or otherwise offensive objects or activities."
In December 2019, the defendants passed an "Amendment to the Restrictive Agreement" ("2019 Amendment") to clarify and enforce rental policies, requiring rentals to be no less than ninety days unless part of an owner-occupied lot, where thirty-day rentals were permitted. The Amendment defined "Leasing" as "regular occupancy of a Lot by any person other than the Owner for which the Owner receives any consideration or benefit, including a fee, gratuity, or emolument." It also provided that:
Lots that are not the primary residence of a homeowner may be rented only in their entirety; no fraction or portion of the Lot may be rented. No transient tenants may be permitted. No Lots may be subleased. All leases must be for a term of at least ninety (90) days.
. . .
If a Lot is owner-occupied, a portion of the Lot may be rented (for example- a room, a basement, or another portion of the home). All leases must be for a term of at least thirty (30) days.
The defendant Association determined after a hearing that the plaintiffs violated the 2019 Amendment. As a result, the plaintiffs sought a declaratory judgment to invalidate the 2019 Amendment and the trial court ruled in their favor, declaring that the 2019 Amendment was "unreasonable, invalid, unenforceable, and with no binding effect on the plaintiffs or their properties." The defendants appealed the order contending that the restrictions contain provisions:
"...concerning the type, location, and number of dwellings that could be constructed, the building material that could be used, and a prohibition on 'commercial, business, or trade venture . . . of any kind, or at any time, to use or suffer to be used, any house or building erected thereon for any such purpose.'"
The defendants also objected to the trial court's summary judgment order in favor of the plaintiffs, insisting that it could also allow future owners of Plaintiffs' properties to conduct short term rentals despite the recorded amendment that prohibits it. The plaintiffs argued that barring short-term rentals was unreasonable in light of the original covenant, contending that they should be strictly construed in favor of the free use of land. They also contended that the defendants waived the issue of future enforcement of the prohibition against subsequent owners on appeal because never raised it at the trial level.
The opinion runs through a fairly standard analysis with appropriate citation relying heavily upon the unreasonableness doctrine as set out in Armstrong v. Ledges Homeowners Ass'n, 360 N.C. 547 (2006) to affirm that the covenants were unreasonable. The Court also relied upon Russell v. Donaldson 222 N.C. App. 702 (2012), where the Court of Appeals determined that "prohibiting business and commercial uses of the property, does not bar short-term residential vacation rentals."
The Court might well have taken note of the North Carolina Supreme Court's pointed comment in Armstrong where it said:
In so doing, we echo the rationale of the Supreme Court of Nebraska in Boyles v. Hausmann, 246 Neb. 181, 191, 517 N.W.2d 610, 617 (1994): "The law will not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the covenant agreement permitted a majority to make changes in existing covenants." ... This Court will not permit the Association to use the Declaration's amendment provision as a vehicle for imposing a new and different set of covenants, thereby substituting a new obligation for the original bargain of the covenanting parties.
Significantly, the opinion dodged the issue of prospective enforcement of the amendment. The appeal was purportedly the first time the defendants raised this issue. They contended that the 2019 Amendment should apply to the plaintiffs personally rather than to their properties in perpetuity. Citing Westminster Homes, Inc. v. Town of Cary Zoning Bd. of Adjustment, 354 N.C. 298 (2001) the Court refused to consider the issue. To clinch the refusal the opinion states:
Furthermore, this matter is nonjusticiable as it has not happened. "The courts have no jurisdiction to determine matters purely speculative, enter anticipatory judgments . . . deal with theoretical problems, give advisory opinions. . . provide for contingencies which may hereafter arise, or give abstract opinions." In re Wash. Cnty. Sheriff's Off., 271 N.C. App. 204, 208, 843 S.E.2d 720, 723 (2020) (cleaned up).
As this court has applied in this case and the Supreme Court succinctly stated in Armstrong, such amendments are unenforceable. It may be inferred that even when procedurally proper, they are not enforceable as against subsequent purchasers.
This is an unpublished opinion of the North Carolina Court of Appeals and as such, does not constitute controlling legal authority. The Court of Appeals notes that citation of unpublished decisions is not favored, but may be permitted in under the North Carolina Rules of Appellate Procedure. The case may be considered significant in that it appears that it is the first time that a North Carolina appellate opinion has spoken on the issue of whether a deed naming a trust as grantee is valid in North Carolina.
The defendants in this case contended that the deed at issue was rendered invalid because it was named the trust as grantee rather than naming the trustee of the trust. The defendants only cited cases from other jurisdictions. The Court of Appeals noted that those cases are not binding on it and concluded that they were irrelevant given clear North Carolina statutory language to the contrary.
Defendants are correct that in North Carolina "the creation of a trust must involve a conveyance of property and before property can be said to be held in trust by the trustee, the trustee must have legal title." In re Estate of Washburn, 158 N.C. App. 457, 462, 581 S.E.2d 148, 151 (2003). However, North Carolina law also provides that a deed that conveys property to a trust is also "deemed to be a transfer to the trustee or trustees of that trust." N.C. Gen. Stat. § 39-6.7(a) (2023). Therefore, the deed at issue in this case, which conveyed real property to the trust, also transferred the property to the trustees. Accordingly, the deed is valid.
On the issue of standing, the defendants also argued that the trust lacked standing because a trust cannot sue or be sued. The opinion states:
Our Supreme Court has held that "legal entities other than natural persons may have standing." Willowmere Cmty. Ass'n, Inc. v. City of Charlotte, 370 N.C. 553, 557, 809 S.E.2d 558, 561, (2018) (internal marks and citations omitted). Previously, our Court has recognized that a trust is a legal entity capable of suing and being sued. See Goodwin, by and through Hales v. Four Cnty. Elec. Tr., Inc., 251 N.C. App. 69, 74, 795 S.E.2d 590, 594 (2016) ("[T]he Membership Co-Op and the Non-Profit Trust are two separate, distinct legal entities.").
The defendants cited several cases from other jurisdictions holding that a trust is not capable of suing or being sued and cannot have standing. The Court of Appeals deemed the cases to be irrelevant because they "directly conflict with our established law..." and as "...we have previously held, a trust is a legal entity that can be party to a legal action in North Carolina. Accordingly, we hold that Plaintiff has standing." The problem with this conclusion is that the issue of whether the Trust in Goodwin was an entity with standing was neither litigated in the case nor essential to its outcome and therefor the statement should be considered as dictum. As the opinion is unpublished, hopefully, it will not be cited for this proposition.
Interestingly enough, trusts are by definition "relationships" and, other than business trusts, not considered to be entities capable of taking title. N.C.G.S. Section 39-6.7(a) was adopted to create a rule of construction that would render deeds to and from "trusts" valid and avoid the issue of whether they were entities capable of taking title. This opinion gets this aspect correct where it states: "Therefore, the deed at issue in this case, which conveyed real property to the trust, also transferred the property to the trustees."